1933 Act File No. 33-48847
1940 Act File No. 811-07021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 5
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6
INVESTMENT SERIES FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
X on December 23, 1994 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on December 15, 1994; or
intends to file the Notice required by that Rule on or about
____________; or
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Thomas J. Donnelly, Esquire Charles H. Morin, Esquire
Houston, Houston & Donnelly Dickstein, Shapiro & Morin, L.L.P.
2510 Centre City Tower 2101 L Street, N.W.
650 Smithfield Street Washington, D.C. 20037
Pittsburgh, Pennsylvania 15222
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of Investment Series
Funds, Inc., which is comprised of two portfolios (1) Capital Growth Fund,
consisting of two classes of shares, (a) Class A Shares, and (b) Class C
Shares, and (2) Fortress Bond Fund, relates to both Capital Growth Fund
and Fortress Bond Fund, and is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page. (1-2) Cover Page
Item 2. Synopsis (1-2) Summaries of Fund Expenses.
Item 3. Condensed Financial
Information. (1-2) Financial Highlights;
Performance Information.
Item 4. General Description of
Registrant (1-2) General Information; Investment
Objective; Investment Policies;
Investment Limitations; Portfolio
Turnover; (1) Liberty Family of Funds;
Liberty Family Retirement Program;
(2) Fortress Investment Program.
Item 5. Management of the Fund (1-2) Investment Series Funds, Inc.
Information; Management of the
Corporation; Administration of the
Fund; Brokerage Transactions; (1)
Distribution of (Class A or Class C)
Shares; (2) Distribution of Fund
Shares.
Item 6. Capital Stock and Other
Securities (1-2) Dividends and Distributions;
Retirement Plans; Shareholder
Information; Voting Rights; Tax
Information; Federal Income Tax;
Pennsylvania Corporate and Personal
Property Taxes.
Item 7. Purchase of Securities Being
Offered. (1-2) Net Asset Value; (2) Investing
in the Fund; (1) Investing in (Class A
or Class C) Shares; (1-2) Share
Purchases; Minimum Investment
Required; What Shares Cost; (1(a) and
(2)) Eliminating or Reducing the Sales
Load; (1-2) Systematic Investment
Program; Certificates and
Confirmations; Exchange Privilege;
Requirements for Exchange; Tax
Consequences; Making an Exchange.
Item 8. Redemption or Repurchase. (1) Redeeming (Class A, or Class C)
Shares; (2) Redeeming Shares; (1-2)
Through a Financial Institution; (1)
Directly from the Fund; Other Classes
of Shares; (2) Directly by Mail;
Exchanges for Shares of Other Funds;
(1-2) Systematic Withdrawal Program;
Accounts with Low Balances; Contingent
Deferred Sales Charge.
Item 9. Pending Legal Proceedings. (1-2) None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page. (1-2) Cover Page.
Item 11. Table of Contents (1-2) Table of Contents.
Item 12. General Information and
History (1-2) General Information About the
Fund.
Item 13. Investment Objectives and
Policies (1-2) Investment Objective and
Policies; Investment Limitations.
Item 14. Management of the Fund (1-2) Investment Series Funds, Inc.
Management.
Item 15. Control Persons and Principal
Holders of Securities (1-2) Fund Ownership.
Item 16. Investment Advisory and Other
Services (1-2) Investment Advisory Services;
Administrative Services; Transfer
Agent and Dividend Disbursing Agent.
Item 17. Brokerage Allocation (1-2) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities (1-2) Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered (1-2) Purchasing Shares; Determining
Net Asset Value; Redeeming Shares; (2)
Exchange Privilege.
Item 20. Tax Status (1-2) Tax Status.
Item 21. Underwriters Not Applicable.
Item 22. Calculation of Performance
Data (1-2) Total Return; Yield; Performance
Comparisons.
Item 23. Financial Statements Filed in Part A.
Capital Growth Fund
(A Portfolio of Investment Series Funds, Inc.)
Class A Shares
Class C Shares
Combined Statement of Additional Information
This Combined Statement of Additional Information should be read with
the respective prospectuses of the Class A Shares and Class C Shares
of Capital Growth Fund (the "Fund") dated December 31, 1994. This
Combined Statement is not a prospectus itself. To receive a copy of
any of the prospectuses, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated Investors
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Restricted and Illiquid
Securities 2
When-Issued and Delayed Delivery
Transactions 2
Lending of Portfolio Securities 2
Repurchase Agreements 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
Investment Series Funds, Inc.
Management 6
The Funds 9
Fund Ownership 9
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 10
Administrative Services 10
Transfer Agent and Dividend
Disbursing Agent 10
Purchasing Shares 11
Distribution and Shareholder
Services Plans 11
Purchases by Sales
Representatives,
Directors, and Employees 11
Conversion to Federal Funds 11
Determining Net Asset Value 11
Determining Market Value of
Securities 12
Redeeming Shares 12
Tax Status 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
Total Return 12
Yield 13
Performance Comparisons 13
Appendix 15
General Information About the Fund
The Fund is a portfolio of Investment Series Funds, Inc. (the
"Corporation"). The Fund was established as a portfolio of Investment
Series Trust, a Massachusetts business trust, on March 17, 1987, and, on
December 18, 1992, reorganized as a portfolio of the Corporation which is
organized under the laws of the State of Maryland. It is qualified to do
business as a foreign corporation in Pennsylvania.
Shares of the Fund are offered in two classes: Class A Shares and Class C
Shares (individually and collectively referred to as "Shares," as the
context may require). This Combined Statement of Additional Information
relates to the above-mentioned Shares.
Investment Objective and Policies
The Fund's investment objective is appreciation of capital. The Fund
pursues this investment objective by investing primarily in equity
securities of companies with prospects for above-average growth in earnings
and dividends or of companies where significant fundamental changes are
taking place. The investment objective cannot be changed without approval
of shareholders.
Types of Investments
The Fund may invest in common stocks, preferred stocks, corporate bonds,
debentures, notes, warrants, and put options on stocks. The Fund may also
invest in short-term money market instruments, U.S. government securities,
and hold cash in such proportions as the Fund's investment adviser,
Federated Advisers (the "Adviser"), may determine.
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 a 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).
Put and Call Options
The Fund may purchase listed put options on stocks or write covered
call options to protect against price movements in particular
securities in its portfolio and generate income. 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. 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: (1) buy put options which are listed on a
recognized options exchange and which are on securities held in its
portfolio; and (2) 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). 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 expire.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series.
Although the Adviser will consider liquidity before entering into
option transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any
particular time.
The Fund reserves the right to hedge the portfolio by buying
financial futures and put options on stock index futures and
financial futures. However, the Fund will not engage in these
transactions until (1) an amendment to its Registration Statement is
filed with the Securities and Exchange Commission (the "SEC") and
becomes effective and (2) ten days after a supplement to the
prospectus disclosing this change in policy has been mailed to the
shareholders.
Money Market Instruments
The Fund may invest in the following money market instruments:
o 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 Federal Deposit Insurance Corporation; and
o prime commercial paper (rated A-1 by Standard and Poor's Ratings
Group, Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch
Investors Service, Inc.).
U.S. Government Securities
The types of U.S. government securities in which the Fund may invest
generally include direct securities of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and securities issued or
guaranteed by U.S. government agencies or instrumentalities. These
securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain securities of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the
securities.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
o Federal Farm Credit Banks;
o Federal Home Loan Banks;
o Federal National Mortgage Association;
o Student Loan Marketing Association; and
o Federal Home Loan Mortgage Corporation.
Restricted and Illiquid Securities
The ability of the Board of Directors of the Corporation (the "Directors")
to determine the liquidity of certain restricted securities is permitted
under a SEC staff position set forth in the adopting release for Rule 144A
under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to
further enhance the liquidity of the secondary market for securities
eligible for resale under Rule 144A. The Fund believes that the staff of
the SEC has left the question of determining the liquidity of all
restricted securities (eligible for resale under Rule 144A) to the
Directors. The Directors consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody
of the Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund will only enter into
repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the
Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase agreement
the Fund transfers possession of a portfolio instrument to another person,
such as a financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio
instrument by remitting the original consideration plus interest at an
agreed upon rate. The use of reverse repurchase agreements may enable the
Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These assets are marked to
market daily and are maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an attempt
to achieve the Fund's investment objective. For the fiscal years ended
October 31, 1994, and 1993, the portfolio turnover rates were 86% and 74%,
respectively.
Investment Limitations
Buying on Margin
The Fund will not purchase any securities on margin but may obtain
such short-term credits as may be necessary for clearance of
transactions and may make margin payments in connection with buying
financial futures, put options on stock index futures, and put
options on financial futures.
Selling Short
The Fund will not sell securities short unless:
o during the time the short position is open, it owns an equal
amount of the securities sold or securities convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issuer as, and equal in amount to, the
securities sold short; and
o not more than 10% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except as permitted by its
investment objective and policies. The Fund may borrow money and
engage in reverse repurchase agreements only in amounts up to one-
third of the value of its net assets, including the amounts 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 to facilitate management of the
portfolio by enabling the Fund to meet redemption requests where the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowing in excess of 5% 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 10% of the value of total assets at the time of the
borrowing.
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 Commodities
The Fund will not purchase or sell commodities. The Fund reserves the
right to hedge the portfolio by purchasing financial futures and put
options on stock index futures and on financial futures.
Investing in Real Estate
The Fund will not purchase or sell real estate, including limited
partnership interests in real estate, except it may invest in the
securities of companies whose business involves the purchase or sale
of real estate, or in securities which are 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.
This shall not prevent the purchase or holding of 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 its Articles of Incorporation.
Diversification of Investments
The Fund will not purchase the securities of any issuer (other than
the U.S. government, its agencies, or instrumentalities or
instruments secured by securities of such issuers, such as repurchase
agreements) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer or acquire
more than 10% of any class of voting securities of any issuer. For
these purposes, the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of priorities,
series, designations, or other differences.
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 cash or cash items, or securities issued or
guaranteed by the U.S. government, its agencies, or
instrumentalities, or repurchase agreements secured by such
instruments.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to
not more than 3% of the total outstanding voting stock of any
investment company, will invest no more than 5% of its total assets
in any one investment company, and will invest no more than 10% of
its total assets in investment companies in general. In order to
comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with
sales loads of less than 1% of the offering price of such securities.
The Fund will purchase securities of closed-end investment companies
only in open market transactions involving any customary brokers'
commissions. However, these limitations are not applicable if the
securities are acquired in a merger, consolidation, reorganization,
or acquisition of assets. While it is a policy to waive advisory fees
on Fund assets invested in securities of other open-end investment
companies, it should be noted that investment companies incur certain
expenses such as custodian and transfer agency fees and, therefore,
any investment by the Fund in shares of another investment company
would be subject to such duplicate expenses.
To comply with investment restrictions of certain states, the Fund will
limit its investment in restricted securities to 5% of its total assets.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors, that
have been in operation for less than three years.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Corporation
The Fund will not purchase or retain the securities of any issuer if
the officers and Directors of the Corporation or 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.
Acquiring Securities
The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may invest in up
to 10% of the voting securities of any one issuer and may exercise
its voting powers consistent with the best interests of the Fund. In
addition, the Fund, other companies advised by the Fund's Adviser,
and other affiliated companies may together buy and hold substantial
amounts of voting stock of a company and may vote together in regard
to such company's affairs. In some such cases, the Fund and its
affiliates might collectively be considered to be in control of such
company. In some cases, Directors and other persons associated with
the Fund and its affiliates might possibly become directors of
companies in which the Fund holds stock.
Purchasing 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 options.
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.
Investing in Warrants
The Fund will not invest more than 5% of the value of its total
assets in warrants. No more than 2% of this 5% may be warrants which
are not listed on the New York or American Stock Exchange. Warrants
acquired in units or attached to securities may be deemed to be
without value for purposes of this policy.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including certain restricted securities not
determined by the Directors to be liquid, and repurchase agreements
providing for settlement in more than seven days after notice.
Investing in Restricted Securities
The Fund will not purchase restricted securities if immediately
thereafter more than 15% of the net assets of the Fund, taken at
market value, would be invested in such securities (except for
commercial paper issued under Section 4(2) of the Securities Act of
1933). To comply with certain state requirements, the Fund will limit
its investment in restricted securities to 5% of its total assets.
(If state requirements change, this limitation may be revised without
notice to shareholders.)
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 limitations, the Fund considers instruments 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.
The Fund does not expect to borrow money, sell securities short, invest in
reverse repurchase agreements, or invest in put and call options in excess
of 5% of the value of its total assets during the current fiscal year.
Investment Series Funds, Inc. Management
Officers and Directors are listed with their addresses, present positions
with Investment Series Funds, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and
Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue , President and Director of the Corporation.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; President, Northgate Village
Development Corporation; Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or Managing General Partner of the
Funds; formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director,
Ryan Homes, Inc.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp.; President, Passport Research, Ltd.; Trustee, Federated
Administrative Services, Federated Services Company, and Federated
Shareholder Services; President or Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Corporation.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President,
State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
F
Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President
and Treasurer, Federated Advisers, Federated Management, Federated
Research, Federated Research Corp., and Passport Research, Ltd.; Executive
Vice President, Treasurer, and Director, Federated Securities Corp.;
Trustee, Federated Services Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and Secretary,
Federated Research Corp. and Passport Research, Ltd.; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee, Federated
Shareholder Services; Executive Vice President and Director, Federated
Securities Corp.; Vice President and Secretary of the Funds.
* This Director is deemed to be an "interested person" as defined in
the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilities of the Board of
Directors between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Arrow Funds; Automated Cash
Management Trust; Automated Government Money Trust; California Municipal
Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated
Government Trust; Federated Growth Trust; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-
Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government
Bond Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund,
Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; The
Medalist Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II;
Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; World Investment Series,
Inc.
Fund Ownership
Officers and Directors own less than 1% of each Fund's outstanding Shares.
As of December 13, 1994, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch Pierce
Fenner and Smith (as record owner holding shares for its clients),
Jacksonville, Florida owned approximately 98,907 Shares (11.52%).
As of December 13, 1994, the following shareholder of record owned 5% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch Pierce
Fenner and Smith (as record owner holding shares for its clients),
Jacksonville, Florida owned approximately 14,897 Shares (15.85%).
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue, his wife,
and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Corporation, 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 Corporation.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the respective prospectuses. For the fiscal
years ended October 31, 1994, and 1993, and the period from January 1,
1992 to October 31, 1992, the Fund's Adviser earned $139,962, $165,261, and
$105,850, respectively, all of which was waived because of undertakings to
limit the Fund's expenses.
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 on the next $70 million of average net
assets, and 1-1/2% per year of the remaining average net assets, the
Adviser will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. (For purposes of this Statement of
Additional Information, Federated Administrative Services and Federated
Administrative Services, Inc., may hereinafter collectively be referred to
as, the "Administrators"). For the fiscal year ended October 31, 1994, the
Administrators collectively earned $213,197. For the fiscal year ended
October 31, 1993, and the period from January 1, 1992 to October 31, 1992,
Federated Administrative Services, Inc. earned $240,157 and $166,758,
respectively, all of which were waived by the Adviser in an effort to limit
Fund expenses. Dr. Henry J. Gailliot, an officer of Federated Advisers, the
Adviser to the Fund, holds approximately 20% of the outstanding common
stock and serves as a director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Administrative
Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type, and number of
accounts and transactions made by shareholders.
Federated Services Company also maintains the Corporation's accounting
records. The fee paid for this service is based on the level of the Fund's
average net assets for the period plus out-of -pocket expenses.
Brokerage Transactions
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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 relation to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising the Funds and other accounts.
To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would
tend to reduce their expenses.
For the fiscal years ended October 31, 1994, and 1993, and the period from
January 1, 1992 to October 31, 1992, the Fund paid $39,729, $44,421, and
$39,310, respectively, in brokerage commissions on brokerage transactions.
As of October 31, 1994, the Fund owned $491,000 of securities of Travelers,
Inc., one of its regular brokers/dealers that derives more than 15% of
gross revenues from securities-related activities.
Purchasing Shares
Shares are sold at their net asset value (plus a sales load on Class A
Shares only) on days the New York Stock Exchange is open for business. The
procedure for purchasing Shares is explained in the respective prospectuses
under "Investing in Class A Shares" or "Investing in Class C Shares".
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Directors expect that the Fund will
be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to
curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder record keeping systems; and (4) responding promptly
to shareholders' requests and inquiries concerning their accounts.
For the fiscal years ended October 31, 1994, and 1993, and the period from
January 1, 1992 to October 31, 1992, payments in the amount of $32,402,
$26,209, and $5,229, respectively, were made pursuant to the Distribution
Plan. In addition, for the fiscal year ended October 31, 1994, payments in
the amount of $8,773, were made pursuant to the Shareholder Services Plan.
Purchases by Sales Representatives, Directors, and Employees
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., their spouses, and their children under 21, may buy Shares at net
asset value without a sales load or contingent deferred sales charge.
Shares may also be sold without a sales load to trusts or pension or profit-
sharing plans for these persons.
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. State Street Bank and
Trust Company acts as the shareholder's agent in depositing checks and
converting them to federal funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the respective
prospectuses.
Determining Market Value of Securities
Market values of the Fund's portfolio securities, other than options, are
determined as follows:
o according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices, and for bonds and
other fixed income securities, as determined by an independent pricing
service;
o for unlisted equity securities, the latest bid prices;
o 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 unless the Board determines this is not fair
value; or
o at fair value as determined in good faith by the Directors.
Options are valued at the market values established by the exchanges at the
close of option trading unless the Directors determine in good faith that
another method of valuing option positions is necessary.
Redeeming Shares
Shares of the Fund are redeemed at the next computed net asset value after
the transfer agent receives the redemption request. Shareholder redemptions
may be subject to a contingent deferred sales charge. Redemption procedures
are explained in the respective prospectuses under "Redeeming Class A
Shares" or "Redeeming Class C Shares."
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. 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.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held the Shares.
Total Return
The average annual total return for both classes of Shares of the Fund is
the average compounded rate of return for a given period that would equate
a $1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the offering price per
Share at the end of the period. The number of Shares owned at the end of
the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales load (Class A Shares
only), adjusted over the period by any additional Shares, assuming the
quarterly reinvestment of all dividends and distributions. Any applicable
contingent deferred sales charge will be deducted from the ending value of
the investment based on the lesser of the offering price per Share at the
time of purchase or the offering price per Share at the time of redemption.
The Fund's average annual total returns for the fiscal year ended October
31, 1994, were (13.48%) and (9.79%) for Class A Shares and Class C Shares,
respectively. The average annual total return for the period from January
16, 1992 (effective date of Class A Shares registration statement) to
October 31, 1994, and for the period from April 13, 1993 (effective date of
Class C Shares registration statement) to October 31, 1994, were (1.69%),
and (1.15%) for Class A Shares and Class C Shares, respectively.
Yield
The yield for each class of Shares of the Fund is determined each day by
dividing the net investment income per Share (as defined by the SEC) earned
by each class of Shares over a thirty-day period by the maximum offering
price per Share of each class of Shares on the last day of the period. This
value is then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by
the Fund because of certain adjustments required by the SEC and, therefore,
may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in each
class of Shares, the performance will be reduced for those shareholders
paying those fees.
The Fund's yield for the thirty-day period ended October 31, 1994, were
1.44% and 0.82% for Class A Shares and Class C Shares, respectively.
Performance Comparisons
The Fund's performance of each class of Shares depends upon such variables
as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
Any class of Shares' performance fluctuates on a daily basis largely
because net earnings and offering price per Share fluctuate. 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:
o Lipper Analytical Services, Inc. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in offering price over a
specified period of time. From time to time, the Fund will quote its
Lipper ranking in the "growth funds" category in advertising and sales
literature.
o 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 movement are leading economic
indicators for the stock market as a whole.
o 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, compares total returns of funds
whose portfolios are invested primarily in common stocks. In addition,
the Standard & Poor's index assumes reinvestment of all dividends paid
by stocks listed on its index. Taxes due on any of these distributions
are not included, nor are brokerage or other fees calculated in the
Standard & Poor's figures.
o Morningstar, Inc., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
Advertisements and sales literature for any class of Shares may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
any class of Shares based on quarterly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect the
effect of a sales load.
Appendix
Standard and Poor's Ratings Group 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 for
issues designated A-1.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-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
structures 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 alternate liquidity.
P-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.
461444200
461444408
1102503B (12/94)
Fortress Bond Fund
(A Portfolio of Investment Series Funds, Inc.)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Fortress Bond Fund (the "Fund") dated December 31,
1994. This Statement is not a prospectus itself. To receive a copy of
the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Futures and Options Transactions 1
Investing in Foreign Currencies 3
When-Issued and Delayed Delivery
Transactions 4
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 5
Investment Series Funds, Inc.
Management 7
The Funds 9
Fund Ownership 10
Investment Advisory Services 10
Adviser to the Fund 10
Advisory Fees 10
Administrative Services 10
Transfer Agent and Dividend
Disbursing Agent 11
Brokerage Transactions 11
Shareholder Services Plan 11
Purchases by Sales
Representatives,
Directors, and Employees 12
Conversion to Federal Funds 12
Other Payments to Financial
Institutions 12
Determining Net Asset Value 12
Determining Market Value of
Securities 12
Redeeming Shares 13
Exchange Privilege 13
Reduced Sales Load 13
Requirements for Exchange 13
Tax Consequences 13
Making an Exchange 13
Tax Status 13
The Fund's Tax Status 13
Shareholders' Tax Status 14
Total Return 14
Yield 14
Performance Comparisons 14
Duration 15
Appendix 16
General Information About the Fund
The Fund is a portfolio of Investment Series Funds, Inc. (the
"Corporation"). The Fund was established as a portfolio of Investment
Series Trust, a Massachusetts business trust, on March 17, 1987, and on
February 5, 1993, was reorganized into a portfolio of the Corporation,
which is organized under the laws of the State of Maryland. It is qualified
to do business as a foreign corporation in Pennsylvania.
Investment Objective and Policies
The investment objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital. The
investment objective cannot be changed without approval of shareholders.
Types of Investments
As a matter of investment policy, which may be changed without shareholder
approval, the Fund will, under normal circumstances, invest at least 65% of
the value of its total net assets in investment grade bonds. Permitted
investments include:
o domestically-issued corporate debt obligations;
o asset-backed securities;
o obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; and
o repurchase agreements.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and listed put options on futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options
on portfolio securities to attempt to increase its current income. The Fund
currently does not intend to invest more than 5% of its total assets in
options transactions.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of security called
for in the contract ("going short") and the buyer who agrees to take
delivery of the security ("going long") at a certain time in the
future.
In the fixed income securities market, price generally moves
inversely to interest rates. Thus, a rise in rates generally means a
drop in price. Conversely, a drop in rates generally means a rise in
price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of
its fixed income securities may decline during the Fund's anticipated
holding period. The Fund would "go long" (agree to purchase
securities in the future at a predetermined price) to hedge against a
decline in market interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set date at
a specified price, the purchase of a put option on a futures contract
entitles (but does not obligate) its purchaser to decide on or before
a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the
hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and
the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale
of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value
of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it
would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the
option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the
Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and the premium
paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio
against an increase in market interest rates. When the Fund writes a
call option on a futures contract, it is undertaking the obligation
of assuming a short futures position (selling a futures contract) at
the fixed strike price at any time during the life of the option if
the option is exercised. As market interest rates rise, causing the
prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to
fulfill, causing the value of the Fund's call option position to
increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option.
This premium can offset the drop in value of the Fund's fixed income
portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of
it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second
option will be less than the premium received by the Fund for the
initial option. The net premium income of the Fund will then offset
the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus
the unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the
futures contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract.
Rather, the Fund is required to deposit an amount of "initial margin"
in cash or U.S. Treasury bills with its custodian (or the broker, if
legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve
the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual
obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known
as "marking to market." Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the
Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put option gives the Fund, in return for a premium, the right to sell
the underlying security to the writer (seller) as 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).
Investing in Foreign Currencies
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts
in order to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and a
foreign currency involved in an underlying transaction. However,
forward foreign currency exchange contracts may limit potential gains
which could result from a positive change in such currency
relationships. The Fund's investment adviser, Federated Advisers (the
"Adviser"), believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The Fund
will not speculate in foreign currency exchange.
There is no limitation as to the percentage of the Fund's assets that
may be committed to such contracts.
The Fund does not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when the Fund
would be obligated to deliver an amount of foreign currency in excess
of the value of the Fund's portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Adviser believes
will tend to be closely correlated with the currency with regard to
price movements. Generally, the Fund does not enter into a forward
foreign currency exchange contract with a term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price
on a specified date or during the option period. The owner of a call
option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but not the
obligation to sell the currency.
When the option is exercised, the seller (i.e., writer) of the option
is obligated to fulfill the terms of the sold option. However, either
the seller or the buyer may, in the secondary market, close its
position during the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency
depreciates in value. Although purchasing a foreign currency option
can protect the Fund against an adverse movement in the value of a
foreign currency, the option will not limit the movement in the value
of such currency. For example, if the Fund were holding securities
denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the
value of the currency, the Fund would not have to exercise its put
option. Likewise, if the Fund were to enter into a contract to
purchase a security denominated in foreign currency and, in
conjunction with that purchase, were to purchase a foreign currency
call option to hedge against a rise in value of the currency, and if
the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise
its call. Instead, the Fund could acquire in the spot market the
amount of foreign currency needed for settlement.
Special Risks Associated With Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the
same risks that apply to options generally.
In addition, there are certain additional risks associated with
foreign currency options. The markets in foreign currency options are
relatively new, and the Fund's ability to establish and close out
positions on such options is subject to the maintenance of a liquid
secondary market. Although the Fund will not purchase or write such
options unless and until, in the opinion of the Adviser, the market
for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in
connection with the underlying currency, there can be no assurance
that a liquid secondary market will exist for a particular option at
any specific time.
In addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the
price of the option position may vary with changes in the value of
either or both currencies and may have no relationship to the
investment merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign
currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than
$1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a
timely basis.
Available quotation information is generally representative of very
large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e. less than $1 million) where
rates may be less favorable. The interbank market in foreign
currencies is a global, around-the-clock market. To the extent that
the U.S. option markets are closed while the markets for the
underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that a defaulting seller
files for bankruptcy or becomes insolvent, disposition of securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy pursuant
to guidelines established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. The securities are marked to
market daily and maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an attempt
to achieve the Fund's investment objectives. For the fiscal years ended
October 31, 1994, and 1993, the portfolio turnover rates were 74% and 51%,,
respectively.
Investment Limitations
Buying on Margin
The Fund will not purchase any securities on margin but may obtain
such short-term credits as may be necessary for the clearance of
transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its net assets, including the amounts
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
any such borrowings in excess of 5% 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 10% of the value of total assets at the time of the
borrowing.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one
issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities and repurchase agreements collateralized by such
securities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in
the securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real estate
or interests in real estate.
Investing in Commodities
The Fund will not purchase 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. The Fund will notify
shareholders before such a change in its operating policies is
implemented.
Investing in Restricted Securities
The Fund will not invest more than 10% of its net assets in
securities subject to restrictions on resale under the federal
securities laws (except for commercial paper issued under Section
4(2) of the Securities Act of 1933).
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.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities,
on a short-term or long-term basis, up to one-third of the value of
its total assets, to broker/dealers, banks, or other institutional
borrowers of securities.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets
in any one industry. However, investing in U.S. government
obligations shall not be considered investments in any one industry.
Selling Short
The Fund will not sell securities short unless:
o during the time the short position is open, it owns an equal amount
of the securities sold or securities readily and freely
convertible into or exchangeable, without payment of additional
consideration, for securities of the same issuer as, and equal in
amount to, the securities sold short; and
o not more than 10% of the Fund's net assets (taken at current value)
is held as collateral for such sales at any one time.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in
securities which are illiquid, including repurchase agreements
providing for settlement in more than seven days after notice.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in those limitations becomes effective.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total
assets in portfolio instruments of unseasoned issuers, including
their predecessors, that have been in operation for less than three
years.
Investing in Issuers Whose Securities Are Owned by Officers and
Directors of the Corporation
The Fund will not purchase or retain the securities of any issuer if
the officers and Directors of the Corporation or 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.
Writing Covered 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. 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, invest no more than 5% of its total assets in any
one investment company, or invest more than 10% of its total assets
in investment companies in general. The Fund will limit its
investments in the securities of other investment companies to those
of money market funds having investment objectives and policies
similar to its own. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization or acquisition of assets. While it is the Fund's
policy to waive its investment advisory fee on assets invested in
securities of open-end investment companies, it should be noted that
investment companies incur certain expenses such as custodian and
transfer agent fees, and therefore any investment by a Fund in shares
of another investment company would be subject to such duplicate
expenses.
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 limitations, the Fund considers instruments issued by a
U.S. branch of a domestic bank having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items."
The use of short sales will allow the Fund to retain certain bonds in its
portfolio longer than it would without such sales. To the extent the Fund
receives the current income produced by such bonds for a longer period than
it might otherwise, the Fund's investment objective of current income is
furthered.
Investment Series Funds, Inc. Management
Officers and Directors are listed with their addresses, present positions
with Investment Series Funds, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and
Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue , President and Director of the Corporation.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Director
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; President, Northgate Village
Development Corporation; Partner or Trustee in private real estate ventures
in Southwest Florida; Director, Trustee, or Managing General Partner of the
Funds; formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director,
Ryan Homes, Inc.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp.; President, Passport Research, Ltd.; Trustee, Federated
Administrative Services, Federated Services Company, and Federated
Shareholder Services; President or Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Corporation.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director, Blue
Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Director
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Professor of Medicine and Trustee, University of Pittsburgh;
Director of Corporate Health, University of Pittsburgh Medical Center;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President,
State Street Bank and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Director
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President
and Treasurer, Federated Advisers, Federated Management, Federated
Research, Federated Research Corp., and Passport Research, Ltd.; Executive
Vice President, Treasurer, and Director, Federated Securities Corp.;
Trustee, Federated Services Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and Secretary,
Federated Research Corp. and Passport Research, Ltd.; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee, Federated
Shareholder Services; Executive Vice President and Director, Federated
Securities Corp.; Vice President and Secretary of the Funds.
* This Director is deemed to be an "interested person" as defined in
the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilities of the Board of
Directors between meetings of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Arrow Funds; Automated Cash
Management Trust; Automated Government Money Trust; California Municipal
Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated
Government Trust; Federated Growth Trust; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Intermediate Government
Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-
Intermediate Government Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government
Bond Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund,
Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; The
Medalist Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II;
Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; World Investment Series,
Inc.
Fund Ownership
Officers and Directors own less than 1% of each Fund's outstanding shares.
As of December 13, 1994, the following shareholder of record owned 5% or
more of the outstanding shares of the Fund: Merrill Lynch Pierce Fenner and
Smith (as record owner holding shares for its clients), Jacksonville,
Florida owned approximately 4,589,529 shares (29.05%).
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue, his wife,
and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Corporation, 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 Corporation.
Advisory Fees
For its advisory services, Federated Advisers receives an annual investment
advisory fee for the Fund as described in the prospectus. For the fiscal
years ended October 31, 1994, and 1993, and the period from January 1, 1992
to October 31, 1992, the Adviser earned $1,081,066, $671,751 and $113,009,
respectively, of which $481,690, $548,973, and $113,009 were voluntarily
waived because of undertakings to limit the Fund's expenses. In addition,
for the fiscal year ended October 31, 1994, and 1993, and for the period
from January 1, 1992 to October 31, 1992, the Adviser voluntarily
reimbursed, with respect to this Fund, $0, $0, and $200,470, respectively.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2 1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net
assets, and 1 1/2% per year of the remaining average net assets, the
Adviser will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. (For purposes of this Statement of
Additional Information, Federated Administrative Services and Federated
Administrative Services, Inc., may hereinafter collectively be referred to
as, the "Administrators"). For the fiscal year ended October 31, 1994, the
Administrators collectively earned $192,379. For the fiscal year ended
October 31, 1993, and the period from January 1, 1992 to October 31, 1992,
Federated Administrative Services, Inc. earned $288,504 and $131,503,
respectively. Dr. Henry J. Gailliot, an officer of Federated Advisers, the
Adviser to the Fund, holds approximately 20% of the outstanding common
stock and serves as a director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Administrative
Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type, and number of
accounts and transactions made by shareholders.
Federated Services Company also maintains the Corporation's accounting
records. The fee paid for this service is based on the level of the Fund's
average net assets for the period plus out-of -pocket expenses.
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 Board of Directors.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o 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 or by
affiliates of Federated Investors in advising the Funds and other accounts.
To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would
tend to reduce their expenses.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales load on days the New York Stock
Exchange is open for business. The procedure for purchasing shares of the
Fund is explained in the prospectus under "Investing in the Fund."
Shareholder Services Plan
This arrangement permits the payment of fees to Federated Shareholder
Services and, indirectly, to financial institutions to cause services to be
provided to shareholders by a representative who has knowledge of the
shareholder's particular circumstances and goals. These activities and
services may include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
For the fiscal year ended October 31, 1994, payments in the amount of
$350,007, were made pursuant to the Shareholder Services Plan.
Purchases by Sales Representatives, Directors, and Employees
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., their spouses and their children under 21, may buy shares at net
asset value without a sales load. Shares may also be sold without a sales
load to trusts or pension or profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds before shareholders
begin to earn dividends. State Street Bank and Trust Company acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
Other Payments to Financial Institutions
The administrative services for which the Distributor will pay financial
institutions include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory and
computer personnel, as is necessary or beneficial to establish and maintain
shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist
clients in changing dividend options, account designations, addresses, and
providing such other services as the Fund may reasonably request.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as follows:
o according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices, and for bonds and
other fixed income securities as determined by an independent pricing
service;
o for short-term obligations, according to the mean bid and asked prices,
as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of less than 60 days at the time
of purchase, at amortized cost unless the Board determines this is not
fair value; or
o at fair value as determined in good faith by the Fund's Board of
Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices.
Redeeming Shares
Shares of the Fund are redeemed at the next computed net asset value, less
any applicable contingent deferred sales charge, after the transfer agent
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although the transfer agent does not
charge for telephone redemptions, it reserves the right to charge a fee for
the cost of wire-transferred redemptions of less than $1,000.
Exchange Privilege
The Securities and Exchange Commission (the "SEC") has issued an order
exempting the Corporation from certain provisions of the Investment Company
Act of 1940, as amended. As a result, Fund shareholders are allowed to
exchange all or some of their shares for shares in other Fortress Funds or
certain Federated Funds which are sold with a sales load that differs from
that of the Fund's or which impose no sales load so long as the Federated
Funds are advised by subsidiaries or affiliates of Federated Investors.
These exchanges are made at net asset value plus the difference between the
Fund's sales load already paid and any sales load of the fund into which
the shares are to be exchanged, if higher. The order also allows certain
other funds, including funds that are not advised by subsidiaries or
affiliates of Federated Investors, which do not have a sales load, to
exchange their shares for Fund shares on a basis other than their current
offering price. These exchanges may be made to the extent that such shares
were acquired in a prior exchange, at net asset value, for shares of a
Federated Fund carrying a sales load.
Reduced Sales Load
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales load, the shareholder must notify Federated
Securities Corp. or Federated Services Company in writing.
Requirements for Exchange
Shareholders using this privilege must exchange shares having a net asset
value equal to the minimum investment requirements of the fund into which
the exchange is being made. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders residing 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 for Fortress
Funds or certain of the Funds are available by calling the Fund.
Tax Consequences
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a short or long-term
capital gain or loss may be realized.
Making an Exchange
Instructions for exchanges for Fortress Funds or certain of the Funds must
be given in writing by the shareholder. Written instructions may require a
signature guarantee.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. 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.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held the Fund shares.
Total Return
The Fund's average annual total returns for the one-year and five-year
periods ended October 31, 1994, and for the period from July 8, 1988
(effective date of the Fund's registration statement) to October 31, 1994,
were (5.28%), 10.69%, and 9.29%, 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 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 monthly reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge is deducted from the ending
value of the investment based on the lesser of the original purchase price
or the net asset value of shares redeemed.
Yield
The Fund's yield for the thirty-day period ended October 31, 1994, was
8.69%.
The yield for the Fund is determined each day by dividing the net
investment income per share (as defined by the SEC) 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 SEC and, therefore, may not correlate to the dividends or
other distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, performance will be
reduced for those shareholders paying those fees.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
o 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 Lehman Brothers, Inc.,
the index calculates total returns for one-month, three-month, twelve-
month, and ten-year periods and year-to-date.
o Salomon Brothers AAA-AA Corporates Index calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
o Merrill Lynch Corporate & Government Master Index is an unmanaged index
comprised of approximately 4,821 issues which include corporate debt
obligations rated BBB or better and publicly issued, non-convertible
domestic debt of the U.S. government or any agency thereof. These
quality parameters are based on composites of ratings assigned by
Standard and Poor's Ratings Group and Moody's Investors Service, Inc.
Only notes and bonds with a minimum maturity of one year are included.
o Merrill Lynch Corporate Master is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better.
These quality parameters are based on composites of ratings assigned by
Standard and Poor's Corporation and Moody's Investors Service, Inc. Only
bonds with a minimum maturity of one year are included.
o Lipper Analytical Services, Inc., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in offering price over a
specific period of time. From time to time, the Fund will quote its
Lipper ranking in advertising and sales literature.
o The Lehman Brothers Corporate Bond Index is comprised of a large
universe of bonds issued by industrial, utility and financial companies
which have a minimum rating of Baa by Moody's Investors Service, Inc.,
BBB by Standard and Poor's Ratings Group or, in the case of bank bonds
not rated by either of the previously mentioned services, BBB by Fitch
Investors Service, Inc.
o Morningstar, Inc., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed Mutual Funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
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 historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of
time.
From time to time, the Fund may advertise its performance, using charts,
graphs, and descriptions, compared to federally insured bank products
including certificates of deposit and time deposits and to money market
funds using the Lipper Analytical Services, Inc., money market instruments
average.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
Duration
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of fixed
income securities, prior to maturity. Volatility is the magnitude of the
change in the price of a bond relative to a given change in the market rate
of interest. A bond's price volatility depends on three primary variables:
the bond's coupon rate; maturity date; and the level of market yields of
similar fixed income securities. Generally, bonds with lower coupons or
longer maturities will be more volatile than bonds with higher coupons or
shorter maturities. Duration combines these variables into a single
measure.
Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When the Fund
invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Fund.
Appendix
Standard and Poor's Ratings Group 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 for
issues designated A-1.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-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
structures 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 alternate liquidity.
P-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.
461444309
2041304B (12/94)
CAPITAL GROWTH FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
PROSPECTUS
The Class A Shares of Capital Growth Fund (the "Fund") represent interests in a
diversified portfolio of securities which is an investment portfolio of
Investment Series Funds, Inc. (the "Corporation"), an open-end, management
investment company (a mutual fund).
The investment objective of the Fund is appreciation of capital.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares and Class C Shares dated December 31, 1994, with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, by calling 1-800-235-4669. To obtain other information, or make
inquiries about the Fund, contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------
Liberty Family Retirement Program 4
INVESTMENT INFORMATION 5
- ------------------------------------------------------
Investment Objective 5
Investment Policies 5
Portfolio Turnover 8
Investment Limitations 8
INVESTMENT SERIES FUNDS, INC. INFORMATION 9
- ------------------------------------------------------
Management of the Corporation 9
Distribution of Class A Shares 10
Administration of the Fund 11
Brokerage Transactions 12
NET ASSET VALUE 12
- ------------------------------------------------------
INVESTING IN CLASS A SHARES 12
- ------------------------------------------------------
Share Purchases 12
Minimum Investment Required 13
What Shares Cost 13
Eliminating or Reducing the Sales Load 14
Systematic Investment Program 16
Certificates and Confirmations 16
Dividends and Distributions 16
Retirement Plans 16
EXCHANGE PRIVILEGE 16
- ------------------------------------------------------
Reduced Sales Load 17
Requirements for Exchange 17
Tax Consequences 17
Making an Exchange 17
REDEEMING CLASS A SHARES 18
- ------------------------------------------------------
Through a Financial Institution 18
Directly from the Fund 18
Contingent Deferred Sales Charge 19
Systematic Withdrawal Program 20
Accounts with Low Balances 20
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
TAX INFORMATION 21
- ------------------------------------------------------
Federal Income Tax 21
Pennsylvania Corporate and Personal
Property Taxes 21
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
OTHER CLASSES OF SHARES 22
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 24
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES 25
- ------------------------------------------------------
FINANCIAL STATEMENTS 26
- ------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 37
- ------------------------------------------------------
APPENDIX 38
- ------------------------------------------------------
ADDRESSES 40
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--CLASS A SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................................................ 5.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)........................................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................... None
Exchange Fee......................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)..................................................................... 0.00%
12b-1 Fee (after waiver)(3).......................................................................... 0.04%
Total Other Expenses (after expense reimbursement)................................................... 1.21%
Shareholder Services Fee (after waiver)(4).............................................. 0.21%
Total Class A Shares Operating Expenses(5)....................................................... 1.25%
</TABLE>
(1) Shareholders who purchase shares with the proceeds of a redemption of shares
of a mutual fund sold with a sales load and not distributed by Federated
Securities Corp., prior to June 1, 1994, and between December 5, 1994 and
January 6, 1995, will be charged a contingent deferred sales charge by the
Fund's distributor of 0.50 of 1% for redemptions made within one year of
purchase. For a more complete description, see "Contingent Deferred Sales
Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The advisor can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.55% of average daily net
assets plus 4.5% of gross income, excluding capital gains and losses.
(3) The maximum 12b-1 fee is 0.25%.
(4) The maximum shareholder services fee is 0.25%.
(5) The Total Class A Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending October 31, 1995. The Total
Class A Shares Operating Expenses were 1.25% for the fiscal year ended October
31, 1994, and would have been 4.04% absent the voluntary waiver of the
management fee and a portion of the 12b-1 fee, and the voluntary reimbursement
of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class A Shares" and "Investment
Series Funds, Inc. Information." Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales load permitted under the rules of the National
Association of Securities Dealers, Inc.
<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............................................................... $ 72 $92 $ 120 $198
You would pay the following expenses on the same investment, assuming
no redemption........................................................ $ 67 $92 $ 120 $198
</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.
The information set forth in the foregoing table and example relates only to
Class A Shares of the Fund. The Fund also offers Class C Shares. Class C Shares
and Class A Shares are subject to certain of the same expenses, however, Class C
Shares are not subject to a sales load, but are subject to a 12b-1 fee of 0.75%
and a contingent deferred sales charge of 1.00%. See, "Other Classes of Shares."
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 37.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1994 1993 1992*
------ ------ ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.38 $11.84 $12.00
- ---------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------
Net investment income 0.12 0.09 0.11
- ---------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.25) 1.71 (0.18)
- --------------------------------------------------------------- ------ ------ ------
Total from investment operations (1.13) 1.80 (0.07)
- --------------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (0.12) (0.10) (0.09)
- ---------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.82) (0.16) --
- --------------------------------------------------------------- ------ ------ ------
Total distributions (0.94) (0.26) (0.09)
- --------------------------------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $11.31 $13.38 $11.84
- --------------------------------------------------------------- ------ ------ ------
TOTAL RETURN** (8.43%) 15.34% (0.61%)
- ---------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------
Expenses 1.25% 1.25% 1.17%(a)
- ---------------------------------------------------------------
Net investment income 1.00% 0.73% 1.19%(a)
- ---------------------------------------------------------------
Expense waiver/reimbursement(b) 2.79% 2.37% 1.33%(a)
- ---------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------
Net assets, end of period (000 omitted) $9,880 $11,609 $6,540
- ---------------------------------------------------------------
Portfolio turnover rate 86% 74% 29%
- ---------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 16, 1992 (date of initial
public investment) to
October 31, 1992.
** 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.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on May
20, 1992. Prior to December 18, 1992, the Fund was operated as a portfolio of
Investment Series Trust, a Massachusetts business trust established pursuant to
a Declaration of Trust dated March 17, 1987. On December 18, 1992, the
shareholders of the Fund voted to reorganize the Fund as a portfolio of the
Corporation. The Articles of Incorporation permit the Corporation to offer
separate series of shares of capital stock representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of this prospectus,
the Board of Directors of the Corporation (the "Directors") has established two
classes of shares, known as Class A Shares and Class C Shares. This prospectus
relates only to the Class A Shares (the "Shares") of the Fund.
Shares of the Fund are designed for individuals as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
equity securities with prospects for above average growth in earnings and
dividends or of companies where significant fundamental changes are taking
place. A minimum initial investment of $500 is required, unless the investment
is in a retirement account, in which case the minimum initial investment is $50.
Shares are sold at net asset value plus a sales load and are redeemed at net
asset value; however, a contingent deferred sales charge is imposed on certain
Shares. For a more complete description, see "Redeeming Class A Shares."
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Federated Liberty."
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
Class A Shares of the Fund are a member of a family of mutual funds,
collectively known as the Liberty Family of Funds. The other funds in the
Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated, corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
- Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal through investment grade
securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
- Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and personal income taxes imposed by the
state of Michigan and Michigan municipalities, primarily through Michigan
municipal securities;
- Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
- Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
- Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return primarily through securities
issued by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
LIBERTY FAMILY RETIREMENT PROGRAM
The Fund is also a member of the Liberty Family Retirement Program, an
integrated program of investment options, plan recordkeeping, and consultation
services for 401(k) and other participant-directed benefit and savings plans.
Under the Program, employers or plan trustees may select a group of investment
options to be offered in a plan which also uses the Program for recordkeeping
and administrative services. Additional fees are charged to participating plans
for these services. As part of the Program, exchanges may readily be made
between investment options selected by the employer or plan trustee.
The other funds participating in the Liberty Family Retirement Program are:
American Leaders Fund, Inc.; Capital Preservation Fund; Fund for U.S. Government
Securities, Inc.; International Equity Fund;
International Income Fund; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Utility Fund, Inc.; Prime Cash Series; Stock and Bond
Fund, Inc.; and Strategic Income Fund.
No sales load is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is appreciation of capital. 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 equity
securities of companies with prospects for above-average growth in earnings and
dividends or of companies where significant fundamental changes are taking
place. The Fund generally invests in companies with market capitalization of
$100,000,000 or more. The investment policies may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Equity securities are selected by the Fund's investment
adviser, Federated Advisers (the "Adviser"), on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of each company's business. The
fundamental changes which the Adviser will seek to identify in companies
include, for example, restructuring of basic businesses or reallocations of
assets which present opportunities for significant share price appreciation. At
times, the Fund will invest in securities of companies which are deemed by the
Adviser to be candidates for acquisition by other entities as indicated by
changes in ownership, changes in standard price to value ratios, and an
examination of other standard analytical indices. Under normal circumstances, at
least 65% of the value of the Fund's total assets will be invested in equity
securities. However, the Fund is not required to purchase or sell these
securities if the 65% investment level changes due to increases or decreases in
the market value of portfolio securities.
The Fund may invest in preferred stocks, corporate bonds, debentures, notes,
warrants, and put options on stocks. For temporary defensive purposes, the Fund
may also invest in short-term money market instruments, U.S. government
securities, and hold cash in such proportions as the Adviser may determine.
CORPORATE DEBT OBLIGATIONS. The Fund may invest up to 35% of the value of its
total assets in corporate debt obligations that are rated B or better by a
nationally recognized statistical rating organization ("NRSRO"). Corporate debt
obligations that are not determined to be investment grade (rated BBB or higher
by Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc., or
Baa or higher by Moody's Investors Service, Inc. ("Moody's")) are high-yield,
high-risk bonds (i.e., "junk bonds"), typically subject to greater market
fluctuations and greater risk of loss of income and
principal due to an issuer's default. To a greater extent than investment grade
bonds, lower rated bonds tend to reflect short-term corporate, economic, and
market developments, as well as investor perceptions of the issuer's credit
quality. In addition, lower rated bonds may be more difficult to dispose of or
to value than higher-rated, lower-yielding bonds. Bonds rated BB or B, or Ba or
B, respectively, by a NRSRO 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.
Downgraded securities will be evaluated on a case by case basis by the Adviser.
The Adviser will determine whether or not the security continues to be an
acceptable investment. If not, the security will be sold. A full description of
the rating categories is contained in the Appendix to the Prospectus.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
REPURCHASE AGREEMENTS. The Fund may purchase acceptable investments pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
or other securities to the Fund and agree at the time of sale to repurchase them
at a mutually agreed upon time and price. To the extent that the original seller
does not repurchase the securities from the Fund, they could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities up to specific limitations. These limitations are not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies but which are subject to
restriction on resale under federal securities law. The Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Directors to be liquid, and repurchase agreements providing
for settlement in more than seven days after notice, to 15% of net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors such as the Fund who agrees
that the Fund is purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or the investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2) commercial
paper and possibly certain other restricted securities which meet the criteria
for liquidity established by the Directors of the Corporation are quite liquid.
The Fund intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Directors, including Section 4(2)
commercial paper, as determined by the Adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. Settlement
dates may be a month or more after entering into these transactions, and the
market values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
FOREIGN SECURITIES. The Fund may invest up to 10% of its net assets in foreign
securities. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investments in domestic issuers. These considerations include
the possibility of expropriation, the unavailability of financial information,
or the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social, or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It may also be
more difficult to enforce contractual obligations abroad than would be the case
in the United States because of differences in the legal systems. Transaction
costs in foreign securities may be higher. The Adviser will consider these and
other factors before investing in foreign securities and will not make such
investments unless, in its opinion, such investments will meet the Fund's
standards and objective. The Fund will only purchase securities issued in U.S.
dollar denominations.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will only
invest in other investment companies that are money market funds having an
investment objective and policies similar to its own and primarily for the
purpose of investing short-term cash which has not yet been invested in other
portfolio instruments. The Adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
PUT AND CALL OPTIONS. The Fund may purchase put options on stocks. These
options will be used only as a hedge to attempt to protect securities which the
Fund holds against decreases in value. The Fund may purchase these put options
as long as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio.
The Fund may also 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. Writing of call options by the Fund is intended to generate
income for the Fund and thereby protect against price movements in particular
securities in the Fund's portfolio.
RISKS. The effective use of options as hedging techniques depends on the
correlation between their prices and the behavior of the Fund's portfolio
securities as well as the Adviser's ability to accurately predict the
direction of stock prices, interest rates and other relevant economic
factors. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange which may or may
not exist for any particular call or put option at any specific time. The
absence of a liquid secondary market also may limit the Fund's ability to
dispose of the securities underlying an option. The inability to close
options also could have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Directors
and will receive collateral equal to at least 100% of the value of the
securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
- sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value
of its net assets is held as collateral for those positions; nor
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
The Fund will not:
- invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations including
the operation of any predecessors;
- commit more than 5% of its total assets to premiums on open put option
positions;
- invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements collateralized by U.S.
government securities, and U.S. government obligations) or purchase more
than 10% of any class of voting securities of any one issuer; nor
- invest more than 5% of its total assets in warrants.
INVESTMENT SERIES FUNDS, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Corporation is managed by a Board of Directors. The
Directors are responsible for managing the business affairs of the Corporation
and for exercising all of the Corporation's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the
Corporation, investment decisions for the Fund are made by Federated Advisers,
the Fund's investment adviser, subject to direction by the Directors. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .55 of 1% of the Fund's average daily net assets plus 4.5% of the
Fund's annual gross income, excluding any capital gains or losses. Gross
income includes, in general, discount earned on U.S. Treasury bills and
agency discount notes, interest earned on all interest bearing obligations
and dividend income recorded on the ex-dividend date but does not include
capital gains or losses or reduction of expenses. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any
time at its sole discretion. The Adviser has also undertaken to reimburse
the Fund for operating expenses in excess of limitations established by
certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approxi-
mately 3,500 client institutions nationwide. Through these same client
institutions, individual shareholders also have access to this same level
of investment expertise.
Peter R. Anderson has been the Fund's senior portfolio manager since
August, 1994. Mr. Anderson joined Federated Investors in 1972 as, and is
presently, a Senior Vice President of the Fund's investment adviser. Mr.
Anderson is a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Wisconsin.
Gregory M. Melvin is the Fund's portfolio manager and has participated in
the management of the Fund since January, 1987. Mr. Melvin joined Federated
Investors in 1980 and has been a Vice President of the Fund's investment
adviser since 1984. Mr. Melvin is a Chartered Financial Analyst and
received his M.B.A. in Finance from Harvard Business School.
James E. Grefenstette has been the Fund's co-portfolio manager since
December, 1994. Mr. Grefenstette joined Federated Investors in 1992 and has
been an Assistant Vice President of the Fund's investment adviser since
1994. Mr. Grefenstette served as an investment analyst of the adviser from
1992 to 1994. Mr. Grefenstette served as a credit analyst with Westinghouse
Credit Corporation from 1990 to 1992, and as a bond trader and then an
Investment Officer with Pittsburgh National Bank from 1987 to 1990. Mr
Grefenstette received his M.S.I.A. from Carnegie Mellon University.
DISTRIBUTION OF CLASS A SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of up
to 0.25 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Fund
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp. will pay
financial institutions, at the time of purchase, an amount equal to 0.50 of 1%
of the net asset value of Shares purchased by their clients or customers under
the Liberty Family Retirement Program or by certain qualified plans as approved
by Federated Securities Corp. (Such payments are subject to a reclaim from the
financial institution should the assets leave the program within 12 months after
purchase.) These payments will be made directly by the distributor from its
assets, and will not be made from the assets of the Fund or by the assessment of
a sales load on Shares.
Glass-Steagall Act prohibits a depository institution (such as a commercial bank
or a savings and loan association) from being an underwriter or distributor of
most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Board of Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the
Corporation and the Fund. Federated Administrative Services provides these at an
annual rate which relates to the average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors (the "Federated Funds") as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
- --------------------- ------------------------------------
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for Shares of the Fund, and dividend
disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania 15222, and Dickstein, Shapiro &
Morin, L.L.P., 2101 L Street, N.W., Washington, D.C. 20037.
INDEPENDENT AUDITORS. Independent auditing services are provided by Ernst &
Young LLP, Pittsburgh, Pennsylvania 15219.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Class A Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Class A Shares in the liabilities of the Fund and those attributable to the
Class A Shares, and dividing the remainder by the total number of Class A Shares
outstanding. The net asset values for Class C Shares may differ from that of
Class A Shares due to the variance in daily net income realized by each
respective class. Such variance will reflect only accrued net income to which
the shareholders of a particular class are entitled.
INVESTING IN CLASS A SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open. Shares may be purchased through a financial
institution which has a sales agreement with the distributor or directly from
the distributor, Federated Securities Corp., once an account has been
established. In connection with the sale of Shares, Federated Securities Corp.
may from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
Participants in plans under the Liberty Family Retirement Program shall purchase
Shares in accordance with the requirements of their respective plans.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 P.M. (Eastern time) and
must be
transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in order
for Shares to be purchased at that day's price. Purchase orders through other
financial institutions (such as a registered investment adviser) must be
received by the financial institution and transmitted to the Fund before 4:00
P.M. (Eastern time) in order for Shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders promptly.
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Capital Growth Fund--Class A Shares; and
- mail both to Federated Services Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank, into federal funds. This is
generally the next business day after the transfer agent's bank receives the
check.
BY WIRE. To purchase Shares directly from the distributor by wire once an
account has been established, call the Fund. All information needed will be
taken over the telephone, and the order is considered received when State
Street Bank receives payment by wire. Federal funds should be wired as
follows: Federated Services Company, c/o State Street Bank and Trust
Company, Boston, Massachusetts 02105; Attention: Mutual Fund Servicing
Division; For Credit to: Capital Growth Fund--Class A Shares; Fund Number
(this number can be found on the account statement or by contacting the
Fund); Group Number or Order Number; Nominee or Institution Name; ABA
Number 011000028. Shares cannot be purchased by wire on Columbus Day,
Veterans' Day, or Martin Luther King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $500, unless the investment is in a
retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts which must be in amounts of at least $50. (Other minimum
investment requirements may apply to investments through the Liberty Family
Retirement Program.)
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DEALER CONCESSION
A PERCENTAGE OF A PERCENTAGE OF AS A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED PUBLIC OFFERING PRICE
- ------------------------------- ----------------------- --------------------- ------------------------
<S> <C> <C> <C>
Less than $50,000.............. 5.50% 5.82% 5.00%
$50,000 but less than
$100,000..................... 4.50% 4.71% 4.00%
$100,000 but less than
$250,000..................... 3.75% 3.90% 3.25%
$250,000 but less than
$500,000..................... 2.50% 2.56% 2.25%
$500,000 but less than
$1,000,000................... 2.00% 2.04% 1.80%
$1,000,000 or greater.......... 0.00% 0.00% 0.25%*
</TABLE>
* See Sub-section entitled "DEALER CONCESSION" on page 14.
The net asset value is determined at 4:00 P.M. (Eastern time) or at the close of
the New York Stock Exchange, Monday through Friday, except on: (i) days on which
there are not sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days during which no
Shares are tendered for redemption and no orders to purchase Shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
No sales load is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.
No sales load is imposed for Shares purchased through bank trust departments or
investment advisers registered under the Investment Advisers Act of 1940, as
amended, or retirement plans where the third party administrator has entered
into certain arrangements with Federated Securities Corp. or its affiliates.
However, investors who purchase Shares through a trust department or investment
adviser may be charged an additional service fee by that institution.
DEALER CONCESSION. In addition to the dealer concession as noted in the table
on the preceding page, the distributor may offer to pay dealers up to 100% of
the sales load retained by it. Such payments may take the form of cash or
promotional incentives, such as payment of certain expenses of qualified
employees and their spouses to attend informational meetings about the Fund or
other special events at recreational-type facilities, or of items of material
value. In some instances, these incentives will be made available only to
dealers whose employees have sold or may sell a significant amount of Shares. On
purchases of $1 million or more, the investor pays no sales load; however, the
distributor will make twelve monthly payments to the dealer totaling 0.25% of
the public offering price over the first year following the purchase. Such
payments are based on the original purchase price of the Shares outstanding at
each month end.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
ELIMINATING OR REDUCING THE SALES LOAD
The sales load can be eliminated or reduced on the purchase of Shares through:
- quantity discounts and accumulated purchases;
- a letter of intent;
- using the reinvestment privilege;
- purchases with proceeds from redemptions of unaffiliated mutual fund
shares; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown on the preceding page,
larger purchases eliminate or reduce the sales load paid. The Fund will combine
purchases made in all funds in the Liberty Family of Funds with purchases of
Shares on the same day by the investor, his spouse, and his children under age
21 when it calculates the sales load. To receive the sales load elimination or
reduction, Federated Securities Corp. must be notified by the institution or
shareholder at the time of investment that purchases are being combined.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $90,000 and he
purchases $10,000 more at the current public offering price, the sales load on
the additional purchase according to the schedule now in effect would be 3.75%,
not 4.50%.
To receive the sales load elimination or reduction, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
at the time the purchase is made that Shares are already owned or that purchases
are being combined. The Fund will eliminate or reduce the sales load after it
confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $50,000 of
shares in the funds in the Liberty Family of Funds over the next 13 months, the
sales load may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales load adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold 5.50% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The 5.50% 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 load.
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 load 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 toward the
dollar fulfillment of the letter of intent. Prior trade purchases will not be
adjusted.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Shares, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED MUTUAL FUND SHARES.
Investors may purchase Shares at net asset value, without a sales load, with the
proceeds from the redemption of shares of an investment company which were sold
with a sales load or commission and were not distributed by Federated Securities
Corp. The purchase must be made within 60 days of the redemption and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. For the period from
December 5, 1994 to January 6, 1995, Federated Securities Corp. will offer to
pay financial institutions an amount equal to .50% of 1% of the net asset value
of Class A Shares purchased by their clients with the proceeds from redemptions
of unaffiliated mutual fund shares. Financial institutions may elect to waive
this initial payment; such waiver will result in the waiver by the Fund of the
otherwise applicable contingent deferred sales charge.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination or
reduction, a shareholder has the privilege of combining concurrent purchases of
two or more funds in the Liberty Family of Funds, the purchase price of which
includes a sales load. For example, if a shareholder concurrently invested
$30,000 in one of the other Liberty Funds with a sales load, and $20,000 in this
Fund, the sales load would be reduced.
To receive this sales load elimination or reduction, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
at the time the concurrent purchases are made. The Fund will eliminate or reduce
the sales load 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 Shares at the net asset value next determined after an order is
received by the transfer agent, plus the applicable sales load. A shareholder
may apply for participation in this program through his financial institution or
directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested in writing to Federated Services Company.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid during
that quarter.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares on payment dates
at the ex-dividend date net asset value without a sales load, unless
shareholders request cash payments on the new account form or by writing to the
dividend disbursing agent. All shareholders on the record date are entitled to
the dividend. If Shares are redeemed or exchanged prior to the record date or
purchased after the record date, those Shares are not entitled to that quarter's
dividend.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact Federated Securities Corp. and
consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class A shareholders may exchange all or some of their
Shares for Class A Shares of other funds in the Liberty Family of Funds. They
may also exchange into certain of the Funds (as defined in the Statement of
Additional Information) for which affiliates of Federated Investors serve as
principal
underwriter. Certain of the Funds are sold with a sales load different from that
of the Fund's or with no sales load; exchanges into these Funds are made at net
asset value plus the difference between the Fund's sales load and contingent
deferred sales charge already paid and any sales load of the Fund into which the
Shares are to be exchanged, if higher. Neither the Fund nor any of the funds in
the Liberty Family of Funds imposes any additional fees on exchanges.
Participants in a plan under the Liberty Family Retirement Program may exchange
all or some of their Shares for Class A Shares of other funds offered under the
plan at net asset value without a contingent deferred sales charge.
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for an elimination or
reduction of the sales load, Federated Securities Corp. must be notified by the
shareholder in writing or by his financial institution.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders who reside 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. The exchange privilege may be
modified or terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares. Such
exchanges may be subject to a contingent deferred sales charge and possibly a
sales load.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending on the circumstances, a short-term or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds and certain of the
Funds may be given in writing or by telephone. Written instructions may require
a signature guarantee. Shareholders may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his broker
or financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail to Federated Services
Company, c/o State Street Bank and Trust Company, Two Heritage Drive, North
Quincy, Massachusetts 02171.
Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations. 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.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and will be
binding upon the shareholder. Such instructions will be processed as of 4:00
P.M. (Eastern time) and must be received by the transfer agent before that time
for Shares to be exchanged the same day. Shareholders exchanging into the Fund
will not receive any dividend that is payable to shareholders of record on that
date. This privilege may be modified or terminated at any time.
REDEEMING CLASS A SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemptions can be made through a financial institution or directly
from the Fund. Redemption requests must be received in proper form. Redemptions
of Shares held through the Liberty Family Retirement Program will be governed by
the requirements of the respective plans.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value, less any applicable contingent deferred sales charge,
next determined after the Fund receives the redemption request from the
financial institution. Redemption requests through a registered broker/dealer
must be received by the broker before 4:00 P.M. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. Redemption requests
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the transfer agent. The
proceeds will be mailed to the shareholder's address of record or wire
transferred to the shareholder's account at a domestic commercial bank that is a
member of the Federal Reserve System, normally within one business day, but in
no event longer than seven days after the request. The minimum amount for a wire
transfer is $1,000. If at any time the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as redeeming by mail, should be considered.
BY MAIL. Shares may also be redeemed by sending a written request to the
transfer agent. The written request should include the shareholder's name, the
Fund and class of shares' 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 contact the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF");
- a member of the New York, American, Boston, Midwest or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"); or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased Shares with proceeds of a redemption of shares of a
mutual fund sold with a sales load and not distributed by Federated Securities
Corp. prior to June 1, 1994, and during the period from December 5, 1994 to
January 6, 1995, will be charged a contingent deferred sales charge by the
Fund's distributor of .50 of 1% for redemptions made within one year from the
date of purchase. Purchases under the program made after that date will not be
subject to any type of contingent
deferred sales charge. The contingent deferred sales charge will be calculated
based upon the lesser of the original purchase price of the Shares or the net
asset value of the Shares when redeemed.
The contingent deferred sales charge will not be imposed on Shares acquired
through reinvestment of dividends or distribution of short-term or long-term
capital gains. Redemptions are deemed to have occurred in the following order:
1) Shares acquired through the reinvestment of dividends and long-term capital
gains, 2) purchases of Shares occurring more than one year before the date of
redemption, 3) purchases of Shares within the previous year without the use of
redemption proceeds as described above, and 4) purchases of Shares within the
previous year through the use of redemption proceeds as described above.
The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total or
partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement, (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account, after the beneficial owner
attains age 59 1/2; or (iii) from the death or total and permanent disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend
to account transfers, rollovers, and other redemptions made for purposes of
reinvestment.
A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds or Liberty
Family Retirement Program funds, or in connection with redemptions by the Fund
of accounts with low balances. No contingent deferred sales charge will be
charged for redemption from the Liberty Family Retirement Program.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Shares. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in Shares. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000. A shareholder may
apply for participation in this program through his financial institution. Due
to the fact that Shares are sold with a sales load, it is not advisable for
shareholders to be purchasing Shares 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, except retirement accounts, and pay the proceeds
to the shareholder if the account balance falls below the required minimum value
of $500. This requirement does not apply, however, if the balance falls below
$500 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Corporation have equal voting rights, except that in matters
affecting only a particular Fund or class, only shares of that Fund or class are
entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet the
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Corporation:
- The Corporation is subject to the Pennsylvania corporate franchise tax;
and
- Fund Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises the total return and yield for Class A
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Class A Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Class A Shares is calculated by dividing the net investment income
per Share (as defined by the Securities and Exchange Commission) earned by Class
A Shares over a thirty-day period by the maximum offering price per Share on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Class A Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares and
Class C Shares. Because Class C Shares may be subject to a shareholder services
fee and a higher 12b-1 fee than Class A Shares, total return and yield for Class
A Shares will likely exceed that of Class C Shares for the same period.
From time to time, the Fund may advertise the performance of Class A Shares
using certain reporting services and/or compare the performance of Class A
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund does not presently offer Class B shares.
Class C Shares are sold primarily to customers of financial institutions at net
asset value with no initial sales load. Class C Shares may be subject to a
contingent deferred sales charge of up to 1.00%, as discussed in the Class C
prospectus. Class C Shares are distributed pursuant to a Rule 12b-1 Plan adopted
by the Fund whereby the distributor is paid a fee of up to .75 of 1%, in
addition to a shareholder services fee of up to .25 of 1% of the Class C Shares'
average daily net assets. Class C Shares are subject to a minimum initial
investment of $1,500, unless the investment is in a retirement account, in which
case the minimum initial investment is $50.
Financial institutions and brokers providing sales and/or shareholder services
may receive different compensation from one class of shares of the Fund than
from another class of shares. The distributor may pay a shareholder services fee
to a financial institution or broker for certain services, in addition to fees
paid pursuant to the Rule 12b-1 Plan. Any fee paid by the distributor for
shareholder services will not be an expense of the class, but will be reimbursed
to the distributor by the Adviser.
The amount of dividends payable to holders of Class A Shares will generally
exceed that of Class C Shares by the difference between Class Expenses and
distribution expenses borne by shares of each respective class.
The stated advisory fee is the same for both classes of the Fund.
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 37.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------
1994**** 1993 1992** 1991 1990 1989*
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.38 $11.84 $12.00 $ 9.11 $ 9.97 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.15 0.13 0.12 0.31 0.32 0.03
- ----------------------------------------
Net realized and unrealized gain
(loss) on investments (1.25) 1.71 (0.18 ) 2.91 (0.86) (0.04)
- ---------------------------------------- ------- ----- ------ ----- ----- -----
Total from investment operations (1.10) 1.84 (0.06 ) 3.22 (0.54) (0.01)
- ---------------------------------------- ------- ----- ------ ----- ----- -----
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net
investment income (0.15) (0.14) (0.10 ) (0.30) (0.32) (0.02)
- ----------------------------------------
Distributions to shareholders from net
realized gain on investment
transactions (0.82) (0.16) -- (0.02) -- --
- ----------------------------------------
Distributions in excess of net
investment income(a) -- -- -- (0.01) -- --
- ---------------------------------------- ------- ----- ------ ----- ----- -----
Total distributions (0.97) (0.30) (0.10 ) (0.33) (0.32) (0.02)
- ---------------------------------------- ------- ----- ------ ----- ----- -----
NET ASSET VALUE, END OF PERIOD $11.31 $13.38 $11.84 $12.00 $ 9.11 $ 9.97
- ---------------------------------------- ------- ----- ------ ----- ----- -----
TOTAL RETURN*** (8.20%) 15.70% (0.53 %) 35.68% (5.43%) (0.02%)
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 1.03% 1.00% 1.00 %(b) 1.00% 1.00% 1.19%(b)
- ----------------------------------------
Net investment income 1.17% 0.98% 1.28 %(b) 2.73% 3.54% 4.21%(b)
- ----------------------------------------
Expense waiver/reimbursement(c) 2.73% 2.37% 1.50 %(b) 1.50% 1.50% 0.78%(b)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000
omitted) $14 $14,836 $18,161 $13,513 $7,484 $5,525
- ----------------------------------------
Portfolio turnover rate 86% 74% 29 % 57% 83% 0%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from November 30, 1989 (date of initial
public investment) to
December 31, 1989.
** During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
**** As of December 9, 1994, Investment shares of the Capital Growth Fund had no
shareholders and were no longer offered for public investment.
(a) These distributions do not represent a return of capital for federal tax
purposes.
(b) Computed on an annualized basis.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 37.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
-------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.36 $12.39
- ---------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------
Net investment income 0.04 (0.01)
- ---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.23) 0.98
- --------------------------------------------------------------------------- ------ ------
Total from investment operations (1.19) 0.97
- --------------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.04) --
- ---------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.82) --
- --------------------------------------------------------------------------- ------ ------
Total distributions (0.86) --
- --------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $11.31 $13.36
- --------------------------------------------------------------------------- ------ ------
TOTAL RETURN** (8.90%) 7.83%
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------
Expenses 2.00% 2.00%(a)
- ---------------------------------------------------------------------------
Net investment income 0.35% (0.18%)(a)
- ---------------------------------------------------------------------------
Expense waiver/reimbursement(b) 2.73% 2.37%(a)
- ---------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,049 $314
- ---------------------------------------------------------------------------
Portfolio turnover rate 86% 74%
- ---------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 13, 1993 (date of initial
public investment) to October 31, 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.
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
COMMON STOCKS--67.2%
- ---------------------------------------------------------------------------------
BASIC INDUSTRY--1.2%
-----------------------------------------------------------------
7,500 (a) Magma Copper Co. $ 134,063
----------------------------------------------------------------- -----------
CAPITAL GOODS--15.0%
-----------------------------------------------------------------
6,700 Dover Corp. 371,850
-----------------------------------------------------------------
20,300 (a) Foamex International, Inc. 182,700
-----------------------------------------------------------------
5,800 General Motors Corp., Class H 208,800
-----------------------------------------------------------------
8,700 Greenfield Industries, Inc. 206,625
-----------------------------------------------------------------
17,400 (a) Kenetech Corp. 221,850
-----------------------------------------------------------------
5,800 Loral Corp. 229,825
-----------------------------------------------------------------
5,800 Stewart & Stevenson Services, Inc. 223,300
----------------------------------------------------------------- -----------
Total 1,644,950
----------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CONSUMER DURABLES--2.6%
-----------------------------------------------------------------
5,900 Chrysler Corp. 287,625
----------------------------------------------------------------- -----------
CONSUMER PRODUCTS--8.6%
-----------------------------------------------------------------
29,000 (a) Dr. Pepper/Seven-Up Cos., Inc. 735,875
-----------------------------------------------------------------
7,000 (a) Safeway, Inc. 206,500
----------------------------------------------------------------- -----------
Total 942,375
----------------------------------------------------------------- -----------
ENERGY--6.1%
-----------------------------------------------------------------
6,400 Ashland Oil Co. 248,800
-----------------------------------------------------------------
10,025 Cinergy Corp. 231,837
-----------------------------------------------------------------
5,800 Sonat, Inc. 188,500
----------------------------------------------------------------- -----------
Total 669,137
----------------------------------------------------------------- -----------
FINANCE--9.4%
-----------------------------------------------------------------
17,400 MBNA Corp. 465,450
-----------------------------------------------------------------
5,941 Mellon Bank Corp. 330,468
-----------------------------------------------------------------
4,600 NationsBank Corp. 227,700
----------------------------------------------------------------- -----------
Total 1,023,618
----------------------------------------------------------------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------
HEALTHCARE--6.3%
-----------------------------------------------------------------
6,000 (a) Foundation Health Corp. $ 196,500
-----------------------------------------------------------------
6,700 Genentech, Inc. 340,025
-----------------------------------------------------------------
3,700 (a) Genetics Institute, Inc. 149,850
----------------------------------------------------------------- -----------
Total 686,375
----------------------------------------------------------------- -----------
INSURANCE--3.2%
-----------------------------------------------------------------
10,000 Travelers, Inc. 347,500
----------------------------------------------------------------- -----------
PROCESS INDUSTRIES--1.9%
-----------------------------------------------------------------
9,200 Praxair, Inc. 212,750
----------------------------------------------------------------- -----------
TECHNOLOGY--6.7%
-----------------------------------------------------------------
5,800 (a) Compaq Computer Corp. 232,725
-----------------------------------------------------------------
10,100 (a) Integrated Device Technology 286,587
-----------------------------------------------------------------
3,500 Intel Corp. 217,437
----------------------------------------------------------------- -----------
Total 736,749
----------------------------------------------------------------- -----------
TRANSPORTATION--1.9%
-----------------------------------------------------------------
8,700 American President Cos., Ltd. 210,975
----------------------------------------------------------------- -----------
UTILITIES--2.7%
-----------------------------------------------------------------
9,200 Sprint Corp. 300,150
----------------------------------------------------------------- -----------
WASTE DISPOSAL--1.5%
-----------------------------------------------------------------
81,200 (a) Chambers Development, Inc. 162,400
----------------------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $6,529,180) 7,358,667
----------------------------------------------------------------- -----------
CONVERTIBLE PREFERRED STOCK--2.1%
- ---------------------------------------------------------------------------------
UTILITIES--2.1%
-----------------------------------------------------------------
4,000 (a) Nacional Financiera, SNC, PRIDES, $6.79 232,000
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $241,450) 232,000
----------------------------------------------------------------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- --------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
CONVERTIBLE SECURITIES--21.0%
- ---------------------------------------------------------------------------------
BASIC INDUSTRY--2.5%
-----------------------------------------------------------------
290,000 Medusa Corp., Conv. Sub. Note, 6.00%, 11/15/2003 $ 269,700
----------------------------------------------------------------- -----------
CAPITAL GOODS--1.9%
-----------------------------------------------------------------
140,000 General Instrument Corp., Conv. Jr. Sub. Note, 5.00%, 6/15/2000 207,277
----------------------------------------------------------------- -----------
CONSUMER PRODUCTS--5.7%
-----------------------------------------------------------------
580,000 Laidlaw, Inc., Conv. Deb., (ADT) 6.00%, 1/15/99 624,225
----------------------------------------------------------------- -----------
FINANCE--6.3%
-----------------------------------------------------------------
10,300 First USA, Inc., PRIDES, $1.99 355,350
-----------------------------------------------------------------
8,700 Sunamerica, Inc., Conv. Pfd., Series D, $2.78 336,038
----------------------------------------------------------------- -----------
Total 691,388
----------------------------------------------------------------- -----------
HEALTHCARE--4.6%
-----------------------------------------------------------------
960,000 Roche Holdings, Inc., LYON, 4.75% accrual 9/23/2008 501,600
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE SECURITIES (IDENTIFIED COST $2,277,724) 2,294,190
----------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CONVERTIBLE BONDS--3.6%
- ---------------------------------------------------------------------------------
CONSUMER PRODUCTS--3.6%
-----------------------------------------------------------------
$1,360,000 Coleman Worldwide Corp., Conv. LYON, 7.25%, accrual, 5/27/2013 389,300
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE BONDS (IDENTIFIED COST $379,921) 389,300
----------------------------------------------------------------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
*REPURCHASE AGREEMENT--6.6%
- ---------------------------------------------------------------------------------
$ 725,000 Morgan (J.P.) Securities, Inc., 4.82%, dated 10/31/94, due
11/1/94
(at amortized cost) $ 725,000
----------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $10,153,275) $10,999,157+
----------------------------------------------------------------- -----------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government
obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
+ The cost of investments for federal tax purposes amounts to $10,246,120. The
net appreciation on a federal tax basis amounts to $753,037, which is
comprised of $1,496,035 appreciation and $742,998 depreciation at October 31,
1994.
(a) Non-income producing.
Note: The categories of investments are shown as a percentage of net assets
($10,943,504) at October 31, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C> <C>
LYON -- Liquid Yield Option Note
PRIDES -- Preferred Redeemable Increased Dividend Equity Securities
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified cost, $10,153,275 and
tax cost,$10,246,120) $10,999,157
- --------------------------------------------------------------------------------
Cash 1,413
- --------------------------------------------------------------------------------
Dividend and interest receivable 31,798
- --------------------------------------------------------------------------------
Receivable for capital stock sold 6,964
- -------------------------------------------------------------------------------- -----------
Total assets 11,039,332
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for capital stock redeemed $45,021
- ----------------------------------------------------------------------
Accrued expenses 50,807
- ---------------------------------------------------------------------- -------
Total liabilities 95,828
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 967,596 shares of capital stock outstanding $10,943,504
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $10,174,897
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 845,882
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (81,505)
- --------------------------------------------------------------------------------
Undistributed net investment income 4,230
- -------------------------------------------------------------------------------- -----------
Total Net Assets $10,943,504
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
Investment Shares (net assets of $14,871 / 1,315 shares of capital stock
outstanding) $11.31
- -------------------------------------------------------------------------------- -----------
Class A Shares (net assets of $9,879,565 / 873,523 shares of capital stock
outstanding) $11.31
- -------------------------------------------------------------------------------- -----------
Class C Shares (net assets of $1,049,068 / 92,758 shares of capital stock
outstanding) $11.31
- -------------------------------------------------------------------------------- -----------
COMPUTATION OF OFFERING PRICE:
Investment Shares (100/94.25 of $11.31)* $12.00
- -------------------------------------------------------------------------------- -----------
Class A Shares (100/94.50 of $11.31)* $11.97
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------
Dividends $ 202,322
- --------------------------------------------------------------------------------------------
Interest 276,602
- -------------------------------------------------------------------------------------------- -----------
Total investment income 478,924
- --------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------
Investment advisory fee $139,962
- --------------------------------------------------------------------------------
Directors' fees 4,841
- --------------------------------------------------------------------------------
Administrative personnel and services 213,197
- --------------------------------------------------------------------------------
Custodian and portfolio accounting fees 88,866
- --------------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 190,895
- --------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 7,090
- --------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 1,683
- --------------------------------------------------------------------------------
Fund share registration costs 40,658
- --------------------------------------------------------------------------------
Auditing fees 13,498
- --------------------------------------------------------------------------------
Legal fees 12,698
- --------------------------------------------------------------------------------
Distribution services fee--Class A Shares 27,353
- --------------------------------------------------------------------------------
Distribution services fee--Class C Shares 5,049
- --------------------------------------------------------------------------------
Printing and postage 72,942
- --------------------------------------------------------------------------------
Insurance premiums 7,017
- --------------------------------------------------------------------------------
Taxes 4,323
- --------------------------------------------------------------------------------
Miscellaneous 14,980
- -------------------------------------------------------------------------------- --------
Total expenses 845,052
- --------------------------------------------------------------------------------
Deduct--
- --------------------------------------------------------------------------------
Waiver of investment advisory fee $139,962
- ---------------------------------------------------------------------
Waiver of distribution services fee--Class A Shares 7,123
- ---------------------------------------------------------------------
Reimbursement of other operating expenses 446,250 593,335
- --------------------------------------------------------------------- -------- --------
Net expenses 251,717
- -------------------------------------------------------------------------------------------- -----------
Net investment income 227,207
- -------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) 1,057,990
- --------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (3,347,016)
- -------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments (2,289,026)
- -------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $(2,061,819)
- -------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------
Net investment income $ 227,207 $ 226,782
- --------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($1,150,835 and
$303,564 net gain, respectively, as computed for federal tax purposes) 1,057,990 303,564
- --------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (3,347,016) 3,026,413
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations (2,061,819) 3,556,759
- -------------------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------
Investment Shares (127,805) (174,344)
- --------------------------------------------------------------------------
Class A Shares (103,720) (76,306)
- --------------------------------------------------------------------------
Class C Shares (2,570) --
- --------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions:
- --------------------------------------------------------------------------
Investment Shares (705,563) (245,773)
- --------------------------------------------------------------------------
Class A Shares (686,918) (95,185)
- --------------------------------------------------------------------------
Class C Shares (60,511) --
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (1,687,087) (591,608)
- -------------------------------------------------------------------------- ------------ ------------
CAPITAL STOCK TRANSACTIONS--
- --------------------------------------------------------------------------
Proceeds from sale of shares 6,385,862 11,839,537
- --------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 1,544,956 531,548
- --------------------------------------------------------------------------
Cost of shares redeemed (19,997,291) (13,278,176)
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets from capital stock transactions (12,066,473) (907,091)
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets (15,815,379) 2,058,060
- --------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------
Beginning of period 26,758,883 24,700,823
- -------------------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of
$4,230 and $11,118 respectively) $ 10,943,504 $ 26,758,883
- -------------------------------------------------------------------------- ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of two, diversified
portfolios. The financial statements included herein are only those of Capital
Growth Fund (the "Fund"). The financial statements of the other portfolio 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.
Effective December 9, 1994, the Fund will provide two classes of shares, "Class
A Shares" and "Class C Shares." During the fiscal year ended October 31, 1994,
the Fund provided three classes of shares "Investment Shares," "Class A Shares,"
and "Class C Shares." As of December 9, 1994, the "Investment Shares" class of
shares had no shareholders and were no longer offered.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other
fixed income securities are valued at the last sale price reported on
national securities exchanges. Unlisted securities and bonds are generally
valued at the price provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less may be stated at
amortized cost, which approximates value.
B. REPURCHASE AND REVERSE 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 and reverse repurchase agreement investments. Additionally,
procedures have been established by the Fund to monitor, on a daily basis,
the market value of each repurchase agreement's underlying collateral to
ensure that the value of collateral at least equals the principal amount of
the repurchase transaction, including accrued interest.
The Fund is also permitted to enter into reverse repurchase agreements, in
which the Fund sells U.S. government securities to financial institutions and
agrees to repurchase the securities at an agreed upon price and date.
The Fund will only enter into repurchase and reverse repurchase agreements
with banks and other recognized financial institutions such as broker/dealers
which are deemed by the Fund's adviser to be creditworthy pursuant to
guidelines established by the Board of Directors of the Corporation (the
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
"Directors"). Risks may arise from the potential inability of counterparties
to honor the terms of these agreements. Accordingly, the Fund could receive
less than the repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
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 not to exceed a period of five years from the
Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1994, there were 1,000,000,000 shares of ($.0001 par value per
share) of capital stock of the Fund authorized. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/94 10/31/93
-------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ -------- -----------
<S> <C> <C> <C> <C>
INVESTMENT SHARES
- -------------------------------------------
Shares sold 225,412 $ 2,857,811 341,272 $ 4,316,048
- -------------------------------------------
Shares issued to shareholders in payment of
dividends declared 71,899 833,031 30,603 380,718
- -------------------------------------------
Shares redeemed (1,404,546) (16,634,524) (796,724) (9,811,729)
- ------------------------------------------- ---------- ------------ -------- -----------
Net change resulting from Investment
share transactions (1,107,235) ($12,943,682) (424,849) ($5,114,963)
- ------------------------------------------- ---------- ------------ -------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/94 10/31/93
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
CLASS A SHARES
- ---------------------------------------------
Shares sold 202,913 $ 2,577,402 575,342 $ 7,204,386
- ---------------------------------------------
Shares issued to shareholders in payment of
dividends declared 57,557 660,838 12,091 150,830
- ---------------------------------------------
Shares redeemed (254,546) (3,225,286) (272,085) (3,450,895)
- --------------------------------------------- -------- ----------- -------- -----------
Net change resulting from Class A share
transactions 5,924 $ 12,954 315,348 $ 3,904,321
- --------------------------------------------- -------- ----------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/94 10/31/93**
-------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ------- ---------
<S> <C> <C> <C> <C>
CLASS C SHARES
- ---------------------------------------------
Shares sold 75,971 $ 950,649 24,661 $ 319,103
- ---------------------------------------------
Shares issued to shareholders in payment of
dividends declared 4,583 51,087 -- --
- ---------------------------------------------
Shares redeemed (11,270) (137,481) (1,187) (15,552)
- --------------------------------------------- ---------- ------------ ------- ---------
Net change resulting from Class C share
transactions 69,284 $ 864,255 23,474 $ 303,551
- --------------------------------------------- ---------- ------------ ------- ---------
Net change resulting from Fund share
transactions (1,032,027) ($12,066,473) (86,027) ($907,091)
- --------------------------------------------- ---------- ------------ ------- ---------
</TABLE>
**For the period from April 13, 1993 (date of initial public investment) to
October 31, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal
to: (a) .55% of the average daily net assets of the Fund, and (b) 4.5% of the
gross income of the Fund, excluding capital gains or losses. The Adviser may
voluntarily choose to waive a portion of its fee and to reimburse certain
operating expenses of the Fund. The Adviser can modify or terminate this
voluntary waiver and reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the Fund's
principal distributor, from the net assets of the Fund to finance activities
intended to result in the sale of the Fund's Class A Shares and Class C Shares.
The Plan provides that the Fund may incur distribution expenses up to .25 of 1%
and .75 of 1% of the average daily net assets of the Class A Shares and Class C
Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with FSC, the Fund will pay
up to .25 of 1% of average net assets of the Class C Shares for the period. This
fee is incurred to obtain certain personal services for shareholders and to
maintain the shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $13,190 and start-up
administrative service expenses of $92,451 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following January
16, 1992 (date the Fund first became effective). For the year ended October 31,
1994, the Fund paid $1,128 and $2,256, respectively pursuant to this agreement.
Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities, for the
fiscal year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $16,672,716
- ------------------------------------------------------------------------------- -----------
SALES $29,642,510
- ------------------------------------------------------------------------------- -----------
</TABLE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Directors and Shareholders of
INVESTMENT SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Capital Growth Fund (one of the portfolios
comprising Investment Series Funds, Inc.) as of October 31, 1994, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights (see pages 2, 24, and 25 of this prospectus) for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capital Growth Fund at October 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 9, 1994
APPENDIX (UNAUDITED)
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP ("S&P") 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.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B--Debt rated "BB" or "B", is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
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 some time in the future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Series Funds, Inc.
Capital Growth Fund Federated Investors Tower
Class A Shares Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C.
- -----------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -----------------------------------------------------------------------------------------------
</TABLE>
CAPITAL GROWTH FUND
CLASS A SHARES
PROSPECTUS
A Diversified Portfolio of
Investment Series Funds, Inc., an Open-End
Management Investment Company
December 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
461444200
1102503A-A (12/94)
- -
CAPITAL GROWTH FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS C SHARES
PROSPECTUS
The Class C Shares of Capital Growth Fund (the "Fund") represent interests in a
diversified portfolio of securities which is an investment portfolio of
Investment Series Funds, Inc. (the "Corporation"), an open-end, management
investment company (a mutual fund).
The investment objective of the Fund is appreciation of capital.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT INSURED OR GUARANTEED BY ANY BANK AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class C Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
C Shares and Class A Shares, dated December 31, 1994, with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge by calling 1-800-235-4669. To obtain other information, or make inquiries
about the Fund, contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------
Liberty Family Retirement Program 4
INVESTMENT INFORMATION 5
- ------------------------------------------------------
Investment Objective 5
Investment Policies 5
Portfolio Turnover 8
Investment Limitations 8
INVESTMENT SERIES FUNDS, INC. INFORMATION 9
- ------------------------------------------------------
Management of the Corporation 9
Distribution of Class C Shares 10
Administration of the Fund 11
Brokerage Transactions 12
NET ASSET VALUE 12
- ------------------------------------------------------
INVESTING IN CLASS C SHARES 12
- ------------------------------------------------------
Share Purchases 12
Minimum Investment Required 13
What Shares Cost 13
Systematic Investment Program 13
Certificates and Confirmations 14
Dividends and Distributions 14
Retirement Plans 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
Requirements for Exchange 14
Tax Consequences 15
Making an Exchange 15
REDEEMING CLASS C SHARES 16
- ------------------------------------------------------
Through a Financial Institution 16
Directly from the Fund 16
Contingent Deferred Sales Charge 17
Systematic Withdrawal Program 18
Accounts with Low Balances 18
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
Pennsylvania Corporate and Personal
Property Taxes 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
OTHER CLASSES OF SHARES 20
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 21
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES 22
- ------------------------------------------------------
FINANCIAL STATEMENTS 23
- ------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 34
- ------------------------------------------------------
APPENDIX 35
- ------------------------------------------------------
ADDRESSES 37
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)........................................ 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2).................................................................. 0.00%
12b-1 Fee......................................................................................... 0.75%
Total Other Expenses (after expense reimbursement)................................................ 1.25%
Shareholder Services Fee............................................................. 0.25%
Total Class C Shares Operating Expenses(3).................................................... 2.00%
</TABLE>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of Shares redeemed within one year of
their purchase date. For a more complete description, see "Contingent Deferred
Sales Charge".
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The advisor can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.55% of average daily net
assets plus 4.5% of gross income, excluding capital gains and losses.
(3) The Total Class C Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending October 31, 1995. The Total
Class C Shares Operating Expenses were 2.00% for the fiscal year ended October
31, 1994, and would have been 4.73% absent the voluntary waiver of the
management fee, and voluntary reimbursement of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class C Shares" and "Investment
Series Funds, Inc. Information." Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales load permitted under the rules of the National
Association of Securities Dealers, Inc.
<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.................................................. $ 31 $63 $ 108 $233
You would pay the following expenses on the same investment,
assuming no redemption............................................ $ 20 $63 $ 108 $233
</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.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Fund. The Fund also offers Class A Shares. Class A Shares
and Class C Shares are subject to certain of the same expenses, however, Class A
Shares are subject to a maximum sales load of 5.50%, a 12b-1 fee of 0.25%, and
may be subject to a contingent deferred sales charge. See, "Other Classes of
Shares."
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 34.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
-------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.36 $12.39
- ---------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------
Net investment income 0.04 (0.01)
- ---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.23) 0.98
- --------------------------------------------------------------------------- ------ ------
Total from investment operations (1.19) 0.97
- --------------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.04) --
- ---------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.82) --
- --------------------------------------------------------------------------- ------ ------
Total distributions (0.86) --
- --------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $11.31 $13.36
- --------------------------------------------------------------------------- ------ ------
TOTAL RETURN** (8.90%) 7.83%
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------
Expenses 2.00% 2.00%
- ---------------------------------------------------------------------------
Net investment income 0.35% (0.18%)(a)
- ---------------------------------------------------------------------------
Expense waiver/reimbursement(b) 2.73% 2.37%(a)
- ---------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,049 $314
- ---------------------------------------------------------------------------
Portfolio turnover rate 86% 74%
- ---------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 13, 1993 (date of initial
public investment) to
October 31, 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.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on May
20, 1992. Prior to December 18, 1992, the Fund was operated as a portfolio of
Investment Series Trust, a Massachusetts business trust established pursuant to
a Declaration of Trust dated March 17, 1987. On December 18, 1992, the
shareholders of the Fund voted to reorganize the Fund as a portfolio of the
Corporation. The Articles of Incorporation permit the Corporation to offer
separate series of shares of capital stock representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of this prospectus,
the Board of Directors of the Corporation (the "Directors") has established two
classes of shares, known as Class C Shares and Class A Shares. This prospectus
relates only to the Class C Shares (the "Shares") of the Fund.
Shares of the Fund are designed for individuals as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
equity securities with prospects for above average growth in earnings and
dividends or of companies where significant fundamental changes are taking
place. A minimum initial investment of $1,500 is required, unless the investment
is in a retirement account, in which case the minimum investment is $50. Shares
are sold at net asset value. However, a contingent deferred sales charge of
1.00% will be imposed on assets redeemed within the first twelve months
following purchase.
The Fund's current net asset value can be found in the mutual funds section of
local newspapers under "Federated Liberty."
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
Class C Shares of the Fund are a member of a family of mutual funds,
collectively known as the Liberty Family of Funds. The other funds in the
Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated, corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S. government
securities;
- Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal through investment grade securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation of
principal, primarily limited to municipal securities;
- Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and personal income taxes imposed by the
state of Michigan and Michigan municipalities, primarily through Michigan
municipal securities;
- Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
- Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
- Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return primarily through securities
issued by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
LIBERTY FAMILY RETIREMENT PROGRAM
The Fund is also a member of the Liberty Family Retirement Program, an
integrated program of investment options, plan recordkeeping, and consultation
services for 401(k) and other participant-directed benefit and savings plans.
Under the Program, employers or plan trustees may select a group of investment
options to be offered in a plan which also uses the Program for recordkeeping
and administrative services. Additional fees are charged to participating plans
for these services. As part of the Program, exchanges may readily be made
between investment options selected by the employer or plan trustee.
The other funds participating in the Liberty Family Retirement Program are:
American Leaders Fund, Inc.; Capital Preservation Fund; Fund for U.S. Government
Securities, Inc.; International Equity Fund; International Income Fund; Liberty
Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Utility Fund, Inc.; Prime Cash Series; Stock and Bond Fund, Inc.; and
Strategic Income Fund. Plans with over $1 million invested in funds available in
the Liberty Family Retirement Program may purchase Class A Shares without a
sales load.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is appreciation of capital. 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 equity
securities of companies with prospects for above-average growth in earnings and
dividends or of companies where significant fundamental changes are taking
place. The Fund generally invests in companies with market capitalization of
$100,000,000 or more. The investment policies may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. Equity securities are selected by the Fund's investment
adviser, Federated Advisers (the "Adviser"), on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of each company's business. The
fundamental changes which the Adviser will seek to identify in companies
include, for example, restructuring of basic businesses or reallocations of
assets which present opportunities for significant share price appreciation. At
times, the Fund will invest in securities of companies which are deemed by the
Adviser to be candidates for acquisition by other entities as indicated by
changes in ownership, changes in standard price to value ratios, and an
examination of other standard analytical indices. Under normal circumstances, at
least 65% of the value of the Fund's total assets will be invested in equity
securities. However, the Fund is not required to purchase or sell these
securities if the 65% investment level changes due to increases or decreases in
the market value of portfolio securities.
The Fund may invest in preferred stocks, corporate bonds, debentures, notes,
warrants, and put options on stocks. For temporary defensive purposes, the Fund
may also invest in short-term money market instruments, U.S. government
securities, and hold cash in such proportions as the Adviser may determine.
CORPORATE DEBT OBLIGATIONS. The Fund may invest up to 35% of the value of its
total assets in corporate debt obligations that are rated B or better by a
nationally recognized statistical rating organization ("NRSRO"). Corporate debt
obligations that are not determined to be investment grade (rated BBB or higher
by Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc., or
Baa or higher by Moody's Investors' Service, Inc. ("Moody's")) are high-yield,
high-risk bonds (i.e., "junk bonds"), typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade bonds, lower rated bonds
tend to reflect short-term corporate, economic, and market developments, as well
as investor perceptions of the issuer's credit quality. In addition, lower rated
bonds may be more difficult to dispose of or to value than higher rated,
lower-yielding bonds. Bonds rated BB or B, or Ba or B, respectively, by a NRSRO
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. Downgraded securities will be
evaluated on a case by case basis by the Adviser. The Adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. A full description of the rating categories is
contained in the Appendix to the Prospectus.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
REPURCHASE AGREEMENTS. The Fund may purchase acceptable investments pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
or other securities to the Fund and agree at the time of sale to repurchase them
at a mutually agreed upon time and price. To the extent that the original seller
does not repurchase the securities from the Fund, they could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities up to specific limitations. These limitations are not applicable to
commercial paper issued under Section 4(2) of the Securities Act of 1933.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies but which are subject to
restriction on resale under federal securities law. The Fund will limit
investments in illiquid securities, including certain restricted securities not
determined by the Directors to be liquid, and repurchase agreements providing
for settlement in more than seven days after notice, to 15% of net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors such as the Fund who agrees
that the Fund is purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or the investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2) commercial
paper and possibly certain other restricted securities which meet the criteria
for liquidity established by the Directors are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial paper,
as determined by the Adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because Section 4(2)
commercial paper is liquid, the Fund intends to not subject such paper to the
limitation applicable to restricted securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into these transactions, and the market values of
the
securities purchased may vary from the purchase prices. Accordingly, the Fund
may pay more/less than the market value of the securities on the settlement
date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
FOREIGN SECURITIES. The Fund may invest up to 10% of its net assets in foreign
securities. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investments in domestic issuers. These considerations include
the possibility of expropriation, the unavailability of financial information,
or the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social, or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It may also be
more difficult to enforce contractual obligations abroad than would be the case
in the United States because of differences in the legal systems. Transaction
costs in foreign securities may be higher. The Adviser will consider these and
other factors before investing in foreign securities and will not make such
investments unless, in its opinion, such investments will meet the Fund's
standards and objective. The Fund will only purchase securities issued in U.S.
dollar denominations.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will only
invest in other investment companies that are money market funds having an
investment objective and policies similar to its own and primarily for the
purpose of investing short-term cash which has not yet been invested in other
portfolio instruments. The Adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
PUT AND CALL OPTIONS. The Fund may purchase put options on stocks. These
options will be used only as a hedge to attempt to protect securities which the
Fund holds against decreases in value. The Fund may purchase these put options
as long as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio.
The Fund may also 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. Writing of call options by the Fund is intended to generate
income for the Fund and thereby protect against price movements in particular
securities in the Fund's portfolio.
RISKS. The effective use of options as hedging techniques depends on the
correlation between their prices and the behavior of the Fund's portfolio
securities as well as the Adviser's ability to accurately predict the
direction of stock prices, interest rates and other relevant economic
factors. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange which may or may not exist for
any particular call or put option at any specific time. The absence of a
liquid secondary
market also may limit the Fund's ability to dispose of the securities
underlying an option. The inability to close options also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Directors
and will receive collateral equal to at least 100% of the value of the
securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
- sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value of
its net assets is held as collateral for those positions; nor
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
The Fund will not:
- invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations including
the operation of any predecessors;
- commit more than 5% of its total assets to premiums on open put option
positions;
- invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements collateralized by U.S.
government securities, and U.S. government obligations) or purchase more
than 10% of any class of voting securities of any one issuer; nor
- invest more than 5% of its total assets in warrants.
INVESTMENT SERIES FUNDS, INC. INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Corporation is managed by a Board of Directors. The
Directors are responsible for managing the business affairs of the Corporation
and for exercising all of the Corporation's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the
Corporation, investment decisions for the Fund are made by Federated Advisers,
the Fund's investment adviser, subject to direction by the Directors. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .55 of 1% of the Fund's average daily net assets plus 4.5% of the
Fund's annual gross income, excluding any capital gains or losses. Gross
income includes, in general, discount earned on U.S. Treasury bills and
agency discount notes, interest earned on all interest bearing obligations
and dividend income recorded on the ex-dividend date but does not include
capital gains or losses or reduction of expenses. The Adviser may voluntary
waive a portion of its fee or reimburse the Fund for certain operating
expenses. The Adviser can terminate this voluntary waiver at any time at
its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain
states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Peter R. Anderson has been the Fund's senior portfolio manager since
August, 1994. Mr. Anderson joined Federated Investors in 1972 as, and is
presently, a Senior Vice President of the Fund's investment adviser. Mr.
Anderson is a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Wisconsin.
Gregory M. Melvin is the Fund's portfolio manager and has participated in
the management of the Fund since January, 1987. Mr. Melvin joined Federated
Investors in 1980 and has been a Vice President of the Fund's investment
adviser since 1984. Mr. Melvin is a Chartered Financial Analyst and
received his M.B.A. in Finance from Harvard Business School.
James E. Grefenstette has been the Fund's co-portfolio manager since
December, 1994. Mr. Grefenstette joined Federated Investors in 1992 and has
been an Assistant Vice President of the Fund's investment adviser since
1994. Mr. Grefenstette served as an investment analyst of the adviser from
1992 to 1994. Mr. Grefenstette served as a credit analyst with Westinghouse
Credit Corporation from 1990 to 1992, and as a bond trader and then an
Investment Officer with Pittsburgh National Bank from 1987 to 1990. Mr.
Grefenstette received his M.S.I.A. from Carnegie Mellon University.
DISTRIBUTION OF CLASS C SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of
0.75 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Fund
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers.
The schedules of such fees and the basis upon which such fees will be paid will
be determined from time to time by the Fund and Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Plan, Federated Securities Corp. will pay
financial institutions an amount equal to l% of the net asset value of Shares
purchased by their clients or customers at the time of purchase (except for
participants in the Liberty Family Retirement Program). Furthermore, certain
financial institutions may be compensated by the Adviser or its affiliates for
the continuing investment of customers' assets in certain funds, including the
Fund, advised by those entities. These payments will be made directly by the
distributor or Adviser from their assets, and will not be made from the assets
of the Fund or by the assessment of a sales load on Shares. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
Glass-Steagall Act prohibits a depository institution (such as a commercial bank
or a savings and loan association) from being an underwriter or distributor of
most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Board of Directors will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the
Corporation and the Fund. Federated Administrative Services provides these at an
annual rate which relates to the average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors (the "Federated Funds") as
specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
MAXIMUM ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
- --------------------------- -----------------------------------
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for Shares of the Fund, and dividend
disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania 15222, and Dickstein, Shapiro &
Morin, L.L.P., 2101 L Street, N.W., Washington, D.C. 20037.
INDEPENDENT AUDITORS. Independent auditing services are provided by Ernst &
Young LLP, Pittsburgh, Pennsylvania 15219.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Class C Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Class C Shares in the liabilities of the Fund and those attributable to the
Class C Shares, and dividing the remainder by the total number of Class C Shares
outstanding. The net asset values for Class A Shares may differ from that of
Class C Shares due to the variance in daily net income realized by each
respective class. Such variance will reflect only accrued net income to which
the shareholders of a particular class are entitled.
INVESTING IN CLASS C SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open. Shares may be purchased through a financial
institution which has a sales agreement with the distributor or directly from
the distributor, Federated Securities Corp., once an account has been
established. In connection with the sale of Shares, Federated Securities Corp.
may from time to time offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
Participants in plans under the Liberty Family Retirement Program shall purchase
Shares in accordance with the requirements of their respective plans.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders placed through a financial institution are considered received when the
Fund is notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 P.M. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions (such as a registered investment adviser) must be
received by the financial institution and transmitted to the Fund before 4:00
P.M. (Eastern time) in order for Shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders promptly.
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Capital Growth Fund--Class C Shares; and
- mail both to Federated Services Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank, into federal funds. This is
generally the next business day after the transfer agent's bank receives the
check.
BY WIRE. To purchase Shares directly from the distributor by wire, call
the Fund. All information needed will be taken over the telephone, and the
order is considered received when State Street Bank receives payment by
wire. Federal funds should be wired as follows: Federated Services Company,
c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Capital Growth
Fund--Class C Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee
or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on Columbus Day, Veterans' Day, or Martin Luther King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, unless the investment is in
a retirement account, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement accounts, which must be in amounts of at least $50. (Other minimum
investment requirements may apply to investments through the Liberty Family
Retirement Program.)
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. The net asset value is determined at 4:00 P.M. (Eastern time) or at
the close of the New York Stock Exchange, Monday through Friday, except on: (i)
days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no Shares are tendered for redemption and no orders to
purchase Shares are received; or (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
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 Shares at the net asset value next determined
after an order is received by the transfer agent. A shareholder may apply for
participation in this program through his financial institution or directly
through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder of record. Share certificates are not issued unless
requested in writing to Federated Services Company.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid during
that quarter.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares on payment dates
at the ex-dividend date net asset value without a sales load, unless
shareholders request cash payments on the new account form or by writing to the
dividend disbursing agent. All shareholders on the record date are entitled to
the dividend. If Shares are redeemed or exchanged prior to the record date or
purchased after the record date, those Shares are not entitled to that quarter's
dividend.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact Federated Securities Corp. and
consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class C shareholders may exchange all or some of their
Shares for Class C Shares of other funds in the Liberty Family of Funds at net
asset value without a contingent deferred sales charge. Participants in a plan
under the Liberty Family Retirement Program may exchange some or all of their
Shares for Class C Shares of other funds offered under their plan at net asset
value without a contingent deferred sales charge. Any contingent deferred sales
charge imposed at the time exchanged-for shares are redeemed is calculated as if
the shareholder had held the shares from the date on which he or she became a
shareholder of the exchanged-from Shares. For more information, see "Contingent
Deferred Sales Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
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. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares. Such
exchanges may be subject to a contingent deferred sales charge and possibly a
sales load.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds or certain of the Funds (as defined in the Statement of
Additional Information) are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending on the circumstances, a short-term or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds and certain of the
Funds may be given in writing or by telephone. Written instructions may require
a signature guarantee. Shareholders may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his broker
or financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail to Federated Services
Company, c/o State Street Bank and Trust Company, Two Heritage Drive, North
Quincy, Massachusetts 02171.
Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the transfer agent. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with the
transfer agent. Shares may be exchanged between two funds by telephone only if
the two funds have identical shareholder registrations. 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.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to the transfer agent and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and will be
binding upon the shareholder. Such instructions will be processed as of 4:00
P.M. (Eastern time) and must be received by the transfer agent before that time
for Shares to be exchanged the same day. Shareholders exchanging into the Fund
will not receive any dividend that is payable to shareholders of record on that
date. This privilege may be modified or terminated at any time.
REDEEMING CLASS C SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemptions can be made through a financial institution or directly
from the Fund. Redemption requests must be received in proper form. Redemptions
of Shares held through the Liberty Family Retirement Program will be governed by
the requirements of the respective plans.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value, less any applicable contingent deferred sales charge,
next determined after the Fund receives the redemption request from the
financial institution. Redemption requests through a registered broker/dealer
must be received by the broker before 4:00 P.M. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. Redemption requests
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares by telephoning the transfer agent. The
proceeds will be mailed to the shareholder's address of record or wire
transferred to the shareholder's account at a domestic commercial bank that is a
member of the Federal Reserve System, normally within one business day, but in
no event longer than seven days after the request. The minimum amount for a wire
transfer is $1,000. If at any time the Fund shall determine it necessary to
terminate or modify this method of redemption, shareholders would be promptly
notified.
An authorization form permitting the transfer agent to accept telephone requests
must first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as redeeming by mail, should be considered.
BY MAIL. Shares may also be redeemed by sending a written request to the
transfer agent. The written request should include the shareholder's name, the
Fund and class of shares' 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 contact the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF");
- a member of the New York, American, Boston, Midwest or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"); or
- any other "eligible guarantor institution," defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased Shares will pay a 1% contingent deferred sales charge
to Federated Securities Corp. for redemptions of those Shares made within one
year from the date of purchase. To the extent that a shareholder exchanges
between or among Class C Shares in other funds in the Liberty Family of Funds,
the time for which the exchanged-for Shares were held will be added, or
"tacked," to the time for which the exchanged-from Shares were held for purposes
of satisfying the one-year holding period. The contingent deferred sales charge
will be calculated based upon the lesser of the original purchase price of the
Shares or the net asset value of the Shares when redeemed.
The contingent deferred sales charge will not be imposed on Shares acquired
through reinvestment of dividends or distribution of short-term or long-term
capital gains. Redemptions are deemed to have occurred in the following order:
1) Shares acquired through the reinvestment of dividends and long-term capital
gains, 2) purchases of Shares occurring more than one year before the date of
redemption, and 3) purchases of Shares within the previous year.
The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total or
partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account, after the beneficial owner
attains age 59 1/2; or (iii) from the death or total and permanent disability of
the beneficial owner. The exemption from the contingent deferred sales charge
for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend
to account transfers, rollovers, and other redemptions made for purposes of
reinvestment.
A contingent deferred sales charge will not be imposed in connection with
exchanges of Shares for Class C Shares in other Liberty Family Funds or Liberty
Family Retirement Program funds, or in connection with redemptions by the Fund
of accounts with low balances. No contingent deferred sales charge will be
imposed on redemptions from the Liberty Family Retirement Program. For
additional information, see "Other Payments to Financial Institutions."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in Shares. For this reason, payments under this program
should not be considered as yield or income on the shareholder's investment in
Shares. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for participation
in this program through his financial institution.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement accounts, and pay the proceeds
to the shareholder if the account balance falls below the required minimum value
of $1,500. This requirement does not apply, however, if the balance falls below
$1,500 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Corporation have equal voting rights, except that in matters
affecting only a particular Fund or class, only shares of that Fund or class are
entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet the
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Corporation:
- The Corporation is subject to the Pennsylvania corporate franchise tax;
and
- Fund Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises the total return and yield for Class C
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Class C Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Class C Shares is calculated by dividing the net investment income
per Share (as defined by the Securities and Exchange Commission) earned by Class
C Shares over a thirty-day period by the maximum offering price per Share on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Class C Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the contingent deferred sales charge, which, if excluded, would increase the
total return and yield.
Total return and yield will be calculated separately for Class C Shares and
Class A Shares. Because Class A Shares may be subject to a lower 12b-1 fee than
Class C Shares, total return and yield for Class A Shares will likely exceed
that of Class C Shares for the same period.
From time to time, the Fund may advertise the performance of Class C Shares
using certain reporting services and/or compare the performance of Class C
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund does not presently offer Class B shares.
Class A Shares offered by the Fund are sold to customers of financial
institutions subject to a front-end sales load of 5.50% and are distributed
pursuant to a Rule 12b-1 Plan adopted by the Fund whereby the distributor is
paid a fee of up to .25 of 1% of the Class A Shares' average daily net assets.
Class A Shares are subject to a minimum initial investment of $500, unless the
investment is in a retirement account, in which case the minimum initial
investment is $50.
Financial institutions and brokers providing sales and/or shareholder services
may receive different compensation from one class of shares of the Fund than
from another class of shares. The distributor may pay a shareholder services fee
to a financial institution or broker for certain services, in addition to fees
paid pursuant to the Rule 12b-1 Plan. Any fee paid by the distributor for
shareholder services will not be an expense of the class, but will be reimbursed
to the distributor by the Adviser.
The amount of dividends payable to holders of Class A Shares will generally
exceed that of Class C Shares by the difference between Class Expenses and
distribution expenses borne by shares of each respective class.
The stated advisory fee is the same for both classes of the Fund.
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 34.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
1994**** 1993 1992** 1991 1990 1989*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.38 $11.84 $12.00 $ 9.11 $ 9.97 $10.00
- ------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------
Net investment income 0.15 0.13 0.12 0.31 0.32 0.03
- ------------------------------------------
Net realized and unrealized gain (loss)
on investments (1.25) 1.71 (0.18 ) 2.91 (0.86) (0.04)
- ------------------------------------------ ----- ----- ------ ----- ----- -----
Total from investment operations (1.10) 1.84 (0.06 ) 3.22 (0.54) (0.01)
- ------------------------------------------ ----- ----- ------ ----- ----- -----
LESS DISTRIBUTIONS
- ------------------------------------------
Dividends to shareholders from net
investment income (0.15) (0.14) (0.10 ) (0.30) (0.32) (0.02)
- ------------------------------------------
Distributions to shareholders from net
realized gain on investment transactions (0.82) (0.16) -- (0.02) -- --
- ------------------------------------------
Distributions in excess of net
investment income(a) -- -- -- (0.01) -- --
- ------------------------------------------ ----- ----- ------ ----- ----- -----
Total distributions (0.97) (0.30) (0.10 ) (0.33) (0.32) (0.02)
- ------------------------------------------ ----- ----- ------ ----- ----- -----
NET ASSET VALUE, END OF PERIOD $11.31 $13.38 $11.84 $12.00 $ 9.11 $ 9.97
- ------------------------------------------ ----- ----- ------ ----- ----- -----
TOTAL RETURN*** (8.20%) 15.70% (0.53 %) 35.68% (5.43%) (0.02%)
- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------
Expenses 1.03% 1.00% 1.00 %(b) 1.00% 1.00% 1.19%(b)
- ------------------------------------------
Net investment income 1.17% 0.98% 1.28 %(b) 2.73% 3.54% 4.21%(b)
- ------------------------------------------
Expense waiver/reimbursement(c) 2.73% 2.37% 1.50 %(b) 1.50% 1.50% 0.78%(b)
- ------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------
Net assets, end of period (000 omitted) $14 $14,836 $18,161 $13,513 $7,484 $5,525
- ------------------------------------------
Portfolio turnover rate 86% 74% 29 % 57% 83% 0%
- ------------------------------------------
</TABLE>
* Reflects operations for the period from November 30, 1989 (date of initial
public investment) to
December 31, 1989.
** During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
**** As of December 9, 1994, Investment shares of Capital Growth Fund had no
shareholders and were no longer offered for public investments.
(a) These distributions do not represent a return of capital for federal tax
purposes.
(b) Computed on an annualized basis.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 34.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1994 1993 1992*
------ ------ ------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.38 $11.84 $12.00
- ---------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------
Net investment income 0.12 0.09 0.11
- ---------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.25) 1.71 (0.18)
- --------------------------------------------------------------- ------ ------ ------
Total from investment operations (1.13) 1.80 (0.07)
- --------------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (0.12) (0.10) (0.09)
- ---------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.82) (0.16) --
- --------------------------------------------------------------- ------ ------ ------
Total distributions (0.94) (0.26) (0.09)
- --------------------------------------------------------------- ------ ------ ------
NET ASSET VALUE, END OF PERIOD $11.31 $13.38 $11.84
- --------------------------------------------------------------- ------ ------ ------
TOTAL RETURN** (8.43%) 15.34% (0.61%)
- ---------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------
Expenses 1.25% 1.25% 1.17%(a)
- ---------------------------------------------------------------
Net investment income 1.00% 0.73% 1.19%(a)
- ---------------------------------------------------------------
Expense waiver/reimbursement(b) 2.79% 2.37% 1.33%(a)
- ---------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------
Net assets, end of period (000 omitted) $9,880 $11,609 $6,540
- ---------------------------------------------------------------
Portfolio turnover rate 86% 74% 29%
- ---------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 16, 1992 (date of initial
public investment) to October 31, 1992.
** 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.
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
COMMON STOCKS--67.2%
- ---------------------------------------------------------------------------------
BASIC INDUSTRY--1.2%
-----------------------------------------------------------------
7,500 (a) Magma Copper Co. $ 134,063
----------------------------------------------------------------- -----------
CAPITAL GOODS--15.0%
-----------------------------------------------------------------
6,700 Dover Corp. 371,850
-----------------------------------------------------------------
20,300 (a) Foamex International, Inc. 182,700
-----------------------------------------------------------------
5,800 General Motors Corp., Class H 208,800
-----------------------------------------------------------------
8,700 Greenfield Industries, Inc. 206,625
-----------------------------------------------------------------
17,400 (a) Kenetech Corp. 221,850
-----------------------------------------------------------------
5,800 Loral Corp. 229,825
-----------------------------------------------------------------
5,800 Stewart & Stevenson Services, Inc. 223,300
----------------------------------------------------------------- -----------
Total 1,644,950
----------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CONSUMER DURABLES--2.6%
-----------------------------------------------------------------
5,900 Chrysler Corp. 287,625
----------------------------------------------------------------- -----------
CONSUMER PRODUCTS--8.6%
-----------------------------------------------------------------
29,000 (a) Dr. Pepper/Seven-Up Cos., Inc. 735,875
-----------------------------------------------------------------
7,000 (a) Safeway, Inc. 206,500
----------------------------------------------------------------- -----------
Total 942,375
----------------------------------------------------------------- -----------
ENERGY--6.1%
-----------------------------------------------------------------
6,400 Ashland Oil Co. 248,800
-----------------------------------------------------------------
10,025 Cinergy Corp. 231,837
-----------------------------------------------------------------
5,800 Sonat, Inc. 188,500
----------------------------------------------------------------- -----------
Total 669,137
----------------------------------------------------------------- -----------
FINANCE--9.4%
-----------------------------------------------------------------
17,400 MBNA Corp. 465,450
-----------------------------------------------------------------
5,941 Mellon Bank Corp. 330,468
-----------------------------------------------------------------
4,600 NationsBank Corp. 227,700
----------------------------------------------------------------- -----------
Total 1,023,618
----------------------------------------------------------------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
COMMON STOCKS--CONTINUED
- ---------------------------------------------------------------------------------
HEALTHCARE--6.3%
-----------------------------------------------------------------
6,000 (a) Foundation Health Corp. $ 196,500
-----------------------------------------------------------------
6,700 Genentech, Inc. 340,025
-----------------------------------------------------------------
3,700 (a) Genetics Institute, Inc. 149,850
----------------------------------------------------------------- -----------
Total 686,375
----------------------------------------------------------------- -----------
INSURANCE--3.2%
-----------------------------------------------------------------
10,000 Travelers, Inc. 347,500
----------------------------------------------------------------- -----------
PROCESS INDUSTRIES--1.9%
-----------------------------------------------------------------
9,200 Praxair, Inc. 212,750
----------------------------------------------------------------- -----------
TECHNOLOGY--6.7%
-----------------------------------------------------------------
5,800 (a) Compaq Computer Corp. 232,725
-----------------------------------------------------------------
10,100 (a) Integrated Device Technology 286,587
-----------------------------------------------------------------
3,500 Intel Corp. 217,437
----------------------------------------------------------------- -----------
Total 736,749
----------------------------------------------------------------- -----------
TRANSPORTATION--1.9%
-----------------------------------------------------------------
8,700 American President Cos., Ltd. 210,975
----------------------------------------------------------------- -----------
UTILITIES--2.7%
-----------------------------------------------------------------
9,200 Sprint Corp. 300,150
----------------------------------------------------------------- -----------
WASTE DISPOSAL--1.5%
-----------------------------------------------------------------
81,200 (a) Chambers Development, Inc. 162,400
----------------------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $6,529,180) 7,358,667
----------------------------------------------------------------- -----------
CONVERTIBLE PREFERRED STOCK--2.1%
- ---------------------------------------------------------------------------------
UTILITIES--2.1%
-----------------------------------------------------------------
4,000 (a) Nacional Financiera, SNC, PRIDES, $6.79 232,000
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $241,450) 232,000
----------------------------------------------------------------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
CONVERTIBLE SECURITIES--21.0%
- ---------------------------------------------------------------------------------
BASIC INDUSTRY--2.5%
-----------------------------------------------------------------
290,000 Medusa Corp., Conv. Sub. Note, 6.00%, 11/15/2003 $ 269,700
----------------------------------------------------------------- -----------
CAPITAL GOODS--1.9%
-----------------------------------------------------------------
140,000 General Instrument Corp., Conv. Jr. Sub. Note, 5.00%, 6/15/2000 207,277
----------------------------------------------------------------- -----------
CONSUMER PRODUCTS--5.7%
-----------------------------------------------------------------
580,000 Laidlaw, Inc., Conv. Deb., (ADT) 6.00%, 1/15/99 624,225
----------------------------------------------------------------- -----------
FINANCE--6.3%
-----------------------------------------------------------------
10,300 First USA, Inc., PRIDES, $1.99 355,350
-----------------------------------------------------------------
8,700 Sunamerica, Inc., Conv. Pfd., Series D, $2.78 336,038
----------------------------------------------------------------- -----------
Total 691,388
----------------------------------------------------------------- -----------
HEALTHCARE--4.6%
-----------------------------------------------------------------
960,000 Roche Holdings, Inc., LYON, 4.75% accrual 9/23/2008 501,600
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE SECURITIES (IDENTIFIED COST $2,277,724) 2,294,190
----------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CONVERTIBLE BONDS--3.6%
- ---------------------------------------------------------------------------------
CONSUMER PRODUCTS--3.6%
-----------------------------------------------------------------
$1,360,000 Coleman Worldwide Corp., Conv. LYON, 7.25%, accrual, 5/27/2013 389,300
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE BONDS (IDENTIFIED COST $379,921) 389,300
----------------------------------------------------------------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ----------------------------------------------------------------- -----------
<C> <C> <S> <C>
*REPURCHASE AGREEMENT--6.6%
- ---------------------------------------------------------------------------------
$ 725,000 Morgan (J.P.) Securities, Inc., 4.82%, dated 10/31/94, due
11/1/94
(at amortized cost) $ 725,000
----------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $10,153,275) $10,999,157+
----------------------------------------------------------------- -----------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government
obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
+ The cost of investments for federal tax purposes amounts to $10,246,120. The
net appreciation on a federal tax basis amounts to $753,037, which is
comprised of $1,496,035 appreciation and $742,998 depreciation at October 31,
1994.
(a) Non-income producing.
Note: The categories of investments are shown as a percentage of net assets
($10,943,504) at October 31, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C> <C>
LYON -- Liquid Yield Option Note
PRIDES -- Preferred Redeemable Increased Dividend Equity Securities
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified cost, $10,153,275,
and tax cost, $10,246,120) $10,999,157
- --------------------------------------------------------------------------------
Cash 1,413
- --------------------------------------------------------------------------------
Dividend and interest receivable 31,798
- --------------------------------------------------------------------------------
Receivable for capital stock sold 6,964
- -------------------------------------------------------------------------------- -----------
Total assets 11,039,332
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for capital stock redeemed $45,021
- ----------------------------------------------------------------------
Accrued expenses 50,807
- ---------------------------------------------------------------------- -------
Total liabilities 95,828
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 967,596 shares of capital stock outstanding $10,943,504
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $10,174,897
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 845,882
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (81,505)
- --------------------------------------------------------------------------------
Undistributed net investment income 4,230
- -------------------------------------------------------------------------------- -----------
Total Net Assets $10,943,504
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
Investment Shares (net assets of $14,871 / 1,315 shares of capital stock
outstanding) $11.31
- -------------------------------------------------------------------------------- -----------
Class A Shares (net assets of $9,879,565 / 873,523 shares of capital stock
outstanding) $11.31
- -------------------------------------------------------------------------------- -----------
Class C Shares (net assets of $1,049,068 / 92,758 shares of capital stock
outstanding) $11.31
- -------------------------------------------------------------------------------- -----------
COMPUTATION OF OFFERING PRICE:
Investment Shares (100/94.25 of $11.31)* $12.00
- -------------------------------------------------------------------------------- -----------
Class A Shares (100/94.50 of $11.31)* $11.97
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------
Dividends $ 202,322
- --------------------------------------------------------------------------------------------
Interest 276,602
- -------------------------------------------------------------------------------------------- -----------
Total investment income 478,924
- --------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------
Investment advisory fee $139,962
- --------------------------------------------------------------------------------
Directors' fees 4,841
- --------------------------------------------------------------------------------
Administrative personnel and services 213,197
- --------------------------------------------------------------------------------
Custodian and portfolio accounting fees 88,866
- --------------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 190,895
- --------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 7,090
- --------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 1,683
- --------------------------------------------------------------------------------
Fund share registration costs 40,658
- --------------------------------------------------------------------------------
Auditing fees 13,498
- --------------------------------------------------------------------------------
Legal fees 12,698
- --------------------------------------------------------------------------------
Distribution services fee--Class A Shares 27,353
- --------------------------------------------------------------------------------
Distribution services fee--Class C Shares 5,049
- --------------------------------------------------------------------------------
Printing and postage 72,942
- --------------------------------------------------------------------------------
Insurance premiums 7,017
- --------------------------------------------------------------------------------
Taxes 4,323
- --------------------------------------------------------------------------------
Miscellaneous 14,980
- -------------------------------------------------------------------------------- --------
Total expenses 845,052
- --------------------------------------------------------------------------------
Deduct--
- --------------------------------------------------------------------------------
Waiver of investment advisory fee $139,962
- ---------------------------------------------------------------------
Waiver of distribution services fee--Class A Shares 7,123
- ---------------------------------------------------------------------
Reimbursement of other operating expenses 446,250 593,335
- --------------------------------------------------------------------- -------- --------
Net expenses 251,717
- -------------------------------------------------------------------------------------------- -----------
Net investment income 227,207
- -------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) 1,057,990
- --------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (3,347,016)
- -------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments (2,289,026)
- -------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $(2,061,819)
- -------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------
Net investment income $ 227,207 $ 226,782
- --------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($1,150,835 and
$303,564 net gain, respectively, as computed for federal tax purposes) 1,057,990 303,564
- --------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (3,347,016) 3,026,413
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations (2,061,819) 3,556,759
- -------------------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- --------------------------------------------------------------------------
Investment Shares (127,805) (174,344)
- --------------------------------------------------------------------------
Class A Shares (103,720) (76,306)
- --------------------------------------------------------------------------
Class C Shares (2,570) --
- --------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions:
- --------------------------------------------------------------------------
Investment Shares (705,563) (245,773)
- --------------------------------------------------------------------------
Class A Shares (686,918) (95,185)
- --------------------------------------------------------------------------
Class C Shares (60,511) --
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (1,687,087) (591,608)
- -------------------------------------------------------------------------- ------------ ------------
CAPITAL STOCK TRANSACTIONS--
- --------------------------------------------------------------------------
Proceeds from sale of shares 6,385,862 11,839,537
- --------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 1,544,956 531,548
- --------------------------------------------------------------------------
Cost of shares redeemed (19,997,291) (13,278,176)
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets from capital stock transactions (12,066,473) (907,091)
- -------------------------------------------------------------------------- ------------ ------------
Change in net assets (15,815,379) 2,058,060
- --------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------
Beginning of period 26,758,883 24,700,823
- -------------------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of
$4,230 and $11,118 respectively) $ 10,943,504 $ 26,758,883
- -------------------------------------------------------------------------- ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CAPITAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of two, diversified
portfolios. The financial statements included herein are only those of Capital
Growth Fund (the "Fund"). The financial statements of the other portfolio 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.
Effective December 9, 1994, the Fund will provide two classes of shares, "Class
A Shares" and "Class C Shares." During the fiscal year ended October 31, 1994,
the Fund provided three classes of shares "Investment Shares," "Class A Shares,"
and "Class C Shares." As of December 9, 1994, the "Investment Shares" class of
shares had no shareholders and were no longer offered.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other
fixed income securities are valued at the last sale price reported on
national securities exchanges. Unlisted securities and bonds are generally
valued at the price provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less may be stated at
amortized cost, which approximates value.
B. REPURCHASE AND REVERSE 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 and reverse repurchase agreement investments. Additionally,
procedures have been established by the Fund to monitor, on a daily basis,
the market value of each repurchase agreement's underlying collateral to
ensure that the value of collateral at least equals the principal amount of
the repurchase transaction, including accrued interest.
The Fund is also permitted to enter into reverse repurchase agreements, in
which the Fund sells U.S. government securities to financial institutions and
agrees to repurchase the securities at an agreed upon price and date.
The Fund will only enter into repurchase and reverse repurchase agreements
with banks and other recognized financial institutions such as broker/dealers
which are deemed by the Fund's adviser to be creditworthy pursuant to
guidelines established by the Board of Directors of the Corporation (the
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
"Directors"). Risks may arise from the potential inability of counterparties
to honor the terms of these agreements. Accordingly, the Fund could receive
less than the repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
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 not to exceed a period of five years from the
Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1994, there were 1,000,000,000 shares of ($.0001 par value per
share) of capital stock of the Fund authorized. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/94 10/31/93
-------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ -------- -----------
<S> <C> <C> <C> <C>
INVESTMENT SHARES
- -------------------------------------------
Shares sold 225,412 $ 2,857,811 341,272 $ 4,316,048
- -------------------------------------------
Shares issued to shareholders in payment of
dividends declared 71,899 833,031 30,603 380,718
- -------------------------------------------
Shares redeemed (1,404,546) (16,634,524) (796,724) (9,811,729)
- ------------------------------------------- ---------- ------------ -------- -----------
Net change resulting from Investment
share transactions (1,107,235) ($12,943,682) (424,849) ($5,114,963)
- ------------------------------------------- ---------- ------------ -------- -----------
</TABLE>
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/94 10/31/93
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
CLASS A SHARES
- ---------------------------------------------
Shares sold 202,913 $ 2,577,402 575,342 $ 7,204,386
- ---------------------------------------------
Shares issued to shareholders in payment of
dividends declared 57,557 660,838 12,091 150,830
- ---------------------------------------------
Shares redeemed (254,546) (3,225,286) (272,085) (3,450,895)
- --------------------------------------------- -------- ----------- -------- -----------
Net change resulting from Class A share
transactions 5,924 $ 12,954 315,348 $ 3,904,321
- --------------------------------------------- -------- ----------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/94 10/31/93**
-------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ------- ---------
<S> <C> <C> <C> <C>
CLASS C SHARES
- ---------------------------------------------
Shares sold 75,971 $ 950,649 24,661 $ 319,103
- ---------------------------------------------
Shares issued to shareholders in payment of
dividends declared 4,583 51,087 -- --
- ---------------------------------------------
Shares redeemed (11,270) (137,481) (1,187) (15,552)
- --------------------------------------------- ---------- ------------ ------- ---------
Net change resulting from Class C share
transactions 69,284 $ 864,255 23,474 $ 303,551
- --------------------------------------------- ---------- ------------ ------- ---------
Net change resulting from Fund share
transactions (1,032,027) ($12,066,473) (86,027) ($907,091)
- --------------------------------------------- ---------- ------------ ------- ---------
</TABLE>
** For the period from April 13, 1993 (date of initial public investment) to
October 31, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal
to: (a) .55% of the average daily net assets of the Fund, and (b) 4.5% of the
gross income of the Fund, excluding capital gains or losses. The Adviser may
voluntarily choose to waive a portion of its fee and to reimburse certain
operating expenses of the Fund. The Adviser can modify or terminate this
voluntary waiver and reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the Fund's
principal distributor, from the net assets of the Fund to finance activities
intended to result in the sale of the Fund's Class A Shares and Class C Shares.
The Plan provides that the Fund may incur distribution expenses up to .25 of 1%
and .75 of 1% of the average daily net assets of the Class A Shares and Class C
Shares, respectively, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with FSC, the Fund will pay
up to .25 of 1% of average net assets of the Class C Shares for the period. This
fee is incurred to obtain certain personal services for shareholders and to
maintain the shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $13,190 and start-up
administrative service expenses of $92,451 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following January
16, 1992 (date the Fund first became effective). For the year ended October 31,
1994, the Fund paid $1,128 and $2,256, respectively pursuant to this agreement.
Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities, for the
fiscal year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $16,672,716
- ------------------------------------------------------------------------------- -----------
SALES $29,642,510
- ------------------------------------------------------------------------------- -----------
</TABLE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Directors and Shareholders of
INVESTMENT SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Capital Growth Fund (one of the portfolios
comprising Investment Series Funds, Inc.) as of October 31, 1994, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights (see pages 2, 21, and 22 of this prospectus) for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capital Growth Fund at October 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 9, 1994
APPENDIX (UNAUDITED)
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP ("S&P") 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.
BBB--DEBT rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B--DEBT rated "BB" or "B", is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
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 some time in the future.
BAA--BONDS which are rated "BAA" are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
BA--BONDS which are "BA" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--BONDS which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Series Funds, Inc.
Capital Growth Fund Federated Investors Tower
Class C Shares Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -----------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C.
- -----------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -----------------------------------------------------------------------------------------------
</TABLE>
CAPITAL GROWTH FUND
CLASS C SHARES
PROSPECTUS
A Diversified Portfolio of
Investment Series Funds, Inc., an Open-End
Management Investment Company
December 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
461444408
1102503A-C (12/94)
- --------------------------------------------------------------------------------
FORTRESS BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
PROSPECTUS
The shares of Fortress Bond Fund (the "Fund") offered by this
prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio of Investment Series
Funds, Inc. (the "Corporation"), an open-end management investment
company (a mutual fund).
The investment objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital by
investing primarily in a portfolio of investment grade bonds.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information dated
December 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy
of the Statement of Additional Information free of charge, by calling
1-800-235-4669. To obtain other information, or make inquiries about
the Fund, contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ---------------------------------------------------
GENERAL INFORMATION 3
- ---------------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- ---------------------------------------------------
INVESTMENT INFORMATION 4
- ---------------------------------------------------
Investment Objective 4
Investment Policies 5
Investment Limitations 12
NET ASSET VALUE 13
- ---------------------------------------------------
INVESTING IN THE FUND 13
- ---------------------------------------------------
Share Purchases 13
Minimum Investment Required 14
What Shares Cost 14
Eliminating the Sales Load 15
Systematic Investment Program 16
Exchange Privilege 16
Certificates and Confirmations 17
Dividends and Distributions 17
Retirement Plans 17
REDEEMING SHARES 17
- ---------------------------------------------------
Through a Financial Institution 17
Directly By Mail 18
Contingent Deferred Sales Charge 18
Systematic Withdrawal Program 19
Accounts with Low Balances 20
Exchanges for Shares of Other Funds 20
INVESTMENT SERIES FUNDS, INC.,
INFORMATION 20
- ---------------------------------------------------
Management of the Corporation 20
Distribution of Fund Shares 21
Administration of the Fund 21
SHAREHOLDER INFORMATION 23
- ---------------------------------------------------
Voting Rights 23
TAX INFORMATION 23
- ---------------------------------------------------
Federal Income Tax 23
Pennsylvania Corporate and Personal
Property Taxes 24
PERFORMANCE INFORMATION 24
- ---------------------------------------------------
FINANCIAL STATEMENTS 25
- ---------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 41
- ---------------------------------------------------
APPENDIX 42
- ---------------------------------------------------
ADDRESSES 44
- ---------------------------------------------------
</TABLE>
I
FORTRESS BOND FUND
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....................... 1.00%
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)(1)..................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)................................................................. 0.48%
12b-1 Fee......................................................................................... None
Total Other Expenses.............................................................................. 0.56%
Shareholder Services Fee (after waiver) (3).......................................... 0.24%
Total Fund Operating Expenses (4)......................................................... 1.04%
<FN>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of shares redeemed within
four years of their purchase date. For a more complete description see
"Contingent Deferred Sales Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.
(3) The maximum shareholder services fee is 0.25%.
(4) The Total Fund Operating Expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1995. The Total Fund
Operating Expenses were 1.05% for the fiscal year ended October 31, 1994,
and were 1.38% absent the voluntary waiver of a portion of the management
fee.
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investment Series Funds, Inc. Information." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period................................................. $31 $54 $67 $136
You would pay the following expenses on the same investment,
assuming no redemption........................................... $21 $43 $67 $136
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1
FORTRESS BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 41.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1994 1993 1992**
- --------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.30 $ 9.23 $ 8.81
- ---------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------
Net investment income 0.76 0.77 0.59
- ---------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.09) 1.07 0.43
- --------------------------------------------------------- --------- -------- --------
Total from investment operations (0.33) 1.84 1.02
- ---------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------
Dividends to shareholders from net investment income (0.75) (0.77) (0.60)
- ---------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.14) -- --
- --------------------------------------------------------- --------- -------- --------
Total distributions (0.89) (0.77) (0.60)
- --------------------------------------------------------- --------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.08 $ 10.30 $ 9.23
- --------------------------------------------------------- --------- -------- --------
TOTAL RETURN*** (3.41%) 20.61% 11.79%
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------
Expenses 1.05% 1.04% 0.49%(a)
- ---------------------------------------------------------
Net investment income 7.92% 7.69% 8.05%(a)
- ---------------------------------------------------------
Expense waiver/reimbursement (b) 0.33% 0.61% 2.01%(a)
- ---------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------
Net assets, end of period (000 omitted) $146,270 $125,762 $54,886
- ---------------------------------------------------------
Portfolio turnover rate 74% 51% 49%
- ---------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1991 1990 1989 1988*
- --------------------------------------------------------- -------- --------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.89 $ 8.79 $ 9.86 $ 10.06
- ---------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------
Net investment income 1.01 1.08 1.23 0.61
- ---------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.92 (1.84) (1.07) (0.16)
- --------------------------------------------------------- -------- --------- -------- --------
Total from investment operations 2.93 (0.76) 0.16 0.45
- ---------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------
Dividends to shareholders from net investment income (1.01) (1.14) (1.23) (0.65)
- ---------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions -- -- -- --
- --------------------------------------------------------- -------- --------- -------- --------
Total distributions (1.01) (1.14) (1.23) (0.65)
- --------------------------------------------------------- -------- --------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.81 $ 6.89 $ 8.79 $ 9.86
- --------------------------------------------------------- -------- --------- -------- --------
TOTAL RETURN*** 44.62% (9.59%) 1.32% 4.62%
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------
Expenses 1.00% 1.01% 1.14% 1.00%(a)
- ---------------------------------------------------------
Net investment income 12.17% 13.43% 12.81% 12.58%(a)
- ---------------------------------------------------------
Expense waiver/reimbursement (b) 1.50% 1.49% 1.36% 1.00%(a)
- ---------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------
Net assets, end of period (000 omitted) $6,068 $7,484 $4,734 $4,968
- ---------------------------------------------------------
Portfolio turnover rate 33% 28% 38% 31%
- ---------------------------------------------------------
<FN>
* Reflects operations for the period from July 8, 1988 (date of initial public
investment) to December 31, 1988.
** During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
*** 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.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
2
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was organized under the laws of the State of Maryland on May 20,
1992. Prior to February 5, 1993, the Fund was operated as a portfolio of
Investment Series Trust, a Massachusetts business trust established pursuant to
a Declaration of Trust dated March 17, 1987. On February 3, 1993, the
shareholders of the Fund voted to reorganize the Fund as a portfolio of the
Corporation. On June 15, 1992, the shareholders of High Income Securities Fund
approved a change to the investment objective of the Fund, as well as the name
of the Fund to Fortress Bond Fund. The Articles of Incorporation permit the
Corporation 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. This prospectus relates only
to Fortress Bond Fund.
A minimum initial investment of $1,500 is required, except for IRA accounts,
which require a $50 minimum initial investment. The minimum subsequent
investment is $100, except for IRA accounts, which require a minimum subsequent
investment of $50.
Fund shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on shares, other than shares purchased through reinvestment of
dividends, which are redeemed within four years of their purchase dates.
FORTRESS INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
This Fund is a member of a family of funds, collectively known as the Fortress
Investment Program. The other funds in the Program are:
- American Leaders Fund, Inc. (Fortress Shares only), providing growth of
capital and income through high-quality stocks;
- California Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and California personal
income taxes;
- Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
income consistent with lower volatility of principal through a diversified
portfolio of adjustable and floating rate mortgage securities which are
issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
- Fortress Municipal Income Fund, Inc., providing a high level of current
income generally exempt from federal regular income tax by investing
primarily in a diversified portfolio of municipal bonds;
- Fortress Utility Fund, Inc., providing high current income and moderate
capital appreciation primarily through equity and debt securities of
utility companies;
- Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
3
- Liberty Equity Income Fund, Inc. (Fortress Shares only), providing above
average income and capital appreciation through income producing equity
securities;
- Limited Term Fund (Fortress Shares only), providing a high level of
current income consistent with minimum fluctuation in principal value;
- Limited Term Municipal Fund (Fortress Shares only), providing a high level
of current income which is exempt from federal regular income tax
consistent with the preservation of capital;
- Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
- New York Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax, New York state personal
income tax, and New York municipal income taxes;
- Ohio Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and Ohio personal income
taxes; and
- World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to fourteen investment vehicles, and by providing
the investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective stated above cannot be changed without the approval of
shareholders. Unless stated otherwise, the investment policies of the Fund
described below may be changed without shareholder approval. As a matter of
investment policy, the Fund will invest, under normal circumstances, at least
65% of the value of its total net assets in investment grade bonds. Investment
grade bonds are generally described as bonds which are rated in one of the top
four rating categories by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc. A
description of the ratings categories is contained in the Appendix to the
Prospectus.
4
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio of investment grade bonds. The permitted investments
include:
- corporate debt obligations (as a matter of operating policy, the lowest
rated corporate debt obligations in which the Fund will invest will be
rated B or better by a NRSRO, or which are of comparable quality in the
judgment of the Fund's investment adviser);
- obligations of the United States;
- notes, bonds, and discount notes of the following U.S. government agencies
or instrumentalities, such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Banks for
Cooperatives, 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;
- asset-backed securities;
- commercial paper which matures in 270 days or less;
- time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), or in institutions whose accounts are insured by
the Savings Association Insurance Fund ("SAIF"), including certificates of
deposit issued by, and other time deposits in, foreign branches of
BIF-insured banks which, if negotiable, mature in six months or less or if
not negotiable, either mature in ninety days or less, or are withdrawable
upon notice not exceeding ninety days;
- bankers' acceptances issued by a BIF-insured bank, or issued by the bank's
Edge Act subsidiary and guaranteed by the bank, with remaining maturities
of nine months or less. The total acceptances of any bank held by the Fund
cannot exceed 0.25% of such bank's total deposits according to the bank's
last published statement of condition preceding the date of acceptance;
- preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
- other securities which are deemed by the Fund's investment adviser,
Federated Advisers (the "Adviser"), to be consistent with the Fund's
investment objective; and
- repurchase agreements collateralized by acceptable investments.
CORPORATE DEBT OBLIGATIONS. Although the Fund will invest primarily in
corporate debt obligations that are rated as investment grade by a NRSRO, or are
determined to be comparable quality in the judgment of the Adviser, the Fund may
invest up to 35% of the value of its total assets in corporate debt obligations
that are not investment grade bonds, but are rated B or better by a NRSRO (i.e.,
"junk bonds"). Corporate debt obligations that are not determined to be
investment grade are high-yield, high-risk bonds, typically subject to greater
market fluctuations and greater risk of loss of
5
income and principal due to an issuer's default. To a greater extent than
investment grade bonds, lower rated bonds tend to reflect short-term corporate,
economic, and market developments, as well as investor perceptions of the
issuer's credit quality. In addition, lower rated bonds may be more difficult to
dispose of or to value than higher rated, lower-yielding bonds. Bonds rated
"BBB" by S&P or "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.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
U.S. GOVERNMENT OBLIGATIONS. The U.S. government obligations in which the Fund
invests are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the Federal Farm Credit System, Federal Home
Loan Banks System, Federal National Mortgage Association, Student Loan
Marketing Association, and Federal Home Loan Mortgage Corporation.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These agencies and instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related and private loans, receivables and
other lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the
6
more favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities including, but not limited to,
interests in pools of receivables, such as credit card and accounts receivable
and motor vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government guarantee, are structurally
similar to collateralized mortgage obligations and mortgage pass-through
securities, which are described below.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in various
mortgage-related asset-backed securities. These types of investments may include
adjustable rate mortgage securities, collateralized mortgage obligations, real
estate mortgage investment conduits, or other securities collateralized by or
representing an interest in real estate mortgages (collectively, "mortgage
securities"). Many mortgage securities are issued or guaranteed by government
agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMs are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMs in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMs issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMs issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies,
7
investment bankers, or companies related to the construction industry. CMOs
purchased by the Fund may be:
- collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
- collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or
- securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the
credit of an agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a NRSRO.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code, as
amended (the "Code"). Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and a
single class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
RESETS OF INTEREST. The interest rates paid on the ARMs, CMOs, and REMICs
in which the Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities
and those derived from a calculated measure, such as a cost of funds index
or a moving average of mortgage rates. Commonly utilized indices include the
one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the National Median Cost of Funds, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a specific bank, or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury Note rate, closely mirror changes in
market interest rate levels. Others tend to lag changes in market rate
levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable rate
mortgage securities that closely mirror the market. Certain residual
interest tranches of CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In the
event the Fund purchases such
8
residual interest mortgage securities, it will factor in the increased
interest and price volatility of such securities when determining its
dollar-weighted average duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMs,
CMOs, and REMIC's in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval, and (2) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected
if market interest rates rise or fall faster and farther than the allowable
caps or floors on the underlying residential mortgage loans. Additionally,
even though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests to
be shorter than the maturities stated in the underlying mortgages.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs") and Eurodollar Time Deposits ("ETDs").
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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but which
are subject to restriction on resale under federal securities law. However, the
Fund will limit investments in illiquid securities, including certain restricted
securities determined by the Board of Directors of the Corporation (the
"Directors") to be illiquid,
9
non-negotiable time deposits, unlisted options, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% of its net
assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under the federal
securities law, and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial paper,
as determined by the Adviser, as liquid and not subject to the investment
limitations applicable to illiquid securities.
FOREIGN SECURITIES. The Fund reserves the right to invest up to 10% of its
total assets in fixed income securities of foreign corporations or governmental
units and to purchase or sell various currencies on either a spot or forward
basis in connection with these investments. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations which are
not ordinarily associated with investments in domestic issuers. These
considerations include the possibility of expropriation, the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more volatility
in foreign securities markets, the impact of political, social, or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It may also be more difficult to enforce contractual obligations
abroad than would be the case in the United States because of differences in the
legal systems. Transaction costs in foreign securities may be higher. The
Adviser will consider these and other factors before investing in foreign
securities and will not make such investments unless, in its opinion, such
investments will meet the Fund's standards and objectives.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will only
invest in other investment companies that are money market funds having an
investment objective and policies similar to its own and primarily for the
purpose of investing short-term cash which has not yet been invested in other
portfolio instruments. The Adviser to the Fund will waive its investment
advisory fee on assets invested in securities of open-end investment companies.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash and cash
items during times of unusual market conditions for defensive purposes and to
maintain liquidity.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the time of sale
to repurchase them at a mutually agreed upon time and price.
10
To the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into these transactions, and the market values of
the securities purchased may vary from the purchase prices. Accordingly, the
Fund may pay more/less than the market value of the securities on the settlement
date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Directors
and will receive collateral in the form of cash or U.S. government securities
equal to at least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PUT AND CALL OPTIONS. The Fund may purchase put options on financial futures
contracts and put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. For the immediate
future, the Fund will enter into futures contracts directly only when it desires
to exercise a financial futures put option in its portfolio rather than either
closing out the option or allowing it to expire. The Fund will only purchase
puts on financial futures contracts which are traded on a nationally recognized
exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums
11
(which are all time premiums) are amortized on a straight line basis over the
life of the option. In contrast, exchange traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from the Clearing Corporation. Strike prices are not adjusted for dividends, and
options are marked to market, thereby obviating the need to amortize the time
premium. Exchange traded options have a continuous liquid market while
over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio 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 Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
RISKS. When the Fund writes a call option, the Fund risks not participating
in any rise in the value of the underlying security. In addition, when the
Fund purchases puts on financial futures contracts to protect against
declines in prices of portfolio securities, there is a risk that the prices
of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This
may cause the futures contract and its corresponding put to react
differently than the portfolio securities to market changes. In addition,
the Adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In such an event,
the Fund may lose the purchase price of the put option. Finally, it is not
certain that a secondary market for options will exist at all times.
Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Fund's ability to establish and close out option positions depends on this
secondary market.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 10% of the value of those assets to secure such borrowings;
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
- sell securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions; nor
12
- with respect to 75% of the value of its total assets, invest more than 5%
in securities of any one issuer other than cash, cash items or securities
issued or guaranteed by the government of the United States, its agencies,
or instrumentalities and repurchase agreements collateralized by such
securities.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitation, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in this investment limitation becomes effective.
The Fund will not:
- invest more than 5% of the value of its total assets in securities of
issuers that have records of less than three years of continuous
operations including the operation of any predecessor.
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 all 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 is open.
Shares of the Fund may be purchased through an investment dealer who has a sales
agreement with the distributor, Federated Securities Corp., or directly from
Federated Securities Corp. once an account has been established, either by mail
or wire. The Fund reserves the right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase shares of
the Fund. Orders through a financial institution are considered received when
the Fund is notified of the purchase order. Purchase orders through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").
13
DIRECTLY BY MAIL. To purchase shares of the Fund by mail directly from
Federated Securities Corp.:
- complete and sign the application available from the Fund;
- enclose a check made payable to Fortress Bond Fund; and
- send both to the Fund's transfer agent, Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after the
transfer agent's bank receives the check.
DIRECTLY BY WIRE. To purchase shares of the Fund directly from Federated
Securities Corp. by Federal Reserve wire, call the Fund. All information needed
will be taken over the telephone, and the order is considered received when the
transfer agent's bank receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,500, except for IRA accounts,
which require a minimum initial investment of $50. Subsequent investments must
be in amounts of at least $100, except for IRA accounts, which must be in
amounts of at least $50.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1.00% of the offering price (which is 1.01% of
the net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load is imposed for Fund shares purchased through
bank trust departments or investment advisers registered under the Investment
Advisers Act of 1940, as amended, purchasing on behalf of their clients, or by
sales representatives, Directors, and employees of the Fund, Federated Advisers,
and Federated Securities Corp., or their affiliates, or any investment dealer
who has a sales agreement with Federated Securities Corp., their spouses and
children under age 21, or any trusts or pension or profit-sharing plans for
these persons. Unaffiliated institutions through whom shares are purchased may
charge fees for services provided which may be related to the ownership of Fund
shares. This prospectus should, therefore, be read together with any agreement
between the customer and the institution with regard to services provided, the
fees charged for these services, and any restrictions and limitations imposed.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Contingent Deferred Sales Charge,"
shareholders may be subject to a contingent deferred sales charge by the
distributor at the time shares are redeemed.
14
DEALER CONCESSION. For sales of shares of the Fund, broker/dealers will
normally receive 100% of the applicable sales load. Any portion of the sales
load which is not paid to a broker/dealer will be retained by the distributor.
However, from time to time, and at the sole discretion of the distributor, all
or part of that portion may be paid to a dealer. The sales load for shares sold
other than through registered broker/dealers will be retained by Federated
Securities Corp. Federated Securities Corp. may pay fees to banks out of the
sales load in exchange for sales and/or administrative services performed on
behalf of the bank's customers in connection with the initiation of customer
accounts and purchases of Fund shares.
ELIMINATING THE SALES LOAD
The sales load can be eliminated 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. There is no sales load for
purchases of $1 million or more. 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 load.
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
$900,000, and he purchases $100,000 or more at the current public offering
price, there will be no sales load on the additional purchase.
The Fund will also combine purchases for the purpose of reducing the contingent
deferred sales charge imposed on some share redemptions. For example, if a
shareholder already owns shares of the Fund having a current value at public
offering price of $1 million and purchases an additional $1 million at the
current public offering price, the applicable contingent deferred sales charge
would be reduced to .50% of those additional shares. For more information on the
level of the contingent deferred sales charge and holding periods, see the
section entitled "Contingent Deferred Sales Charge."
To receive the sales load elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by their financial institution at the time the purchase is made
that Fund shares are already owned or that purchases are being combined. The
Fund will eliminate the sales load and/or reduce the contingent deferred sales
charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $1 million of
Fund shares over the next 13 months, the sales load may be eliminated by signing
a letter of intent to that effect. This letter of intent includes a provision
for a sales load elimination depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 1.00% of
the
15
total amount intended to be purchased in escrow (in shares of the Fund) until
such purchase is completed.
The 1.00% 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,
which must be $1 million or more of Fund shares, is not purchased. In this
event, an appropriate number of escrowed shares may be redeemed in order to
realize the 1.00% sales load.
This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of the contingent deferred sales charge and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days.
REINVESTMENT PRIVILEGE. If shares have been redeemed in the Fund, 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 load.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to receive this
elimination of the sales load. If the shareholder redeems his shares in the
Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Fortress Investment Program, the purchase prices of which include a
sales load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in the Fund, the sales load would be
eliminated.
To receive this sales load elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales load
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in amounts of not less than $100 per transaction. Under this
program, funds may be automatically withdrawn monthly from the shareholder's
checking account and invested in Fund shares at the net asset value next
determined after an order is received by the transfer agent, plus the 1.00%
sales load for purchases under $1 million. A shareholder may apply for
participation in this program through Federated Securities Corp.
EXCHANGE PRIVILEGE
Shares in other Fortress Funds may be exchanged for Fund shares at net asset
value without a sales load (if previously paid) or a contingent deferred sales
charge.
Shares in certain of the Funds (as defined in the Statement of Additional
Information) which are advised by subsidiaries or affiliates of Federated
Investors may also be exchanged for Fund shares at net asset value (plus a sales
load, if applicable). Shareholders using this privilege must exchange shares
having a net asset value of at least $1,500. This privilege is available to
shareholders who reside
16
in any state in which the fund shares being acquired may be sold. Further
information on the exchange privilege is available by calling Federated
Securities Corp.
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
on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional shares of the Fund on payment dates at
the ex-dividend date net asset value without a sales load unless cash payments
are requested by shareholders on the application or by writing to Federated
Securities Corp.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans
(including 401(k) and 403(b) plans) or for IRA accounts. For further details,
contact Federated Securities Corp. and consult a tax adviser.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the transfer agent receives the
redemption request. Redemptions will be made on days on which the Fund computes
its net asset value. Redemption requests must be received in proper form and can
be made through a financial institution, or directly from the Fund by written
request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem shares of the Fund by calling his financial institution
(such as a bank or an investment dealer) to request the redemption. Shares will
be redeemed at the net asset value, less any applicable contingent deferred
sales charge, next determined after the Fund receives the redemption request
from the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in
order for shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
17
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request to the transfer
agent. This written request must include the shareholder's name, the Fund name,
the Fund account number, and the share or dollar amount to be redeemed. Shares
will be redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the transfer agent receives the
redemption request.
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 may call the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from their Fund accounts within certain time
periods following the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's
18
distributor. The contingent deferred sales charge is calculated on the lesser of
the original purchase price of the shares or the net asset value of the shares
at the time of redemption, as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES LOAD
------------------------ ------------------ --------------------
<S> <C> <C>
Up to $1,999,999 less than 4 years 1.00%
$2,000,000 to $4,999,999 less than 2 years 0.50%
$5,000,000 or more less than 1 year 0.25%
</TABLE>
In instances in which Fund shares have been acquired in exchange for shares in
other Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through: (i) the reinvestment of
dividends or distributions of long-term capital gains; or (ii) the exchange of
shares of Government Income Securities, Inc. where those shares were purchased
during that Fund's Charter Offering Period. In computing the amount of the
contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred first of shares
acquired through the reinvestment of dividends and long-term capital gains,
second of purchases of shares occurring prior to the number of years necessary
to satisfy the applicable holding period, and finally of purchases of shares
occurring within the current holding period. For accounts with shares subject to
multiple share holding periods, the redemption sequence will be determined
first, with reinvested dividends and long-term capital gains, and second, on a
first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a return under the following circumstances: (i) a total or partial
distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account, after the beneficial owner
attains age 59 1/2; or (iii) from the death or disability of the beneficial
owner. The exemption from the contingent deferred sales charge for qualified
plans, an IRA, Keogh Plan, or a custodial account does not extend to account
transfers, rollovers, and other redemptions made for purposes of reinvestment.
The contingent deferred sales charge is not charged in connection with exchanges
of shares for shares in other Fortress Funds or in connection with redemptions
by the Fund of accounts with low balances.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly 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, of not less than $100 per
transaction. Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to Fund shares, and
the fluctuation of the net asset value of Fund shares redeemed under this
program, redemptions may reduce, and eventually use up, 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 invested at
least $10,000 in the Fund (at current offering price).
19
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that shares are sold with a sales load, it is
not advisable for shareholders to be purchasing shares while participating in
this program.
The contingent deferred sales charge is charged for shares redeemed through this
program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below 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.
EXCHANGES FOR SHARES OF OTHER FUNDS
Fund shares may be exchanged for shares in other Fortress Funds at net asset
value without a contingent deferred sales charge or a sales load.
Fund shares may also be exchanged for shares in certain of the Funds which are
advised by subsidiaries or affiliates of Federated Investors at net asset value.
However, such exchanges will be subject to a contingent deferred sales charge
and possibly a sales load. Before the exchange, a shareholder must receive a
prospectus of the Fund for which the exchange is being made.
Shareholders using this privilege must exchange shares having a net asset value
equal to the minimum investment requirements of the Fund into which the exchange
is being made. Further information on the exchange privilege and prospectuses
for other Fortress Funds and the Funds are available by calling Federated
Securities Corp.
INVESTMENT SERIES FUNDS, INC., INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Corporation is managed by a Board of Directors. The
Directors are responsible for managing the Corporation's business affairs and
for exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers, the Fund's investment adviser, subject to direction by the Directors.
The Adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .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 many mutual
20
funds with similar objectives and policies. Under the investment advisory
contract, which provides for voluntary waivers of expenses by the Adviser,
the Adviser may voluntarily waive some or all of the advisory fee. The
Adviser can terminate this voluntary waiver of some or all of its advisory
fee at any time at its sole discretion. The Adviser has also undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the Trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services to
a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956 as
Federated Investors, Inc., develops and manages mutual funds primarily for
the financial industry. Federated Investors' track record of competitive
performance and its disciplined, risk averse investment philosophy serve
approximately 3,500 client institutions nationwide. Through these same
client institutions, individual shareholders also have access to this same
level of investment expertise.
Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992.
Mr. Balestrino joined Federated Investors in 1986 and has been an Assistant
Vice President of the Fund's investment adviser since 1991. Mr. Balestrino
served as an Investment Analyst of the investment adviser from 1989 until
1991, and from 1986 until 1989 he acted as Project Manager in the Product
Development Department. Mr. Balestrino is a Chartered Financial Analyst and
received his M.V.R.P. in Urban and Regional Planning from the University of
Pittsburgh.
Mark E. Durbiano has been the Fund's co-portfolio manager since June, 1992.
Mr. Durbiano joined Federated Investors in 1982 and has been a Vice
President of the Fund's investment adviser since 1988. Mr. Durbiano is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Pittsburgh.
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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the
Corporation and the Fund. Federated Administrative Services
21
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors (the
"Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<C> <S>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Fund to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The Distributor will pay financial
institutions, for distribution and/or administrative services, an amount equal
to 1.00% of the offering price of the shares acquired by their clients or
customers on purchases up to $1,999,999, .50% of the offering price on purchases
of $2,000,000 to $4,999,999, and .25% of the offering price on purchases of
$5,000,000 or more. (This fee is in addition to the 1.00% sales load on
purchases of less than $1 million.) The financial institutions may elect to
waive the initial payment described above; such waiver will result in the waiver
by the Fund of the otherwise applicable contingent deferred sales charge.
Furthermore, the Adviser or its affiliate may offer to pay a fee from their own
assets to financial institutions as financial assistance for providing
substantial marketing, sales and operational support to the Distributor. The
support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of shares the dealer sells or may sell, and/or upon
the type and nature of sales or operational support furnished by the dealer.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund, and
dividend disbursing agent for the Fund.
22
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each portfolio
or class in the Corporation have equal voting rights, except that only shares of
a particular portfolio or class are entitled to vote on matters affecting that
portfolio or class. As of December 12, 1994, Merrill Lynch Pierce Fenner &
Smith, Jacksonville, Florida, acting in various capacities for numerous
accounts, was the owner of record of approximately 4,589,529 shares (29.05%) of
the Fund, 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.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. The Directors shall call a special meeting of shareholders upon the
written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the 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
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Unless otherwise exempt, shareholders of the Fund are required to pay federal
income tax on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions are
received in cash or as additional shares. Distributions representing long-term
capital gains, if any, will be taxable to shareholders as long-term capital
gains no matter how long the shareholders have held the shares. No federal
income tax is due on any distributions
23
earned in an IRA or qualified retirement plan until distributed, so long as such
IRA or qualified retirement plan meets the applicable requirements of the Code.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Corporation:
- The Fund is subject to the Pennsylvania corporate franchise tax; and
- Fund shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specific period of time, in the value
of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by 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 and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
24
FORTRESS BOND FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--88.3%
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE--2.5%
-------------------------------------------------------------------
$3,450,000 Grumman Corp., Deb., 10.375%, 1/1/99 $ 3,586,827
------------------------------------------------------------------- -----------
AIR TRANSPORTATION--3.5%
-------------------------------------------------------------------
2,000,000 AMR Corp., Deb., 10.00%, 2/1/2001 2,061,540
-------------------------------------------------------------------
2,100,000 Southwest Airlines, Inc., Deb., 9.40%, 7/1/2001 2,213,169
-------------------------------------------------------------------
1,000,000 US Air, Inc., Pass Thru Cert., Series 1993-A2, 9.625%, 9/1/2003 840,000
------------------------------------------------------------------- -----------
Total 5,114,709
------------------------------------------------------------------- -----------
AUTOMOTIVE--3.9%
-------------------------------------------------------------------
500,000 Aftermarket Technology Corp., Sr. Sub. Note, 12.00%, 8/1/2004 508,750
-------------------------------------------------------------------
2,000,000 Arvin Industries, Inc., Note, 6.875%, 2/15/2001 1,809,780
-------------------------------------------------------------------
2,200,000 Chrysler Corp., Deb., 12.375%, 5/1/2020 2,892,846
-------------------------------------------------------------------
500,000 Motor Wheel Corp., Sr. Note, Series B, 11.50%, 3/1/2000 491,250
------------------------------------------------------------------- -----------
Total 5,702,626
------------------------------------------------------------------- -----------
BANKING--0.4%
-------------------------------------------------------------------
500,000 First Nationwide Holdings, Inc., Sr. Note, 12.25%, 5/15/2001 521,250
------------------------------------------------------------------- -----------
BROADCAST RADIO & TV--1.7%
-------------------------------------------------------------------
500,000 Allbritton Communications Co., Sr. Sub. Note, 11.50%, 8/15/2004 510,000
-------------------------------------------------------------------
500,000 Chancellor Broadcasting Co., Sr. Sub. Note, 12.50%, 10/1/2004 500,000
-------------------------------------------------------------------
1,000,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 1,015,000
-------------------------------------------------------------------
500,000 Sinclair Broadcast Group Inc., Sr. Sub. Note, 10.00%, 12/15/2003 482,500
------------------------------------------------------------------- -----------
Total 2,507,500
------------------------------------------------------------------- -----------
BUSINESS EQUIPMENT & SERVICES--0.7%
-------------------------------------------------------------------
500,000 Anacomp, Inc., Sr. Sub. Note, 15.00%, 11/1/2000 552,500
-------------------------------------------------------------------
500,000 Bell & Howell Co., Sr. Sub. Note, Series B, 10.75%, 10/1/2002 482,500
------------------------------------------------------------------- -----------
Total 1,035,000
------------------------------------------------------------------- -----------
</TABLE>
25
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
CABLE TELEVISION--2.2%
-------------------------------------------------------------------
$ 500,000 Cablevision Systems Corp., Sr. Sub. Deb., 9.875%, 2/15/2013 $ 462,500
-------------------------------------------------------------------
1,000,000 Continental Cablevision Inc., Sr. Deb., 9.50%, 8/1/2013 905,000
-------------------------------------------------------------------
1,500,000 International Cabletel, Inc., Sr. Dfd. Coupon Note, 0/10.875%,
10/15/2003 836,250
-------------------------------------------------------------------
500,000 Marcus Cable Operating Co. L.P., Sr. Deb., 11.875%, 10/1/2005 466,250
-------------------------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Sr. Secd. Note, 9.65%, 1/15/2014 620,659
------------------------------------------------------------------- -----------
Total 3,290,659
------------------------------------------------------------------- -----------
CHEMICALS & PLASTICS--4.2%
-------------------------------------------------------------------
1,500,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 1,473,750
-------------------------------------------------------------------
500,000 Foamex Capital Corp., Sr. Sub. Deb., 11.875%, 10/1/2004 502,500
-------------------------------------------------------------------
2,500,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 11.375%, 10/1/98 1,525,000
-------------------------------------------------------------------
875,000 Harris Chemical North America, Inc., Sr. Secd. Disc. Note,
0/10.25%, 7/15/2001 710,938
-------------------------------------------------------------------
500,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 478,750
-------------------------------------------------------------------
500,000 Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 500,000
-------------------------------------------------------------------
1,000,000 UCC Investors Holdings, Inc., Sr. Sub. Note, 11.00%, 5/1/2003 1,010,000
------------------------------------------------------------------- -----------
Total 6,200,938
------------------------------------------------------------------- -----------
CLOTHING & TEXTILES--1.9%
-------------------------------------------------------------------
1,800,000 Reebok International Ltd., Deb., 9.75%, 9/15/98 1,846,548
-------------------------------------------------------------------
1,000,000 Westpoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 902,500
------------------------------------------------------------------- -----------
Total 2,749,048
------------------------------------------------------------------- -----------
CONGLOMERATES--4.5%
-------------------------------------------------------------------
2,500,000 Leucadia National Corp., Sr. Sub., 10.375%, 6/15/2002 2,637,500
-------------------------------------------------------------------
2,000,000 Noranda, Inc., Deb., 8.125%, 6/15/2004 1,921,520
-------------------------------------------------------------------
1,000,000 Noranda, Inc., Deb., 8.625%, 7/15/2002 1,001,100
-------------------------------------------------------------------
1,000,000 Sherritt Gordon Ltd., Sr. Note, 9.75%, 4/1/2003 965,000
------------------------------------------------------------------- -----------
Total 6,525,120
------------------------------------------------------------------- -----------
</TABLE>
26
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
CONTAINER & GLASS PRODUCTS--1.9%
-------------------------------------------------------------------
$1,000,000 Owens-Corning Fiberglass Corp., Deb., 9.375%, 6/1/2012 $ 1,010,760
-------------------------------------------------------------------
750,000 Silgan Holdings, Inc., Sr. Disc. Deb., 0/13.25%, 12/15/2002 605,625
-------------------------------------------------------------------
1,000,000 U.S. Can Co., Sr. Sub. Note, 13.50%, 1/15/2002 1,115,000
------------------------------------------------------------------- -----------
Total 2,731,385
------------------------------------------------------------------- -----------
COSMETICS & TOILETRIES--0.8%
-------------------------------------------------------------------
2,000,000 Revlon World Wide Corp., Sr. Secd. Discount Note, Series B, 12.00%
accrual, 3/15/98 1,110,000
------------------------------------------------------------------- -----------
ECOLOGICAL SERVICES & EQUIPMENT--1.3%
-------------------------------------------------------------------
500,000 Allied Waste Industries, Inc., Sr. Sub. Note, 10.75%, 2/1/2004 465,000
-------------------------------------------------------------------
1,000,000 ICF Kaiser International, Inc., Sr. Sub. Note, 12.00% 12/31/2003 880,000
-------------------------------------------------------------------
500,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 492,500
------------------------------------------------------------------- -----------
Total 1,837,500
------------------------------------------------------------------- -----------
FINANCE / AUTOMOTIVE--2.1%
-------------------------------------------------------------------
1,000,000 Ford Capital, Deb., 9.00%, 8/15/98 1,032,440
-------------------------------------------------------------------
2,000,000 General Motors Acceptance Corp., Medium Term Note, 7.50%, 5/18/98 1,980,740
------------------------------------------------------------------- -----------
Total 3,013,180
------------------------------------------------------------------- -----------
FINANCIAL INTERMEDIARIES--1.7%
-------------------------------------------------------------------
500,000 Coldwell Banker Corp., Sr. Sub. Note, Series B, 10.25%, 6/30/2003 513,125
-------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., Inc., Medium Term Note, 7.25%, 6/14/2004 1,966,820
------------------------------------------------------------------- -----------
Total 2,479,945
------------------------------------------------------------------- -----------
FOOD & DRUG RETAILERS--4.0%
-------------------------------------------------------------------
1,000,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 700,000
-------------------------------------------------------------------
4,075,000 Hook-Superx, Inc., Sr. Note, 10.125%, 6/1/2002 4,217,625
-------------------------------------------------------------------
1,000,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 888,750
------------------------------------------------------------------- -----------
Total 5,806,375
------------------------------------------------------------------- -----------
</TABLE>
27
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
FOOD PRODUCTS--3.5%
-------------------------------------------------------------------
$ 500,000 Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005 $ 505,000
-------------------------------------------------------------------
500,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 437,500
-------------------------------------------------------------------
2,000,000 Grand Metropolitan Investment Corp., Company Guarantee, 7.00%,
6/15/99 1,930,540
-------------------------------------------------------------------
1,000,000 PMI Acquistion Corp., Sr. Sub. Note, 10.25%, 9/1/2003 972,500
-------------------------------------------------------------------
3,000,000 Specialty Foods Acquistion Corp., Sr. Secd. Disc. Deb., Series B,
0/13.00%, 8/15/2005 1,305,000
------------------------------------------------------------------- -----------
Total 5,150,540
------------------------------------------------------------------- -----------
FOOD SERVICES--1.6%
-------------------------------------------------------------------
1,000,000 Americold Corp., First Mortgage Bond, Series B, 11.50%, 3/1/2005 900,000
-------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.75%, 9/15/2001 472,500
-------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 471,250
-------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Sub. Deb., 11.25%, 11/1/2004 427,500
------------------------------------------------------------------- -----------
Total 2,271,250
------------------------------------------------------------------- -----------
FOREST PRODUCTS--4.5%
-------------------------------------------------------------------
500,000 Domtar, Inc., Deb., 11.25%, 9/15/2017 508,750
-------------------------------------------------------------------
500,000 Domtar, Inc., Note, 12.00%, 4/15/2001 537,500
-------------------------------------------------------------------
1,000,000 Georgia-Pacific Corp., Deb., 10.125%, 5/15/2000 1,019,740
-------------------------------------------------------------------
2,500,000 Georgia-Pacific Corp., Deb., 9.50%, 5/15/2022 2,516,125
-------------------------------------------------------------------
500,000 Riverwood International Corp., Sr. Sub. Note, 11.25%, 6/15/2002 518,750
-------------------------------------------------------------------
500,000 Stone Container Corp., Sr. Note, 11.50%, 10/1/2004 505,625
-------------------------------------------------------------------
1,000,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 943,750
------------------------------------------------------------------- -----------
Total 6,550,240
------------------------------------------------------------------- -----------
GOVERNMENT AGENCY--1.2%
-------------------------------------------------------------------
2,000,000 Tennessee Valley Authority, Deb., 7.85%, 6/15/2044 1,769,420
------------------------------------------------------------------- -----------
HEALTH SERVICES--1.3%
-------------------------------------------------------------------
2,000,000 Columbia HCA Healthcare Corp., Medium Term Note, 8.05%, 8/25/2006 1,904,000
------------------------------------------------------------------- -----------
</TABLE>
28
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
HEALTHCARE--0.8%
-------------------------------------------------------------------
$1,111,175 Amerisource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 $ 1,122,287
------------------------------------------------------------------- -----------
HOME PRODUCTS & FURNISHINGS--0.8%
-------------------------------------------------------------------
1,750,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 1,181,250
------------------------------------------------------------------- -----------
HOTELS, MOTELS, INNS & CASINOS--0.4%
-------------------------------------------------------------------
500,000 Motels of America, Inc., Sr. Sub. Note, 12.00%, 4/15/2004 567,500
------------------------------------------------------------------- -----------
INDUSTRIAL PRODUCTS & EQUIPMENT--3.6%
-------------------------------------------------------------------
500,000 Truck Components, Inc., Sr. Note, Series B, 12.25%, 6/30/2001 526,250
-------------------------------------------------------------------
4,435,000 Varity Corp., Sr. Note, 11.375%, 11/15/98 4,734,362
------------------------------------------------------------------- -----------
Total 5,260,612
------------------------------------------------------------------- -----------
INSURANCE--3.0%
-------------------------------------------------------------------
2,000,000 Delphi Financial Group Inc., Note, 8.00%, 10/1/2003 1,684,000
-------------------------------------------------------------------
3,000,000 Sunamerica, Inc., Deb., 8.125%, 4/28/2023 2,664,390
------------------------------------------------------------------- -----------
Total 4,348,390
------------------------------------------------------------------- -----------
LEISURE & ENTERTAINMENT--0.6%
-------------------------------------------------------------------
1,000,000 Paramount Communications, Inc., Sr. Deb., 8.25%, 8/1/2022 831,640
------------------------------------------------------------------- -----------
OIL & GAS--9.9%
-------------------------------------------------------------------
2,710,000 Ashland Oil, Inc., Deb., 11.125%, 10/15/2017 3,057,720
-------------------------------------------------------------------
1,000,000 Burlington Resources, Note, 7.15%, 5/1/99 973,200
-------------------------------------------------------------------
1,000,000 Falcon Drilling Co., Inc., Sr. Note, Series B, 9.75%, 1/15/2001 972,500
-------------------------------------------------------------------
1,000,000 Giant Industries, Sr. Sub. Note, 9.75%, 11/15/2003 930,000
-------------------------------------------------------------------
1,000,000 H.S. Resources, Inc., Sr. Sub. Note, 9.875%, 12/1/2003 942,500
-------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Deb., 11.125%, 6/1/2019 1,130,940
-------------------------------------------------------------------
1,000,000 Triton Energy Corp., Sr. Sub. Disc. Note, 0/9.75%, 12/15/2000 755,000
-------------------------------------------------------------------
2,000,000 USX Corp., Deb., 9.125%, 1/15/2013 1,919,120
-------------------------------------------------------------------
</TABLE>
29
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
OIL & GAS--CONTINUED
-------------------------------------------------------------------
$1,000,000 USX Corp., Note, 6.375%, 7/15/98 $ 940,520
-------------------------------------------------------------------
3,000,000 Western Atlas, Inc., Deb., 8.55%, 6/15/2024 2,827,440
------------------------------------------------------------------- -----------
Total 14,448,940
------------------------------------------------------------------- -----------
PRINTING & PUBLISHING--3.1%
-------------------------------------------------------------------
500,000 Affliated Newspaper, Sr. Disc. Note, Class B, 0/13.25%, 7/1/2006 260,000
-------------------------------------------------------------------
250,000 Garden State Newspapers, Inc., Sr. Sub. Note, 12.00%, 7/1/2004 248,750
-------------------------------------------------------------------
1,000,000 News America Holdings, Inc., Sr. Note, 12.00%, 12/15/2001 1,132,220
-------------------------------------------------------------------
3,000,000 News America Holdings, Inc., Sr. Note, 8.50%, 2/15/2005 2,881,590
------------------------------------------------------------------- -----------
Total 4,522,560
------------------------------------------------------------------- -----------
RETAILERS--1.4%
-------------------------------------------------------------------
1,000,000 Brylane Capital Corp., Sr. Sub. Note, Series B, 10.00%, 9/1/2003 947,500
-------------------------------------------------------------------
1,000,000 J.C. Penney Co., S.F. Deb., 9.75%, 6/15/2021 1,058,850
------------------------------------------------------------------- -----------
Total 2,006,350
------------------------------------------------------------------- -----------
SOVEREIGN GOVERNMENT--8.8%
-------------------------------------------------------------------
2,500,000 Freeport Terminal (Malta) Ltd., Gtd. Global Note, 7.50%, 3/29/2009 2,281,475
-------------------------------------------------------------------
1,400,000 New Zealand Government, Deb., 10.50%, 7/16/2000 1,498,000
-------------------------------------------------------------------
1,000,000 Province of New Brunswick, Local Government Guarantee, 9.75%,
5/15/2020 1,091,100
-------------------------------------------------------------------
1,500,000 Province of Quebec, Deb., 13.25%, 9/15/2014 1,854,525
-------------------------------------------------------------------
2,000,000 Province of Quebec, Deb., 7.50%, 7/15/2023 1,687,020
-------------------------------------------------------------------
2,000,000 Republic of Columbia, Note, 8.75%, 10/6/99 1,977,420
-------------------------------------------------------------------
2,500,000 Victoria Public Authority, Local Government Guarantee, 8.25%,
1/15/2002 2,484,375
------------------------------------------------------------------- -----------
Total 12,873,915
------------------------------------------------------------------- -----------
</TABLE>
30
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
STEEL--2.8%
-------------------------------------------------------------------
$ 500,000 Armco, Inc., Sr. Note, 11.375%, 10/15/99 $ 511,250
-------------------------------------------------------------------
500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 464,375
-------------------------------------------------------------------
1,000,000 Carbide/Graphite Group Inc., Sr. Note, 11.50%, 9/1/2003 1,010,000
-------------------------------------------------------------------
1,250,000 Envirosource, Inc., Sr. Note, 9.75%, 6/15/2003 1,109,375
-------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 11.125%, 3/15/2001 497,500
-------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 9.50%, 1/15/2004 445,625
------------------------------------------------------------------- -----------
Total 4,038,125
------------------------------------------------------------------- -----------
SURFACE TRANSPORTATION--2.8%
-------------------------------------------------------------------
2,000,000 American President Co. Ltd., Sr. Note, 7.125%, 11/15/2003 1,764,060
-------------------------------------------------------------------
1,000,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 928,750
-------------------------------------------------------------------
500,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 492,500
-------------------------------------------------------------------
1,000,000 Trism, Inc., Sr. Sub. Note, 10.75%, 12/15/2000 985,000
------------------------------------------------------------------- -----------
Total 4,170,310
------------------------------------------------------------------- -----------
TELECOMMUNICATIONS & CELLULAR--0.5%
-------------------------------------------------------------------
1,000,000 Panamsat, L.P., Sr. Sub. Disc. Note, 0/11.375%, 8/1/2003 677,500
------------------------------------------------------------------- -----------
TOBACCO--0.5%
-------------------------------------------------------------------
750,000 Philip Morris, Deb., 8.625%, 3/1/99 769,462
------------------------------------------------------------------- -----------
UTILITIES--0.4%
-------------------------------------------------------------------
750,000 California Energy Co., Inc., Sr. Disc. Note, 0/10.25%, 1/15/2004 533,438
------------------------------------------------------------------- -----------
TOTAL CORPORATE BONDS (IDENTIFIED COST $136,358,135) 129,209,791
------------------------------------------------------------------- -----------
CONVERTIBLE PREFERRED STOCKS--2.0%
- -------------------------------------------------------------------------------
BANKING--2.0%
-------------------------------------------------------------------
150,000 Citicorp., PERCS, Series 15, 8.25% 2,943,750
------------------------------------------------------------------- -----------
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $2,975,000) $ 2,943,750
------------------------------------------------------------------- -----------
</TABLE>
31
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ---------- ------------------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--0.0%
- -------------------------------------------------------------------------------
ECOLOGICAL SERVICES & EQUIPMENT--0.0%
-------------------------------------------------------------------
4,800(a) ICF Kaiser International, Inc., Warrants $ 2,400
------------------------------------------------------------------- -----------
PRINTING & PUBLISHING--0.0%
-------------------------------------------------------------------
500(a) Affiliated Newspaper 12,562
------------------------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $16,831) 14,962
------------------------------------------------------------------- -----------
ASSET-BACKED SECURITIES--4.7%
- -------------------------------------------------------------------------------
STRUCTURED PRODUCTS--4.7%
-------------------------------------------------------------------
$1,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 1,023,810
-------------------------------------------------------------------
1,000,000 GE Capital Home Equity Loan 1991-1, Class B, 8.70%, 8/30/2011 988,330
-------------------------------------------------------------------
1,000,000 Greentree Financial Corp., 1992-2, Class B, 9.15%, 1/15/2018 1,003,750
-------------------------------------------------------------------
2,000,000 MBNA Master Credit Card Trust, 1992-2, Class A, 6.20%, 8/15/99 1,928,720
-------------------------------------------------------------------
1,000,000 Merrill Lynch Mortgage Investment, Inc., 1988-H, Class B, 9.70%,
6/15/2008 1,021,880
-------------------------------------------------------------------
1,000,000 Residential Funding Corp., 1993-S26, Class A10, 7.50%, 7/25/2023 843,120
------------------------------------------------------------------- -----------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $7,290,312) 6,809,610
------------------------------------------------------------------- -----------
MORTGAGE-BACKED SECURITIES--1.5%
- -------------------------------------------------------------------------------
GOVERNMENT AGENCY--1.5%
-------------------------------------------------------------------
2,420,238 Government National Mortgage Association, Pool 379983, 7.50%,
2/15/2024 2,246,998
------------------------------------------------------------------- -----------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,443,684) 2,246,998
------------------------------------------------------------------- -----------
*REPURCHASE AGREEMENT--1.1%
- -------------------------------------------------------------------------------
1,605,000 J.P. Morgan Securities, Inc., 4.82%, dated 10/31/94, due 11/1/94
(at amortized cost) 1,605,000
------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $150,688,962) $142,830,111+
------------------------------------------------------------------- -----------
<FN>
+ The cost of investments for federal tax purposes amounts to $150,688,962. The
net unrealized depreciation on a federal tax cost basis amounts to
$7,858,851, and is comprised of $329,907 appreciation and $8,188,758
depreciation at October 31, 1994.
* The repurchase agreement is fully collateralized by U.S. government
obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(a) Non-income Producing.
Note: The categories of investments are shown as a percentage of net assets
($146,270,055) at October 31, 1994.
</TABLE>
32
FORTRESS BOND FUND
- ---------------------------------------------------------
<TABLE>
<S> <C>
The following abbreviations are used in this portfolio:
PERCS --Preferred Equity Redeemable Preferred Stock
PIK --Payment in Kind
SF --Sinking Fund
</TABLE>
(See Notes which are an integral part of the Financial Statements)
33
FORTRESS BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost: $150,688,962) $142,830,111
- --------------------------------------------------------------------------------
Cash 19,855
- --------------------------------------------------------------------------------
Receivable for investments sold 3,706,172
- --------------------------------------------------------------------------------
Interest receivable 3,546,494
- --------------------------------------------------------------------------------
Receivable for capital stock sold 699,579
- -------------------------------------------------------------------------------- ------------
Total assets 150,802,211
- -------------------------------------------------------------------------------- ------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for investments purchased $2,487,041
- ----------------------------------------------------------------------
Payable for capital stock redeemed 1,299,169
- ----------------------------------------------------------------------
Dividends payable 623,242
- ----------------------------------------------------------------------
Accrued expenses and other liabilities 122,704
- ---------------------------------------------------------------------- ----------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 4,532,156
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 16,110,377 shares of capital stock outstanding $146,270,055
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $157,260,387
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (7,858,851)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (3,335,869)
- --------------------------------------------------------------------------------
Undistributed net investment income 204,388
- -------------------------------------------------------------------------------- ------------
Total Net Assets $146,270,055
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, and Redemption Proceeds Per Share:
(net assets of $146,270,055 DIVIDED BY 16,110,377 shares of capital stock
outstanding) $ 9.08
- -------------------------------------------------------------------------------- ------------
COMPUTATION OF OFFERING PRICE:
- --------------------------------------------------------------------------------
Offering Price Per Share (100/99 of $9.08)* $ 9.17
- -------------------------------------------------------------------------------- ------------
<FN>
* See "What Shares Cost" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
34
FORTRESS BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Interest $12,799,966
- -------------------------------------------------------------------------------------
Dividends 118,106
- ------------------------------------------------------------------------------------- -----------
Total investment income 12,918,072
- -------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $1,081,066
- -----------------------------------------------------------------------
Directors' fees 5,008
- -----------------------------------------------------------------------
Administrative personnel and services 192,379
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 66,297
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 134,126
- -----------------------------------------------------------------------
Shareholder services fee 350,007
- -----------------------------------------------------------------------
Fund share registration costs 41,758
- -----------------------------------------------------------------------
Auditing fees 13,508
- -----------------------------------------------------------------------
Legal fees 9,189
- -----------------------------------------------------------------------
Printing and postage 41,014
- -----------------------------------------------------------------------
Insurance premiums 6,784
- -----------------------------------------------------------------------
Taxes 40,247
- -----------------------------------------------------------------------
Miscellaneous 6,621
- ----------------------------------------------------------------------- ----------
Total expenses 1,988,004
- -----------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 481,690
- ----------------------------------------------------------------------- ----------
Net expenses 1,506,314
- ------------------------------------------------------------------------------------- -----------
Net investment income 11,411,758
- ------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions
(identified cost basis) (3,358,420)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments (13,277,162)
- ------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (16,635,582)
- ------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $(5,223,824)
- ------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
35
FORTRESS BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 11,411,758 $ 6,888,178
- ---------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($3,359,826 net loss
and $2,084,112 net gain, respectively, as computed for federal tax
purposes) (3,358,420) 2,082,462
- ---------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (13,277,162) 6,719,114
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations (5,223,824) 15,689,754
- --------------------------------------------------------------------------- ------------- -------------
NET EQUALIZATION CREDITS 81,055 116,945
- --------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (11,262,574) (7,005,123)
- ---------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (1,863,673) --
- ---------------------------------------------------------------------------
Distributions in excess of net investment income -- (20,955)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (13,126,247) (7,026,078)
- --------------------------------------------------------------------------- ------------- -------------
CAPITAL STOCK TRANSACTIONS--(EXCLUSIVE OF AMOUNTS
ALLOCATED TO NET INVESTMENT INCOME)
- ---------------------------------------------------------------------------
Proceeds from sale of shares 84,985,424 84,195,992
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 4,135,607 2,669,825
- ---------------------------------------------------------------------------
Cost of shares redeemed (50,343,919) (24,770,792)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from capital stock transactions 38,777,112 62,095,025
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets 20,508,096 70,875,646
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 125,761,959 54,886,313
- --------------------------------------------------------------------------- ------------- -------------
End of period (including undistributed net investment income of $204,388
and $0, respectively) $ 146,270,055 $ 125,761,959
- --------------------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
36
FORTRESS BOND FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Corporation consists of two diversified
portfolios. The financial statements included herein present only those of
Fortress Bond Fund (the "Fund"). The financial statements of the other portfolio
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.
Effective February 3, 1993, the Fund was registered into a portfolio of
Investment Series Funds, Inc. Prior to that date, the Fund was operated as a
portfolio of Investment Series Trust.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed corporate bonds and other fixed-income and
asset backed securities are valued at the last sale price reported on
national securities exchanges. Unlisted bonds and securities and short-term
obligations are valued at the prices provided by an independent pricing
service. Listed equity securities are valued at the last sale price reported
on national securities exchanges. Unlisted securities and short-term
obligations (and private placement securities) are generally valued at the
prices provided by an independent pricing service. Short-term securities
with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
During the year ended October 31, 1994, the Fund changed its method of
accounting for costing securities and calculating gains and losses for
financial reporting purposes from the average cost method to the specific
identification method. This accounting change resulted only in
reclassification between unrealized and realized gains and losses, and
therefore had no effect on the net results from operations, net assets or
net asset value per share. The specific identification method is the
preferred method used in the industry and it more closely agrees with the
costing method for federal tax purposes.
B. REPURCHASE AND REVERSE 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 and reverse repurchase agreement investments. Additionally,
procedures have been established by the Fund to monitor, on a daily basis,
the market value of each repurchase agreement's underlying collateral to
ensure that the value of collateral at least equals the principal amount of
the repurchase agreement, including accrued interest.
37
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
The Fund is also permitted to enter into reverse repurchase agreements, in
which the Fund sells U.S. government securities to financial institutions
and agrees to repurchase the securities at an agreed upon price and date.
The Fund will only enter into repurchase and reverse repurchase agreements
with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Board of Directors of the
Corporation (the "Directors"). Risks may arise from the potential inability
of counterparties to honor the terms of these agreements. Accordingly, the
Fund could receive less than the repurchase price on the sale of collateral
securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary. At October 31, 1994, the Fund,
for federal tax purposes, had a capital loss carryforward of $3,359,826,
which will reduce the Fund's taxable income arising from future net realized
gain on investments, if any, to the extent permitted by the Code, and thus
will reduce the amount of the distributions to shareholders which would
otherwise be necessary to relieve the Fund of any liability for federal tax.
Pursuant to the Code, such capital loss carryforward will expire in 2002
($3,359,826).
E. EQUALIZATION--The Fund follows the accounting practice known as equalization
by which a portion of the proceeds from sales and costs of redemptions of
capital stock equivalent, on a per share basis, to the amount of
undistributed net investment income on the date of the transaction is
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share is unaffected by sales or
redemptions of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
G. OTHER--Investment transactions are accounted for on the trade date.
38
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
(3) CAPITAL STOCK
At October 31, 1994, there were 1,000,000,000,000 shares ($0.0001 par value per
share) of capital stock of the Fund authorized. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1994 1993
- -------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Shares sold 8,746,756 8,508,866
- --------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 436,461 269,258
- --------------------------------------------------------------------------------
Shares redeemed (5,284,540) (2,510,109)
- -------------------------------------------------------------------------------- ----------- -------------
Net change resulting from Fund share transactions 3,898,677 6,268,015
- -------------------------------------------------------------------------------- ----------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
..75 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee and to reimburse certain operating expenses
of the Fund. The Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is incurred to
obtain certain personal services for shareholders and to maintain the
shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
39
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended October 31, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $140,759,517
- -------------------------------------------------- ------------
SALES $103,126,151
- -------------------------------------------------- ------------
</TABLE>
40
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
- ---------------------------------------------------------
To the Directors and Shareholders of
INVESTMENT SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Fortress Bond Fund (one of the portfolios
comprising Investment Series Funds, Inc.) as of October 31, 1994, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights (see page 2 of the prospectus) for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Fortress Bond Fund at October 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 9, 1994
41
APPENDIX (UNAUDITED)
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP ("S&P") 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.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B--Debt rated "BB" or "B", is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates a low degree of
speculation.
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 some time 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
42
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degreee 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.
43
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Series Funds, Inc.
Fortress Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Center
Pittsburgh, Pennsylvania 15219
- -------------------------------------------------------------------------------------------
</TABLE>
44
- --------------------------------------------------------------------------------
FORTRESS BOND FUND
PROSPECTUS
A Diversified Portfolio of
Investment Series Funds, Inc.,
an Open-End Management
Investment Company
Prospectus dated December 31,
1994
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
461444309
2041304A (12/94) [RECYCLED PAPER SYMBOL]
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (See Item 23);
(b) Exhibits:
(1) Copy of Articles of Incorporation of the Registrant; (1)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) (i-iii) Copy of Specimen Certificates for Shares of
Capital Stock of the Registrant; (1)
(5) Conformed Copy of Investment Advisory Contract of the
Registrant; (3)
(6) Copy of Distributor's Contract of Registrant; (2)
(i) Conformed Copy of Exhibit D to Distributor's Contract;+
(7) Not applicable;
(8) Conformed Copy of Custodian Agreement of the Registrant;(3)
(9) (i) Conformed Copy of Agreement for Fund Accounting,
Shareholder Recordkeeping, and Custody Services
Procurement;+
(ii) Conformed Copy of Shareholder Services Plan dated
April, 13, 1993;+
(iii) Conformed Copy of Current Shareholder Services Plan
dated March 1, 1994;+
(iv) Conformed Copy of Shareholder Services Agreement;+
(v) Copy of Shareholder Services Sub-contract;+
(vi) Conformed Copy of Administrative Services Agreement;+
(10) Copy of Opinion and Consent of Counsel as to legality of
shares being registered; (2)
(11) (i) Copy of Consent of Independent Auditors;+
(ii) Copy of Review of Methodology and Procedures for
Accounting for Multiple Classes of Shares by Arthur
Andersen, dated May 1, 1992; (2)
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i) Copy of Distribution Plan; (2)
(a) Conformed Copy of Exhibits B and C to
Distribution Plan;+
(ii) Copy of Dealer Agreement; (2)
(iii) Copy of 12b-1 Agreement; (2)
(16) Not applicable;
(17) Financial Data Schedules;+
(18) Opinion and Consent of Counsel as to Availability of
Rule 485(b);+
(19) (i) Power of Attorney; (2)
(ii) Limited Power of Attorney;+
_____________
+ All exhibits have been filed electronically via EDGAR.
(1) Response is incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A filed August 21, 1992. (File No. 33-48847)
(2) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File No. 33-48847)
(3) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed December 29, 1993 (File No. 33-48847)
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of December , 1994
Fortress Bond Fund
Shares of capital stock
(no par value)
Capital Growth Fund
(Class A Shares)
Shares of capital stock
(no par value)
Capital Growth Fund
(Class C Shares)
Shares of capital stock
(no par value)
Item 27. Indemnification: (1)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment
adviser, see the section entitled "Investment Series Funds,
Inc., Information - Management of the Corporation" in Part A.
The affiliations with the Registrant of four of the Trustees
and one of the Officers of the investment adviser are included
in Part B of this Registration Statement under "Investment
Series Funds, Inc. Management." The remaining Trustee of the
investment adviser, his position with the investment adviser,
and, in parentheses, his principal occupation is: Mark D.
Olson (Partner, Wilson, Halbrook & Bayard), 107 W. Market
Street, Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are: Mark L.
Mallon, Executive Vice President; Henry J. Gailliot, Senior
Vice President-Economist; Peter R. Anderson, William D. Dawson,
J. Thomas Madden, Gary J. Madich, and J. Alan Minteer, Senior
Vice Presidents; Jonathan C. Conley, Deborah A. Cunningham,
Mark E. Durbiano, Roger A. Early, Kathleen M. Foody-Malus,
David C. Francis, Thomas M. Franks; Edward C.
Gonzales, Jeff A. Kozemchak, John W. McGonigle, Gregory M.
Melvin, Susan M. Nason, Mary Jo Ochson, Robert J. Ostrowski,
Charles A. Ritter, and Christopher H. Wiles, Vice Presidents;
Edward C. Gonzales, Treasurer; and John W. McGonigle,
Secretary. The business address of each of the
Officers of the investment adviser is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. These individuals are
also officers of a majority of the investment advisers to the
Funds listed in Part B of this Registration Statement under
"The Funds."
________________
(1) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File No. 33-48847)
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the
following open-end investment companies: Alexander Hamilton
Funds; American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; BayFunds; The Biltmore Funds; The
Biltmore Municipal Funds; California Municipal Cash Trust; Cash
Trust Series, Inc.; 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 Institutional
Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-
Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First Priority
Funds; First Union Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fountain Square Funds; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Independence One Mutual Funds; 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 Utility Fund, Inc.; Liquid Cash Trust;
Managed Series Trust; Marshall Funds, Inc.; Money Market
Management, Inc.; The Medalist Funds; Money Market Obligations
Trust; Money Market Trust; The Monitor Funds; 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; SouthTrust Vulcan Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund,
Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Tower Mutual Funds; 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; Vision Fiduciary Funds, Inc.; Vision
Group of Funds, Inc.; and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter
for the following closed-end investment company: Liberty Term
Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief INSERT OFFICE
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice INSERT OFFICE
Federated Investors Tower President, and Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities
Corp.
John W. McGonigle Director, Executive Vice Vice President and
Federated Investors Tower President, and Assistant Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Tower Securities Corp. Secretary
Pittsburgh, PA 15222-3779
Item 30. Location of Accounts and Records: (1)
Item 31. Management Services: Not applicable.
(1) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File No. 33-48847)
Item 32. Undertakings:
Registrant hereby undertakes, if requested to do so by the holders
of at least 10% of the registrant's outstanding shares, to call a
meeting of shareholders for the purpose of voting upon the question
of removal of a Director or Directors and to assist in
communications with other shareholders as required by Section 16(c).
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, INVESTMENT SERIES FUNDS,
INC., has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the
City of Pittsburgh and Commonwealth of Pennsylvania, on the 23rd day of
December, 1994.
INVESTMENT SERIES FUNDS, INC.
BY: /s/Robert C. Rosselot
Robert C. Rosselot, Assistant Secretary
Attorney in Fact for John F. Donahue
December 23, 1994
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By: /s/Robert C. Rosselot
Robert C. Rosselot Attorney In Fact December 23,
ASSISTANT SECRETARY For the Persons 1994
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
J. Christopher Donahue* President and Director
Edward C. Gonzales* Vice President and Treasurer
(Principal Financial and
Accounting Officer)
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
Gregor F. Meyer* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
* By Power of Attorney
Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our reports dated
December 9, 1994 in Post-Effective Amendment Number 5 to the Registration
Statement (Form N-1A No. 33-48847 and related Prospectuses of the
individual funds of INVESTMENT SERIES FUNDS, INC. (comprising respectively,
Fortress Bond Fund and Capital Growth Fund) dated December 31, 1994.
By: ERNST & YOUNG LLP
Ernst & Young LLP
Pittsburgh, Pennsylvania
December 21, 1994
Exhibit 18 under Form N-1A
Exhibit 99 under Item 601/Reg. SK
HOUSTON, HOUSTON & DONNELLY
ATTORNEYS AT LAW
2510 CENTRE CITY TOWER
WILLIAM McC. HOUSTON PITTSBURGH, PA. 15222
FRED CHALMERS HOUSTON, JR. __________
THOMAS J. DONNELLY
JOHN F. MECK (412) 471-5828 FRED CHALMERS HOUSTON
FAX (412) 471-0736 (1914 - 1971)
MARIO SANTILLI, JR.
THEODORE M. HAMMER
December 22, 1994
Investment Series Funds, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Gentlemen:
As counsel to Investment Series Funds, Inc. ("Fund") we have reviewed
Post-effective Amendment No. 5 to the Fund's Registration Statement to be
filed with the Securities and Exchange Commission under the Securities Act of
1933 (File No. 33-48847). The subject Post-effective Amendment will be filed
pursuant to Paragraph (b) of Rule 485 and become effective pursuant to said
Rule on December 22, 1994.
Our review also included an examination of other relevant portions of
the amended 1933 Act Registration Statement of the Fund and such other
documents and records deemed appropriate. On the basis of this review we are
of the opinion that Post-effective Amendment No. 5 does not contain
disclosures which would render it ineligible to become effective pursuant to
Paragraph (b) of Rule 485.
We hereby consent to the filing of this representation letter as a part
of the Fund's Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 and as part of any application or
registration statement filed under the Securities Laws of the States of the
United States.
Very truly yours,
Houston, Houston & Donnelly
By: /s/ Thomas J. Donnelly
TJD:heh
-1-
Exhibit 9(vi) under Form N-1A
Exhibit 16 under Item 601/Reg. S-K
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement is made as of this first day of
March, 1994, between those investment companies listed on Exhibit 1, as may
be amended from time to time, having their principal office and place of
business at Federated Investors Tower, Pittsburgh PA 15222-3779
(individually referred to herein as "Fund" and collectively referred to as
"Funds), on behalf of the portfolios of the Funds, and Federated
Administrative Services, a Delaware business trust (herein called "FAS").
WHEREAS, the Funds desire to retain FAS as their Administrator to
provide them with Administrative Services (as herein defined), and FAS is
willing to render such services;
WHEREAS, the Funds are registered as open-end management investment
companies under the Investment Company Act of 1940, as amended (the "1940
Act"), with authorized and issued shares of capital stock or beneficial
interest ("Shares"); and
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. Appointment of Administrator. The Funds hereby appoint FAS as
Administrator of the Funds on the terms and conditions set forth in this
Agreement; and FAS hereby accepts such appointment and agrees to perform the
services and duties set forth in Section 2 of this Agreement in consideration
of the compensation provided for in Section 4 hereof.
2. Services and Duties. As Administrator, and subject to the
supervision and control of the Funds' Boards of Trustees or Directors, as
applicable (the "Boards"), FAS will provide facilities, equipment, and
personnel to carry out the following administrative services for operation of
the business and affairs of the Funds and each of their portfolios:
(a) prepare, file, and maintain the Funds'
governing documents and any amendments thereto, including the
Declaration of Trust or Articles of Incorporation, as
appropriate,(which has already been prepared and filed), the By-
laws and minutes of meetings of their Boards, Committees, and
shareholders;
(b) prepare and file with the Securities
and Exchange Commission and the appropriate state securities
authorities the registration statements for the Funds and the
Funds' shares and all amendments thereto, reports to regulatory
authorities and shareholders, prospectuses, proxy statements,
and such other documents all as may be necessary to enable the
Funds to make continuous offerings of their shares, as
applicable;
(c) prepare, negotiate, and administer
contracts on behalf of the Funds with, among others, each Fund's
investment adviser, distributor, custodian, and transfer agent,
subject to any applicable restrictions of the Boards or the 1940
Act;
(d) supervise the Funds' custodians in the
maintenance of the Funds' general ledgers and in the preparation
of the Funds' financial statements, including oversight of
expense accruals and payments, the determination of the net
asset value of the Funds and the declaration and payment of
dividends and other distributions to shareholders;
(e) calculate performance data of the
Funds for dissemination to information services covering the
investment company industry;
(f) prepare and file the Funds' tax
returns;
(g) examine and review the operations of
the Funds' custodians and transfer agents;
(h) coordinate the layout and printing of
publicly disseminated prospectuses and reports;
(i) perform internal audit examinations in
accordance with a charter to be adopted by FAS and the Funds;
(j) assist with the design, development,
and operation of the Funds;
(k) provide individuals reasonably
acceptable to the Funds' Boards for nomination, appointment, or
election as officers of the Funds, who will be responsible for
the management of certain of the Funds' affairs as determined by
the Funds' Boards; and
(l) consult with the Funds and their
Boards of Trustees or Directors, as appropriate, on matters
concerning the Funds and their affairs.
The foregoing, along with any additional services that FAS shall agree
in writing to perform for the Funds hereunder, shall hereafter be referred to
as "Administrative Services." Administrative Services shall not include any
duties, functions, or services to be performed for any Fund by such Fund's
investment adviser, distributor, custodian, transfer agent, or shareholder
service agent, pursuant to their respective agreements with such Fund.
3. Expenses. FAS shall be responsible for expenses incurred in
providing office space, equipment, and personnel as may be necessary or
convenient to provide the Administrative Services to the Fund, including the
compensation of FAS employees who serve on the Funds' Boards, or as officers
of the Funds. Each Fund shall be responsible for all other expenses incurred
by FAS on behalf of such Fund, including without limitation postage and
courier expenses, printing expenses, travel expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to members of such Fund's Board who are not FAS
employees, and trade association dues.
4. Compensation. For the Administrative Services provided, each
Fund hereby agrees to pay and FAS hereby agrees to accept as full
compensation for its services rendered hereunder an administrative fee at an
annual rate, payable daily, as specified below, based upon the total assets
of all of the Funds:
Maximum Administrative Average Daily Net Assets
Fee of the Funds
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of
$750 million
However, in no event shall the administrative fee received during any
year of this Agreement be less than, or be paid at a rate less than would
aggregate, $125,000, per individual Fund, with an additional $30,000 for each
class of shares added to any such Fund after the date hereof.
5. Standard of Care.
(a) FAS shall not be liable for any error
of judgment or mistake of law or for any loss suffered by any
Fund in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and
duties under this Agreement. FAS shall be entitled to rely on
and may act upon advice of counsel (who may be counsel for such
Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice. Any
person, even though also an officer, trustee, partner, employee
or agent of FAS, who may be or become a member of such Fund's
Board, officer, employee or agent of any Fund, shall be deemed,
when rendering services to such Fund or acting on any business
of such Fund (other than services or business in connection with
the duties of FAS hereunder) to be rendering such services to or
acting solely for such Fund and not as an officer, trustee,
partner, employee or agent or one under the control or direction
of FAS even though paid by FAS.
(b) This Section 5 shall survive
termination of this Agreement.
6. Duration and Termination. The initial term of this Agreement
with respect to each Fund shall commence on the date hereof, and extend for a
period of one year, renewable annually by the approval of the Board of
Directors/Trustees of each Fund.
7. Amendment. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which an enforcement of the change, waiver,
discharge or termination is sought.
8. Limitations of Liability of Trustees or Officers, Employees,
Agents and Shareholders of the Funds. FAS is expressly put on notice of the
limitation of liability as set forth in the Declaration of Trust of each Fund
that is a Massachusetts business trust and agrees that the obligations
assumed by each such Fund pursuant to this Agreement shall be limited in any
case to such Fund and its assets and that FAS shall not seek satisfaction of
any such obligations from the shareholders of such Fund, the Trustees,
Officers, Employees or Agents of such Fund, or any of them.
9. Limitations of Liability of Trustees and Shareholders of FAS.
The execution and delivery of this Agreement have been authorized by the
Trustees of FAS and signed by an authorized officer of FAS, acting as such,
and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, and the
obligations of this Agreement are not binding upon any of the Trustees or
shareholders of FAS, but bind only the trust property of FAS as provided in
the Declaration of Trust of FAS.
10. Notices. Notices of any kind to be given hereunder shall be
in writing (including facsimile communication) and shall be duly given if
delivered to any Fund at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to FAS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention: President.
11. Miscellaneous. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject hereof whether oral or written. The captions in this Agreement
are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction
or effect. If any provision of this Agreement shall be held or made invalid
by a court or regulatory agency decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. Subject to the
provisions of Section 5, hereof, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and shall be governed by Pennsylvania law; provided, however, that
nothing herein shall be construed in a manner inconsistent with the
Investment Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
12. Counterparts. This Agreement may be executed by different
parties on separate counterparts, each of which, when so executed and
delivered, shall be an original, and all such counterparts shall together
constitute one and the same instrument.
13. Assignment; Successors. This Agreement shall not be assigned by
any party without the prior written consent of FAS, in the case of assignment
by any Fund, or of the Funds, in the case of assignment by FAS, except that
any party may assign to a successor all of or a substantial portion of its
business to a party controlling, controlled by, or under common control with
such party. Nothing in this Section 14 shall prevent FAS from delegating its
responsibilities to another entity to the extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Investment Companies (listed
on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Federated Administrative Services
By: /s/ Edward C. Gonzales
Edward C. Gonzales
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
EXHIBIT 1
INVESTMENT SERIES FUNDS, INC.
-1-
Exhibit 9(v) under Form N-1A
Exhibit 16 under Item 601/Reg. S-K
SHAREHOLDER SERVICES SUB-CONTRACT
This Agreement is made between the Financial Institution executing
this Agreement ("Provider") and Federated Shareholder Services ("FSS")
on behalf of the investment companies listed in Exhibit A hereto (the
"Funds"), for whom FSS administers the Shareholder Services Plan
("Plan") and who have approved this form of Agreement. In consideration
of the mutual covenants hereinafter contained, it is hereby agreed by
and between the parties hereto as follows:
1. FSS hereby appoints Provider to render or cause to be
rendered personal services to shareholders of the Funds and/or the
maintenance of accounts of shareholders of the Funds ("Services").
Provider agrees to provide Services which, in its best judgment, are
necessary or desirable for its customers who are investors in the Funds.
Provider further agrees to provide FSS, upon request, a written
description of the Services which Provider is providing hereunder.
2. During the term of this Agreement, the Funds will pay the
Provider fees as set forth in a written schedule delivered to the
Provider pursuant to this Agreement. The fee schedule for Provider may
be changed by FSS sending a new fee schedule to Provider pursuant to
Paragraph 9 of this Agreement. For the payment period in which this
Agreement becomes effective or terminates, there shall be an appropriate
proration of the fee on the basis of the number of days that this
Agreement is in effect during the quarter. To enable the Funds to
comply with an applicable exemptive order, Provider represents that the
fees received pursuant to this Agreement will be disclosed to its
customers, will be authorized by its customers, and will not result in
an excessive fee to the Provider.
3. The Provider understands that the Department of Labor views
ERISA as prohibiting fiduciaries of discretionary ERISA assets from
receiving shareholder service fees or other compensation from funds in
which the fiduciary's discretionary ERISA assets are invested. To date,
the Department of Labor has not issued any exemptive order or advisory
opinion that would exempt fiduciaries from this interpretation. Without
specific authorization from the Department of Labor, fiduciaries should
carefully avoid investing discretionary assets in any fund pursuant to
an arrangement where the fiduciary is to be compensated by the fund for
such investment. Receipt of such compensation could violate ERISA
provisions against fiduciary self-dealing and conflict of interest and
could subject the fiduciary to substantial penalties.
4. The Provider agrees not to solicit or cause to be solicited
directly, or indirectly at any time in the future, any proxies from the
shareholders of a Fund in opposition to proxies solicited by management
of the Fund, unless a court of competent jurisdiction shall have
determined that the conduct of a majority of the Board of Trustees or
Directors of the Fund constitutes willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties. This paragraph 4 will
survive the term of this Agreement.
5. This Agreement shall continue in effect for one year from
the date of its execution, and thereafter for successive periods of one
year if the form of this Agreement is approved at least annually by the
Board of each Fund, including a majority of the members of the Board of
the Fund who are not interested persons of the Fund and have no direct
or indirect financial interest in the operation of the Fund's Plan or in
any related documents to the Plan ("Disinterested Board Members") cast
in person at a meeting called for that purpose.
6. Notwithstanding paragraph 5, this Agreement may be
terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Disinterested Board Members of the
Fund or by a vote of a majority of the outstanding voting
securities of the Fund as defined in the Investment Company Act
of 1940 on not more than sixty (60) days' written notice to the
parties to this Agreement;
(b) automatically in the event of the Agreement's
assignment as defined in the Investment Company Act of 1940; and
(c) by either party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
7. The Provider agrees to obtain any taxpayer identification
number certification from its customers required under Section 3406 of
the Internal Revenue Code, and any applicable Treasury regulations, and
to provide the Fund or its designee with timely written notice of any
failure to obtain such taxpayer identification number certification in
order to enable the implementation of any required backup withholding.
8. The execution and delivery of this Agreement have been
authorized by the Trustees of FSS and signed by an authorized officer of
FSS, acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of
them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or shareholders of FSS, but bind only the trust
property of FSS as provided in the Declaration of Trust of FSS.
9. Notices of any kind to be given hereunder shall be in
writing (including facsimile communication) and shall be duly given if
delivered to Provider at the address set forth below and if delivered to
FSS at Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
10. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. Subject to the provisions of Sections 5
and 6, hereof, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and
shall be governed by Pennsylvania law; provided, however, that nothing
herein shall be construed in a manner inconsistent with the Investment
Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
11. This Agreement may be executed by different parties on
separate counterparts, each of which, when so executed and delivered,
shall be an original, and all such counterparts shall together
constitute one and the same instrument.
12. This Agreement shall not be assigned by any party without
the prior written consent of FSS in the case of assignment by Provider,
or of Provider in the case of assignment by FSS, except that any party
may assign to a successor all of or a substantial portion of its
business to a party controlling, controlled by, or under common control
with such party.
13. This Agreement may be amended by FSS from time to time by
the following procedure. FSS will mail a copy of the amendment to the
Provider's address, as shown below. If the Provider does not object to
the amendment within thirty (30) days after its receipt, the amendment
will become part of the Agreement. The Provider's objection must be in
writing and be received by FSS within such thirty days.
14. This Agreement may be terminated with regard to a
particular Fund or Class at any time, without the payment of any
penalty, by FSS or by the vote of a majority of the Disinterested
Trustees or Directors, as applicable, or by a majority of the
outstanding voting securities of the particular Fund or Class on not
more than sixty (60) days' written notice to the Provider. This
Agreement may be terminated by Provider on sixty (60) days' written
notice to FSS.
15. The Provider acknowledges and agrees that FSS has entered
into this Agreement solely in the capacity of agent for the Funds and
administrator of the Plan. The Provider agrees not to claim that FSS is
liable for any responsibilities or amounts due by the Funds hereunder.
[Provider]
Address
City State Zip Code
Dated: By:
Authoried Signature
Title
Print Name of Authorized Signature
FEDERATED SHAREHOLDER SERVICES
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By:
Vice President
EXHIBIT A to Shareholder Services Sub-Contract with
Funds covered by this Agreement:
Shareholder Service Fees
1. During the term of this Agreement, FSS will pay Provider a
quarterly fee. This fee will be computed at the annual rate of ______
of the average net asset value of shares of the Funds held during the
quarter in accounts for which the Provider provides Services under this
Agreement, so long as the average net asset value of Shares in the Funds
during the quarter equals or exceeds such minimum amount as FSS shall
from time to time determine and communicate in writing to the Provider.
2. For the quarterly period in which the Agreement becomes
effective or terminates, there shall be an appropriate proration of any
fee payable on the basis of the number of days that the Agreement is in
effect during the quarter.
EXHIBIT 1
INVESTMENT SERIES FUNDS, INC.
-1-
Exhibit 9(iii) under Form N-1A
Exhibit 16 under Item 601/Reg. S-K
SHAREHOLDER SERVICES PLAN
This Shareholder Services Plan ("Plan") is adopted as of this 1st
day of March, 1994, by the Boards of Directors or Trustees, as
applicable (the "Boards"), of those investment companies listed on
Exhibit 1 hereto as may be amended from time to time, having their
principal office and place of business at Federated Investors Tower,
Pittsburgh, PA 15222-3779 (individually referred to herein as a "Fund"
and collectively as "Funds").
1. This Plan is adopted to allow the Funds to make payments as
contemplated herein to obtain certain personal services for shareholders
and/or the maintenance of shareholder accounts ("Services").
2. This Plan is designed to compensate Federated Shareholder
Services ("FSS") for providing personal services and/or the maintenance
of shareholder accounts to the Funds and their shareholders. In
compensation for the services provided pursuant to this Plan, FSS may be
paid a monthly fee computed at the annual rate not to exceed .25 of 1%
of the average aggregate net asset value of the shares of each Fund held
during the month.
3. Any payments made by the Funds to FSS pursuant to this Plan
will be made pursuant to a "Shareholder Services Agreement" between FSS
and each of the Funds.
4. Quarterly in each year that this Plan remains in effect, FSS
shall prepare and furnish to the Boards of the Funds, and the Boards
shall review, a written report of the amounts expended under the Plan.
5. This Plan shall become effective with regard to each Fund
(i) after approval by majority votes of: (a) such Fund's Board; and (b)
the members of the Board of such Fund who are not interested persons of
such Fund and have no direct or indirect financial interest in the
operation of such Fund's Plan or in any related documents to the Plan
("Independent Trustees or Directors"), cast in person at a meeting
called for the purpose of voting on the Plan.
6. This Plan shall remain in effect with respect to each Fund
presently set forth on an exhibit and any subsequent Fund added pursuant
to an exhibit during the initial year of this Plan for the period of one
year from the date set forth above and may be continued thereafter if
this Plan is approved with respect to each Fund at least annually by a
majority of the relevant Fund's Board and a majority of the Independent
Trustees or
Directors, of such Fund as applicable, cast in person at a meeting
called for the purpose of voting on the renewal of such Plan. If this
Plan is adopted with respect to a fund after the first annual approval
by the Trustees or Directors as described above, this Plan will be
effective as to that Fund at such time as Exhibit 1 hereto is amended to
add such Fund and will continue in effect until the next annual approval
of this Plan by the Funds' Boards and thereafter for successive periods
of one year subject to approval as described above.
7. All material amendments to this Plan must be approved by a
vote of the Board of each Fund and of the Independent Directors or
Trustees of such Fund, cast in person at a meeting called for such
purpose.
8. This Plan may be terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Independent Board Members of any
Fund or by a vote of a majority of the outstanding voting
securities of any Fund as defined in the Investment Company Act
of 1940 on sixty (60) days' written notice to the parties to
this Agreement; or
(b) by any party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
9. While this Plan shall be in effect, the selection and
nomination of Independent Directors or Trustees of each Fund shall be
committed to the discretion of the Independent Directors or Trustees
then in office.
10. All agreements with any person relating to the
implementation of this Plan shall be in writing and any agreement
related to this Plan shall be subject to termination, without penalty,
pursuant to the provisions of Paragraph 8 herein.
11. This Plan shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
Witness the due execution hereof this as of the date set forth
above.
Investment Companies (listed
on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Federated Shareholder Services
By: /s/ James J. Dolan
Title: President
Attest: /s/ John W. McGonigle
John W. McGonigle
EXHIBIT 1
INVESTMENT SERIES FUNDS, INC.
-1-
Exhibit 9(iv) under Form N-1A
Exhibit 16 under Item 601/Reg. S-K
SHAREHOLDER SERVICES AGREEMENT
AGREEMENT made as of the first day of March, 1994, by and between
those investment companies listed on Exhibit 1, as may be amended from
time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have
approved a Shareholder Services Plan (the "Plan") and this form of
Agreement (individually referred to herein as a "Fund" and collectively
as "Funds") and Federated Shareholder Services, a Delaware business
trust, having its principal office and place of business at Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779 ("FSS").
1. The Funds hereby appoint FSS to render or cause to be
rendered personal services to shareholders of the Funds and/or the
maintenance of accounts of shareholders of the Funds ("Services"). In
addition to providing Services directly to shareholders of the Funds,
FSS is hereby appointed the Funds' agent to select, negotiate and
subcontract for the performance of Services. FSS hereby accepts such
appointments. FSS agrees to provide or cause to be provided Services
which, in its best judgment (subject to supervision and control of the
Funds' Boards of Trustees or Directors, as applicable), are necessary or
desirable for shareholders of the Funds. FSS further agrees to provide
the Funds, upon request, a written description of the Services which FSS
is providing hereunder.
2. During the term of this Agreement, each Fund will pay FSS
and FSS agrees to accept as full compensation for its services rendered
hereunder a fee at an annual rate, calculated daily and payable monthly,
up to 0.25% of 1% of average net assets of each Fund.
For the payment period in which this Agreement becomes effective
or terminates with respect to any Fund, there shall be an appropriate
proration of the monthly fee on the basis of the number of days that
this Agreement is in effect with respect to such Fund during the month.
To enable the Funds to comply with an applicable exemptive order, FSS
represents that the fees received pursuant to this Agreement will be
disclosed to and authorized by any person or entity receiving Services,
and will not result in an excessive fee to FSS.
3. This Agreement shall continue in effect for one year from
the date of its execution, and thereafter for successive periods of one
year only if the form of this Agreement is approved at least annually by
the Board of each Fund, including a majority of the members of the Board
of the Fund who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Funds'
Plan or in any related documents to the Plan ("Independent Board
Members") cast in person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be
terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Independent Board Members of any
Fund or by a vote of a majority of the outstanding voting
securities of any Fund as defined in the Investment Company Act
of 1940 on sixty (60) days' written notice to the parties to
this Agreement;
(b) automatically in the event of the Agreement's
assignment as defined in the Investment Company Act of 1940; and
(c) by any party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
5. FSS agrees to obtain any taxpayer identification number
certification from each shareholder of the Funds to which it provides
Services that is required under Section 3406 of the Internal Revenue
Code, and any applicable Treasury regulations, and to provide each Fund
or its designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake
of law or for any loss suffered by any Fund in connection with the
matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. FSS shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for such
Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Any person, even
though also an officer, trustee, partner, employee or agent of FSS, who
may be or become a member of such Fund's Board, officer, employee or
agent of any Fund, shall be deemed, when rendering services to such Fund
or acting on any business of such Fund (other than services or business
in connection with the duties of FSS hereunder) to be rendering such
services to or acting solely for such Fund and not as an officer,
trustee, partner, employee or agent or one under the control or
direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing
signed by the party against which an enforcement of the change, waiver,
discharge or termination is sought.
8. FSS is expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust of each Fund that is
a Massachusetts business trust and agrees that the obligations assumed
by each such Fund pursuant to this Agreement shall be limited in any
case to such Fund and its assets and that FSS shall not seek
satisfaction of any such obligations from the shareholders of such Fund,
the Trustees, Officers, Employees or Agents of such Fund, or any of
them.
9. The execution and delivery of this Agreement have been
authorized by the Trustees of FSS and signed by an authorized officer of
FSS, acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of
them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or shareholders of FSS, but bind only the trust
property of FSS as provided in the Declaration of Trust of FSS.
10. Notices of any kind to be given hereunder shall be in
writing (including facsimile communication) and shall be duly given if
delivered to any Fund and to such Fund at the following address:
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President and if delivered to FSS at Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President.
11. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. Subject to the provisions of Sections 3
and 4, hereof, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and
shall be governed by Pennsylvania law; provided, however, that nothing
herein shall be construed in a manner inconsistent with the Investment
Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
12. This Agreement may be executed by different parties on
separate counterparts, each of which, when so executed and delivered,
shall be an original, and all such counterparts shall together
constitute one and the same instrument.
13. This Agreement shall not be assigned by any party without
the prior written consent of FSS in the case of assignment by any Fund,
or of the Funds in the case of assignment by FSS, except that any party
may assign to a successor all of or a substantial portion of its
business to a party controlling, controlled by, or under common control
with such party. Nothing in this Section 14 shall prevent FSS from
delegating its responsibilities to another entity to the extent provided
herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year
first above written.
Investment Companies (listed
on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Federated Shareholder Services
By: /s/ James J. Dolan
Title: President
Attest: /s/ John W. McGonigle
John W. McGonigle
EXHIBIT 1
INVESTMENT SERIES FUNDS, INC.
-1-
Exhibit 19(ii) under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, dated as of September 9,
1994, that INVESTMENT SERIES FUNDS, INC., a corporation duly organized
under the laws of the State of Maryland (the "Corporation") does hereby
nominate, constitute and appoint FEDERATED ADVISERS, a business trust
duly organized under the laws of the State of Delaware (the "Adviser"),
to act hereunder as the true and lawful agent and attorney-in-fact of
the Corporation, acting on behalf of each of the series portfolios for
which the Adviser acts as investment adviser shown on Schedule 1
attached hereto and incorporated by reference herein (each such series
portfolio being hereinafter referred to as a "Fund" and collectively as
the "Funds"), for the specific purpose of executing and delivering all
such agreements, instruments, contracts, assignments, bond powers, stock
powers, transfer instructions, receipts, waivers, consents and other
documents, and performing all such acts, as the Adviser may deem
necessary or reasonably desirable, related to the acquisition,
disposition and/or reinvestment of the funds and assets of a Fund of the
Corporation in accordance with Adviser's supervision of the investment,
sale and reinvestment of the funds and assets of each Fund pursuant to
the authority granted to the Adviser as investment Adviser of each Fund
under that certain investment advisory contract dated June 22, 1992 by
and between the Adviser and the Corporation (such investment advisory
contract, as may be amended, supplemented or otherwise modified from
time to time is hereinafter referred to as the "Investment Advisory
Contract").
The Adviser shall exercise or omit to exercise the powers
and authorities granted herein in each case as the Adviser in its sole
and absolute discretion deems desirable or appropriate under existing
circumstances. The Corporation hereby ratifies and confirms as good and
effectual, at law or in equity, all that the Adviser, and its officers
and employees, may do by virtue hereof. However, despite the above
provisions, nothing herein shall be construed as imposing a duty on the
Adviser to act or assume responsibility for any matters referred to
above or other matters even though the Adviser may have power or
authority hereunder to do so. Nothing in this Limited Power of Attorney
shall be construed (i) to be an amendment or modifications of, or
supplement to, the Investment Advisory Contract, (ii) to amend, modify,
limit or denigrate any duties, obligations or liabilities of the Adviser
under the terms of the Investment Advisory Contract or (iii) exonerate,
relieve or release the Adviser any losses, obligations, penalties,
actions, judgments and suits and other costs, expenses and disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against the Adviser (x) under the terms of the Investment
Advisory Contract or (y) at law, or in equity, for the performance of
its duties as the investment Adviser of any of the Funds.
The Corporation hereby agrees to indemnify and save harmless
the Adviser and its trustees, officers and employees (each of the
foregoing an "Indemnified Party" and collectively the "Indemnified
Parties") against and from any and all losses, obligations, penalties,
actions, judgments and suits and other costs, expenses and disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against an Indemnified Party, other than as a consequence of
gross negligence or willful misconduct on the part of an Indemnified
Party, arising out of or in connection with this Limited Power of
Attorney or any other agreement, instrument or document executed in
connection with the exercise of the authority granted to the Adviser
herein to act on behalf of the Corporation, including without limitation
the reasonable costs, expenses and disbursements in connection with
defending such Indemnified Party against any claim or liability related
to the exercise or performance of any of the Adviser's powers or duties
under this Limited Power of Attorney or any of the other agreements,
instruments or documents executed in connection with the exercise of the
authority granted to the Adviser herein to act on behalf of the
Corporation, or the taking of any action under or in connection with any
of the foregoing. The obligations of the Corporation under this
paragraph shall survive the termination of this Limited Power of
Attorney with respect to actions taken by the Adviser on behalf of the
Corporation during the term of this Limited Power of Attorney. No Fund
shall have any joint or several obligation with any other Fund to
reimburse or indemnify an Indemnified Party for any action, event,
matter or occurrence performed or omitted by or on behalf of the Adviser
in its capacity as agent or attorney-in-fact of Corporation acting on
behalf of any other Fund hereunder.
Any person, partnership, corporation or other legal entity
dealing with the Adviser in its capacity as attorney-in-fact hereunder
for the Corporation is hereby expressly put on notice that the Adviser
is acting solely in the capacity as an agent of the Corporation and that
any such person, partnership, corporation or other legal entity must
look solely to the Corporation in question for enforcement of any claim
against the Corporation, as the Adviser assumes no personal liability
whatsoever for obligations of the Corporation entered into by the
Adviser in its capacity as attorney-in-fact for the Corporation.
Each person, partnership, corporation or other legal entity
which deals with a Fund of the Corporation through the Adviser in its
capacity as agent and attorney-in-fact of the Corporation, is hereby
expressly put on notice (i) that all persons or entities dealing with
the Corporation must look solely to the assets of the Fund of the
Corporation on whose behalf the Adviser is acting pursuant to its powers
hereunder for enforcement of any claim against the Corporation, as the
directors, officers and/or agents of such Corporation, the shareholders
of the various classes of shares of the Corporation and the other Funds
of the Corporation assume no personal liability whatsoever for
obligations entered into on behalf of such Fund of the Corporation, and
(ii) that the rights, liabilities and obligations of any one Fund are
separate and distinct from those of any other Fund of the Corporation.
The execution of this Limited Power of Attorney by the
Corporation acting on behalf of the several Funds shall not be deemed to
evidence the existence of any express or implied joint undertaking or
appointment by and among any or all of the Funds. Liability for or
recourse under or upon any undertaking of the Adviser pursuant to the
power or authority granted to the Adviser under this Limited Power of
Attorney under any rule of law, statute or constitution or by the
enforcement of any assessment or penalty or by legal or equitable
proceedings or otherwise shall be limited only to the assets of the Fund
of the Corporation on whose behalf the Adviser was acting pursuant to
the authority granted hereunder.
The Corporation hereby agrees that no person, partnership,
corporation or other legal entity dealing with the Adviser shall be
bound to inquire into the Adviser's power and authority hereunder and
any such person, partnership, corporation or other legal entity shall be
fully protected in relying on such power or authority unless such
person, partnership, corporation or other legal entity has received
prior written notice from the Corporation that this Limited Power of
Attorney has been revoked. This Limited Power of Attorney shall be
revoked and terminated automatically upon the cancellation or
termination of the Investment Advisory Contract between the Corporation
and the Adviser. Except as provided in the immediately preceding
sentence, the powers and authorities herein granted may be revoked or
terminated by the Corporation at any time provided that no such
revocation or termination shall be effective until the Adviser has
received actual notice of such revocation or termination in writing from
the Corporation.
This Limited Power of Attorney constitutes the entire
agreement between the Corporation and the Adviser, may be changed only
by a writing signed by both of them, and shall bind and benefit their
respective successors and assigns; provided, however, the Adviser shall
have no power or authority hereunder to appoint a successor or
substitute attorney in fact for the Corporation.
This Limited Power of Attorney shall be governed and
construed in accordance with the laws of the Commonwealth of
Pennsylvania without reference to principles of conflicts of laws. If
any provision hereof, or any power or authority conferred upon the
Adviser herein, would be invalid or unexercisable under applicable law,
then such provision, power or authority shall be deemed modified to the
extent necessary to render it valid or exercisable while most nearly
preserving its original intent, and no provision hereof, or power or
authority conferred upon the Adviser herein, shall be affected by the
invalidity or the non-exercisability of another provision hereof, or of
another power or authority conferred herein.
This Limited Power of Attorney may be executed in as many
identical counterparts as may be convenient and by the different parties
hereto on separate counterparts. This Limited Power of Attorney shall
become binding on the Corporation when the Corporation shall have
executed at least one counterpart and the Adviser shall have accepted
its appointment by executing this Limited Power of Attorney.
Immediately after the execution of a counterpart original of this
Limited Power of Attorney and solely for the convenience of the parties
hereto, the Corporation and the Adviser will execute sufficient
counterparts so that the Adviser shall have a counterpart executed by it
and the Corporation, and the Corporation shall have a counterpart
executed by the Corporation and the Adviser. Each counterpart shall be
deemed an original and all such taken together shall constitute but one
and the same instrument, and it shall not be necessary in making proof
of this Limited Power of Attorney to produce or account for more than
one such counterpart.
IN WITNESS WHEREOF, the Corporation has caused this Limited
Power of Attorney to be executed by its duly authorized officer as of
the date first written above.
ATTEST: INVESTMENT SERIES FUNDS, INC.
By: /s/ John W. McGonigle By: /s/ Richard B. Fisher
Title: Secretary Title: Vice President
Accepted and agreed to this
September 9, 1994
FEDERATED ADVISERS
By: /s/ William D. Dawson
Title: Executive Vice President
Schedule 1
to Limited Power of Attorney
dated as of September 9, 1994
by INVESTMENT SERIES FUNDS, INC.
(the "Corporation"), acting on
behalf of each of the series portfolios
listed below, and appointing
FEDERATED ADVISERS
the attorney-in-fact of the
Corporation
List of Series Portfolios
CAPITAL GROWTH FUND
FORTRESS BOND FUND
-1-
Exhibit 6(i) under Form N-
1A
Exhibit 1 under Item
601/Reg. S-K
Exhibit D
to the
Distributor's Contract
INVESTMENT SERIES FUNDS, INC.
Capital Growth Fund
Class C Shares
The following provisions are hereby incorporated and made part of
the Distributor's Contract dated the 22nd day of June, 1992, between
Investment Series Funds, Inc. and Federated Securities Corp. with
respect to Classes of Funds set forth above.
1. The Fund hereby appoints FSC to engage in activities
principally intended to result in the sale of Shares of the Classes.
Pursuant to this appointment FSC is authorized to select a group of
brokers ("Brokers") to sell shares of the above-listed Classes
("Shares"), at the current offering price thereof as described and set
forth in the respective prospectuses of the Fund, and to render
administrative support services to the Fund and its shareholders. In
addition, FSC is authorized to select a group of Administrators
("Administrators") to render administrative support services to the
Fund and its shareholders.
2. Administrative support services may include, but are not
limited to, the following eleven functions: (1) account openings: the
Broker or Administrator communicates account openings via computer
terminals located on the Broker or Administrator's premises; 2) account
closings: the Broker or Administrator communicates account closings via
computer terminals; 3) enter purchase transactions: purchase
transactions are entered through the Broker or Administrator's own
personal computer or through the use of a toll-free telephone number; 4)
enter redemption transactions: Broker or Administrator enters
redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also
wires funds and receives funds for Fund share purchases and redemptions,
confirms and reconciles all transactions, reviews the activity in the
Fund's accounts, and provides training and supervision of its personnel;
6) interest posting: Broker or Administrator posts and reinvests
dividends to the Fund's accounts; 7) prospectus and shareholder reports:
Broker or Administrator maintains and distributes current copies of
prospectuses and shareholder reports; 8) advertisements: the Broker or
Administrator continuously advertises the availability of its services
and products; 9) customer lists: the Broker or Administrator
continuously provides names of potential customers; 10) design services:
the Broker or Administrator continuously designs material to send to
customers and develops methods of making such materials accessible to
customers; and 11) consultation services: the Broker or Administrator
continuously provides information about the product needs of customers.
3. During the term of this Agreement, the Fund will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the
annual rate of .25 of the average aggregate net asset value of the
Class C Shares of the Capital Growth Fund held during the month. For
the month in which this Agreement becomes effective or terminates, there
shall be an appropriate proration of any fee payable on the basis of the
number of days that the Agreement is in effect during the month.
4. FSC may from time-to-time and for such periods as it deems
appropriate reduce its compensation to the extent any Class expenses
exceed such lower expense limitation as FSC may, by notice to the Fund,
voluntarily declare to be effective.
5. FSC will enter into separate written agreements with various
firms to provide certain of the services set forth in Paragraph 1
herein. FSC, in its sole discretion, may pay Brokers and Administrators
a periodic fee in respect of Shares owned from time to time by their
clients or customers. The schedules of such fees and the basis upon
which such fees will be paid shall be determined from time to time by
FSC in its sole discretion.
6. FSC will prepare reports to the Board of Directors of the
Fund on a quarterly basis showing amounts expended hereunder including
amounts paid to Brokers and Administrators and the purpose for such
payments.
In consideration of the mutual covenants set forth in the
Distributor's Contract dated June 22, 1992 between Investment Series
Funds, Inc. and Federated Securities Corp., Investment Series Funds,
Inc. executes and delivers this Exhibit on behalf of the Funds, and with
respect to the separate Classes of Shares thereof, first set forth in
this Exhibit.
Witness the due execution hereof this 13th day of April, 1993.
ATTEST: INVESTMENT SERIES FUNDS, INC.
/s/John W. McGonigle By:/s/J. Christopher Donahue
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/S. Elliott Cohan By:/s/John A. Staley, IV
Secretary Executive Vice President
(SEAL)
-1-
Exhibit 9(ii) under Form N-
1A
Exhibit 16 under Item
601/Reg. S-K
INVESTMENT SERIES FUNDS, INC.
SHAREHOLDER SERVICES PLAN
This Shareholder Services Plan ("Plan") is adopted as of this 13th
day of April, 1993, by the Board of Directors of Investment Series
Funds, Inc. (the "Fund"), a Maryland corporation with respect to certain
classes of shares ("Classes") of the portfolios of the Corporation ("the
Portfolios") set forth in exhibits hereto.
1. This Plan is adopted to allow the Fund to make payments as
contemplated herein to obtain certain personal services for shareholders
and/or the maintenance of shareholder accounts ("Services").
2. This Plan is designed to compensate broker/dealers and other
participating financial institutions and other persons ("Providers") for
providing services to the Fund and its shareholders. The Plan will be
administered by Federated Administrative Services, Inc. ("FAS"). In
compensation for the services provided pursuant to this Plan, Providers
will be paid a monthly fee computed at the annual rate not to exceed .25
of 1% of the average aggregate net asset value of the shares of the Fund
held during the month.
3. Any payments made by the Portfolios to any Provider pursuant
to this Plan will be made pursuant to the "Shareholder Services
Agreement" entered into by FAS on behalf of the Fund and the Provider.
Providers which have previously entered into "Administrative Agreements"
or "Rule 12b-1 Agreements" with Federated Securities Corp. may be
compensated under this Plan for Services performed pursuant to those
Agreements until the Providers have executed a "Shareholder Services
Agreement" hereunder.
4. The Fund has the right (i) to select, in its sole
discretion, the Providers to participate in the Plan and (ii) to
terminate without cause and in its sole discretion any Shareholder
Services Agreement.
5. Quarterly in each year that this Plan remains in effect, FAS
shall prepare and furnish to the Board of Directors of the Fund, and the
Board of Directors shall review, a written report of the amounts
expended under the Plan.
6. This Plan shall become effective (i) after approval by
majority votes of: (a) the Fund's Board of Directors; and (b) the
members of the Board of the Corporation who are not interested persons
of the Corporation and have no direct or indirect financial interest in
the operation of the Corporation's Plan or in any related documents to
the Plan ("Disinterested Directors"), cast in person at a meeting called
for the purpose of voting on the Plan; and (ii) upon execution of an
exhibit adopting this Plan.
7. This Plan shall remain in effect with respect to each Class
presently set forth on an exhibit and any subsequent Classes added
pursuant to an exhibit during the initial year of this Plan for the
period of one year from the date set forth above and may be continued
thereafter if this Plan is approved with respect to each Class at least
annually by a majority of the Corporation's Board of Directors and a
majority of the Disinterested Directors, cast in person at a meeting
called for the purpose of voting on such Plan. If this Plan is adopted
with respect to a class after the first annual approval by the Directors
as described above, this Plan will be effective as to that Class upon
execution of the applicable exhibit pursuant to the provisions of
paragraph 6(ii) above and will continue in effect until the next annual
approval of this Plan by the Directors and thereafter for successive
periods of one year subject to approval as described above.
8. All material amendments to this Plan must be approved by a
vote of the Board of Directors of the Fund and of the Disinterested
Directors, cast in person at a meeting called for the purpose of voting
on it.
9. This Plan may be terminated at any time by: (a) a majority
vote of the Disinterested Directors; or (b) a vote of a majority of the
outstanding voting securities of the Fund as defined in Section 2(a)(42)
of the Act.
10. While this Plan shall be in effect, the selection and
nomination of Disinterested Directors of the Fund shall be committed to
the discretion of the Disinterested Directors then in office.
11. All agreements with any person relating to the
implementation of this Plan shall be in writing and any agreement
related to this Plan shall be subject to termination, without penalty,
pursuant to the provisions of Paragraph 9 herein.
12. This Plan shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
Witness the due execution hereof this 13th day of April, 1993.
INVESTMENT SERIES FUNDS, INC.
By:/s/John F. Donahue
President
EXHIBIT A
to the
Shareholder Services Plan
Investment Series Funds, Inc.
Capital Growth Fund
Class C Shares
This Plan is adopted by Investment Series Funds, Inc. with respect
to the Class of Shares of the Portfolio of the Corporation set forth
above.
In compensation for the services provided pursuant to this Plan,
Providers will be paid a monthly fee computed at the annual rate of .25
of 1% of the average aggregate net asset value of the Class C Shares of
Capital Growth Fund held during the month.
Witness the due execution hereof this 13th day of April, 1993.
Investment Series Funds, Inc.
By: /s/John F. Donahue
President
EXHIBIT B
to the
Shareholder Services Plan
Investment Series Funds, Inc.
Fortress Bond Fund
This Plan is adopted by Investment Series Funds, Inc. with respect
to the Portfolio of the Corporation set forth above.
In compensation for the services provided pursuant to this Plan,
Providers will be paid a monthly fee computed at the annual rate of .25
of 1% of the average aggregate net asset value of the Fortress Bond Fund
held during the month.
Witness the due execution hereof this 13th day of April, 1993.
Investment Series Funds, Inc.
By: /s/John F. Donahue
President
-1-
Exhibit 15(i)(a) under Form
N-1A
Exhibit 1 under Item
601/Reg. S-K
EXHIBIT B
to the
Plan
Investment Series Funds, Inc.
Capital Growth Fund
Class C Shares
This Plan is adopted by Investment Series Funds, Inc. with respect
to the Class of Shares of the portfolio of the Corporation set forth
above.
In compensation for the services provided pursuant to this Plan,
Providers will be paid a monthly fee computed at the annual rate of .25
of 1% of the average aggregate net asset value of the Class C Shares of
Capital Growth Fund held during the month.
Witness the due execution hereof this 13th day of April, 1993.
INVESTMENT SERIES FUNDS, INC.
By: /s/John F. Donahue
President
Exhibit 15(i)(a) under Form
N-1A
Exhibit 1 under Item
601/Reg. S-K
EXHIBIT C
to the
Plan
Investment Series Funds, Inc.
Fortress Bond Fund
This Plan is adopted by Investment Series Funds, Inc. with respect
to the Portfolio of the Corporation set forth above.
In compensation for the services provided pursuant to this Plan,
FSC will be paid a monthly fee computed at the annual rate of .25 of 1%
of the average aggregate net asset value of the Fortress Bond Fund held
during the month.
Witness the due execution hereof this 13th day of April, 1993.
INVESTMENT SERIES FUNDS, INC.
By: /s/John F. Donahue
President
FSCO Services Provider New Contract1 December 1, 1994
Exhibit 9(i) Under Form N-
1A
Exhibit 10 Under Item
601/Reg. SK
AGREEMENT
for
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
and
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of the 1st day of December, 1994, by and between
those investment companies listed on Exhibit 1 as may be amended from
time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Trust"), on
behalf of the portfolios (individually referred to herein as a "Fund" and
collectively as "Funds") of the Trust, and FEDERATED SERVICES COMPANY, a
Delaware business trust, having its principal office and place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-
3779 (the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended
(the "1940 Act"), with authorized and issued shares of capital stock or
beneficial interest ("Shares"); and
WHEREAS, the Trust may desire to retain the Company to provide certain
pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so
indicated on Exhibit 1, and the Company is willing to furnish such
services; and
WHEREAS, the Trust may desire to appoint the Company as its transfer
agent, dividend disbursing agent if so indicated on Exhibit 1, and agent
in connection with certain other activities, and the Company desires to
accept such appointment; and
WHEREAS, the Trust may desire to appoint the Company as its agent to
select, negotiate and subcontract for custodian services from an approved
list of qualified banks if so indicated on Exhibit 1, and the Company
desires to accept such appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or
another agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for
those investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
SECTION ONE: Fund Accounting.
Article 1. Appointment.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and
on the terms set forth in this Agreement. The Company accepts such
appointment and agrees to furnish the services herein set forth in return
for the compensation as provided in Article 3 of this Section.
Article 2. The Company's Duties.
Subject to the supervision and control of the Trust's Board of
Trustees or Directors ("Board"), the Company will assist the Trust with
regard to fund accounting for the Trust, and/or the Funds, and/or the
Classes, and in connection therewith undertakes to perform the following
specific services;
A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent
pricing services selected by the Company in consultation with the
adviser, or sources selected by the adviser, and reviewed by the
board; secondarily, if a designated pricing service does not
provide a price for a security which the Company believes should
be available by market quotation, the Company may obtain a price
by calling brokers designated by the investment adviser of the
fund holding the security, or if the adviser does not supply the
names of such brokers, the Company will attempt on its own to
find brokers to price those securities; thirdly, for securities
for which no market price is available, the Pricing Committee of
the Board will determine a fair value in good faith. Consistent
with Rule 2a-4 of the 40 Act, estimates may be used where
necessary or appropriate. The Company's obligations with regard
to the prices received from outside pricing services and
designated brokers or other outside sources, is to exercise
reasonable care in the supervision of the pricing agent. The
Company is not the guarantor of the securities prices received
from such agents and the Company is not liable to the Fund for
potential errors in valuing a Fund's assets or calculating the
net asset value per share of such Fund or Class when the
calculations are based upon such prices. All of the above
sources of prices used as described are deemed by the Company to
be authorized sources of security prices. The Company provides
daily to the adviser the securities prices used in calculating
the net asset value of the fund, for its use in preparing
exception reports for those prices on which the adviser has
comment. Further, upon receipt of the exception reports
generated by the adviser, the Company diligently pursues
communication regarding exception reports with the designated
pricing agents.
B. Determine the net asset value per share of each Fund and/or Class,
at the time and in the manner from time to time determined by the
Board and as set forth in the Prospectus and Statement of
Additional Information ("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
D. Calculate capital gains or losses of each of the Funds resulting
from sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books and
financial records of the Trust, including for each Fund, and/or
Class, as required under Section 31(a) of the 1940 Act and the
Rules thereunder in connection with the services provided by the
Company;
F. Preserve for the periods prescribed by Rule 31a-2 under the 1940
Act the records to be maintained by Rule 31a-1 under the 1940 Act
in connection with the services provided by the Company. The
Company further agrees that all such records it maintains for the
Trust are the property of the Trust and further agrees to
surrender promptly to the Trust such records upon the Trust's
request;
G. At the request of the Trust, prepare various reports or other
financial documents required by federal, state and other
applicable laws and regulations; and
H. Such other similar services as may be reasonably requested by the
Trust.
Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for its services rendered
pursuant to Section One of this Agreement in accordance with the
fees agreed upon from time to time between the parties hereto.
Such fees do not include out-of-pocket disbursements of the
Company for which the Funds shall reimburse the Company upon
receipt of a separate invoice. Out-of-pocket disbursements shall
include, but shall not be limited to, the items agreed upon
between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall bear the
cost of: custodial expenses; membership dues in the Investment
Company Institute or any similar organization; transfer agency
expenses; investment advisory expenses; costs of printing and
mailing stock certificates, Prospectuses, reports and notices;
administrative expenses; interest on borrowed money; brokerage
commissions; taxes and fees payable to federal, state and other
governmental agencies; fees of Trustees or Directors of the
Trust; independent auditors expenses; Federated Administrative
Services and/or Federated Administrative Services, Inc. legal and
audit department expenses billed to Federated Services Company
for work performed related to the Trust, the Funds, or the
Classes; law firm expenses; or other expenses not specified in
this Article 3 which may be properly payable by the Funds and/or
classes.
C. The compensation and out-of-pocket expenses shall be accrued by
the Fund and shall be paid to the Company no less frequently than
monthly, and shall be paid daily upon request of the Company.
The Company will maintain detailed information about the
compensation and out-of-pocket expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be
adjusted from time to time, shall be dated and signed by a duly
authorized officer of the Trust and/or the Funds and a duly
authorized officer of the Company.
E. The fee for the period from the effective date of this Agreement
with respect to a Fund or a Class to the end of the initial month
shall be prorated according to the proportion that such period
bears to the full month period. Upon any termination of this
Agreement before the end of any month, the fee for such period
shall be prorated according to the proportion which such period
bears to the full month period. For purposes of determining fees
payable to the Company, the value of the Fund's net assets shall
be computed at the time and in the manner specified in the Fund's
Prospectus.
F. The Company, in its sole discretion, may from time to time
subcontract to, employ or associate with itself such person or
persons as the Company may believe to be particularly suited to
assist it in performing services under this Section One. Such
person or persons may be third-party service providers, or they
may be officers and employees who are employed by both the
Company and the Funds. The compensation of such person or
persons shall be paid by the Company and no obligation shall be
incurred on behalf of the Trust, the Funds, or the Classes in
such respect.
SECTION TWO: Shareholder Recordkeeping.
Article 4. Terms of Appointment.
Subject to the terms and conditions set forth in this Agreement, the
Trust hereby appoints the Company to act as, and the Company agrees to
act as, transfer agent and dividend disbursing agent for each Fund's
Shares, and agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of any Fund
("Shareholder(s)"), including without limitation any periodic investment
plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a
writing signed or initialed by one or more person or persons as the Board
shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved. Oral
instructions will be deemed to be Proper Instructions if (a) the Company
reasonably believes them to have been given by a person previously
authorized in Proper Instructions to give such instructions with respect
to the transaction involved, and (b) the Trust, or the Fund, and the
Company promptly cause such oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Trust, or the
Fund, and the Company are satisfied that such procedures afford adequate
safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
Article 5. Duties of the Company.
The Company shall perform the following services in accordance with
Proper Instructions as may be provided from time to time by the Trust as
to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the
purchase of shares and promptly deliver payment and
appropriate documentation therefore to the custodian of the
relevant Fund, (the "Custodian"). The Company shall notify
the Fund and the Custodian on a daily basis of the total
amount of orders and payments so delivered.
(2) Pursuant to purchase orders and in accordance with the
Fund's current Prospectus, the Company shall compute and
issue the appropriate number of Shares of each Fund and/or
Class and hold such Shares in the appropriate Shareholder
accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or
its agent requests a certificate, the Company, as Transfer
Agent, shall countersign and mail by first class mail, a
certificate to the Shareholder at its address as set forth
on the transfer books of the Funds, and/or Classes, subject
to any Proper Instructions regarding the delivery of
certificates.
(4) In the event that any check or other order for the purchase
of Shares of the Fund and/or Class is returned unpaid for
any reason, the Company shall debit the Share account of
the Shareholder by the number of Shares that had been
credited to its account upon receipt of the check or other
order, promptly mail a debit advice to the Shareholder, and
notify the Fund and/or Class of its action. In the event
that the amount paid for such Shares exceeds proceeds of
the redemption of such Shares plus the amount of any
dividends paid with respect to such Shares, the Fund
and/the Class or its distributor will reimburse the Company
on the amount of such excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as
Dividend Disbursing Agent for the Funds in accordance with
the provisions of its governing document and the then-
current Prospectus of the Fund. The Company shall prepare
and mail or credit income, capital gain, or any other
payments to Shareholders. As the Dividend Disbursing
Agent, the Company shall, on or before the payment date of
any such distribution, notify the Custodian of the
estimated amount required to pay any portion of said
distribution which is payable in cash and request the
Custodian to make available sufficient funds for the cash
amount to be paid out. The Company shall reconcile the
amounts so requested and the amounts actually received with
the Custodian on a daily basis. If a Shareholder is
entitled to receive additional Shares by virtue of any such
distribution or dividend, appropriate credits shall be made
to the Shareholder's account, for certificated Funds and/or
Classes, delivered where requested; and
(2) The Company shall maintain records of account for each Fund
and Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or
set forth in Proper Instructions, deliver the appropriate
instructions therefor to the Custodian. The Company shall
notify the Funds on a daily basis of the total amount of
redemption requests processed and monies paid to the
Company by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds
from the Custodian with respect to any redemption, the
Company shall pay or cause to be paid the redemption
proceeds in the manner instructed by the redeeming
Shareholders, pursuant to procedures described in the then-
current Prospectus of the Fund.
(3) If any certificate returned for redemption or other request
for redemption does not comply with the procedures for
redemption approved by the Fund, the Company shall promptly
notify the Shareholder of such fact, together with the
reason therefor, and shall effect such redemption at the
price applicable to the date and time of receipt of
documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the
registered owners thereof.
(5) The Company shall identify and process abandoned accounts
and uncashed checks for state escheat requirements on an
annual basis and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each
Fund, and/or Class, and maintain pursuant to applicable
rules of the Securities and Exchange Commission ("SEC") a
record of the total number of Shares of the Fund and/or
Class which are authorized, based upon data provided to it
by the Fund, and issued and outstanding. The Company shall
also provide the Fund on a regular basis or upon reasonable
request with the total number of Shares which are
authorized and issued and outstanding, but shall have no
obligation when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the issuance of such
Shares or to take cognizance of any laws relating to the
issue or sale of such Shares, which functions shall be the
sole responsibility of the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by
the Trust or the Fund to include a record for each
Shareholder's account of the following:
(a) Name, address and tax identification number (and
whether such number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account,
including dividends paid and date and price for all
transactions;
(d) Any stop or restraining order placed against the
account;
(e) Information with respect to withholding in the case of
a foreign account or an account for which withholding
is required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application,
dividend address and correspondence relating to the
current maintenance of the account;
(g) Certificate numbers and denominations for any
Shareholder holding certificates;
(h) Any information required in order for the Company to
perform the calculations contemplated or required by
this Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such
record retention shall be at the expense of the Company,
and such records may be inspected by the Fund at reasonable
times. The Company may, at its option at any time, and
shall forthwith upon the Fund's demand, turn over to the
Fund and cease to retain in the Company's files, records
and documents created and maintained by the Company
pursuant to this Agreement, which are no longer needed by
the Company in performance of its services or for its
protection. If not so turned over to the Fund, such
records and documents will be retained by the Company for
six years from the year of creation, during the first two
of which such documents will be in readily accessible form.
At the end of the six year period, such records and
documents will either be turned over to the Fund or
destroyed in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the
following information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in
each state for "blue sky" purposes as determined
according to Proper Instructions delivered from time
to time by the Fund to the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption
fees, or other transaction- or sales-related
payments;
(f) Such other information as may be agreed upon from time
to time.
(2) The Company shall prepare in the appropriate form, file with
the Internal Revenue Service and appropriate state
agencies, and, if required, mail to Shareholders, such
notices for reporting dividends and distributions paid as
are required to be so filed and mailed and shall withhold
such sums as are required to be withheld under applicable
federal and state income tax laws, rules and regulations.
(3) In addition to and not in lieu of the services set forth
above, the Company shall:
(a) Perform all of the customary services of a transfer
agent, dividend disbursing agent and, as relevant,
agent in connection with accumulation, open-account
or similar plans (including without limitation any
periodic investment plan or periodic withdrawal
program), including but not limited to: maintaining
all Shareholder accounts, mailing Shareholder reports
and Prospectuses to current Shareholders, withholding
taxes on accounts subject to back-up or other
withholding (including non-resident alien accounts),
preparing and filing reports on U.S. Treasury
Department Form 1099 and other appropriate forms
required with respect to dividends and distributions
by federal authorities for all Shareholders,
preparing and mailing confirmation forms and
statements of account to Shareholders for all
purchases and redemptions of Shares and other
conformable transactions in Shareholder accounts,
preparing and mailing activity statements for
Shareholders, and providing Shareholder account
information; and
(b) provide a system which will enable the Fund to monitor
the total number of Shares of each Fund and/or Class
sold in each state ("blue sky reporting"). The Fund
shall by Proper Instructions (i) identify to the
Company those transactions and assets to be treated
as exempt from the blue sky reporting for each state
and (ii) verify the classification of transactions
for each state on the system prior to activation and
thereafter monitor the daily activity for each state.
The responsibility of the Company for each Fund's
and/or Class's state blue sky registration status is
limited solely to the recording of the initial
classification of transactions or accounts with
regard to blue sky compliance and the reporting of
such transactions and accounts to the Fund as
provided above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders
relating to their Share accounts and such other
correspondence as may from time to time be addressed to the
Company;
(2) The Company shall prepare Shareholder meeting lists, mail
proxy cards and other material supplied to it by the Fund
in connection with Shareholder Meetings of each Fund;
receive, examine and tabulate returned proxies, and certify
the vote of the Shareholders;
(3) The Company shall establish and maintain facilities and
procedures for safekeeping of stock certificates, check
forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of,
such certificates, forms and devices.
Article 6. Duties of the Trust.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes'
Prospectus and for complying with all applicable requirements of
the Securities Act of 1933, as amended (the "1933 Act"), the 1940
Act and any laws, rules and regulations of government authorities
having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of
blank Share certificates and from time to time shall renew such
supply upon request of the Company. Such blank Share
certificates shall be properly signed, manually or by facsimile,
if authorized by the Trust and shall bear the seal of the Trust
or facsimile thereof; and notwithstanding the death, resignation
or removal of any officer of the Trust authorized to sign
certificates, the Company may continue to countersign
certificates which bear the manual or facsimile signature of such
officer until otherwise directed by the Trust.
C. Distributions
The Fund shall promptly inform the Company of the declaration of
any dividend or distribution on account of any Fund's shares.
Article 7. Compensation and Expenses.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an
annual maintenance fee for each Shareholder account as agreed
upon between the parties and as may be added to or amended from
time to time. Such fees may be changed from time to time subject
to written agreement between the Trust and the Company. Pursuant
to information in the Fund Prospectus or other information or
instructions from the Fund, the Company may sub-divide any Fund
into Classes or other sub-components for recordkeeping purposes.
The Company will charge the Fund the same fees for each such
Class or sub-component the same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust
and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed
upon between the parties, as may be added to or amended from time
to time. In addition, any other expenses incurred by the Company
at the request or with the consent of the Trust and/or the Fund,
will be reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by
the Fund and shall be paid to the Company no less frequently than
monthly, and shall be paid daily upon request of the Company.
The Company will maintain detailed information about the
compensation and out-of-pocket expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be
adjusted from time to time, shall be dated and signed by a duly
authorized officer of the Trust and/or the Funds and a duly
authorized officer of the Company.
Article 8. Assignment of Shareholder Recordkeeping.
Except as provided below, no right or obligation under this Section
Two may be assigned by either party without the written consent of the
other party.
A. This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and
assigns.
B. The Company may without further consent on the part of the Trust
subcontract for the performance hereof with (A) State Street Bank
and its subsidiary, Boston Financial Data Services, Inc., a
Massachusetts Trust ("BFDS"), which is duly registered as a
transfer agent pursuant to Section 17A(c)(1) of the Securities
Exchange Act of 1934, as amended, or any succeeding statute
("Section 17A(c)(1)"), or (B) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1), or (C) a BFDS
affiliate, or (D) such other provider of services duly registered
as a transfer agent under Section 17A(c)(1) as Company shall
select; provided, however, that the Company shall be as fully
responsible to the Trust for the acts and omissions of any
subcontractor as it is for its own acts and omissions; or
C. The Company shall upon instruction from the Trust subcontract for
the performance hereof with an Agent selected by the Trust, other
than BFDS or a provider of services selected by Company, as
described in (2) above; provided, however, that the Company shall
in no way be responsible to the Trust for the acts and omissions
of the Agent.
SECTION THREE: Custody Services Procurement
Article 9. Appointment.
The Trust hereby appoints Company as its agent to evaluate and obtain
custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved
by the Board as eligible for selection by the Company as a custodian (the
"Eligible Custodian"). The Company accepts such appointment.
Article 10. The Company and Its Duties.
Subject to the review, supervision and control of the Board, the
Company shall:
A. evaluate the nature and the quality of the custodial services
provided by the Eligible Custodian;
B. employ the Eligible Custodian to serve on behalf of the Trust as
Custodian of the Trust's assets substantially on the terms set
forth as the form of agreement in Exhibit 2;
C. negotiate and enter into agreements with the Custodians for the
benefit of the Trust, with the Trust as a party to each such
agreement. The Company shall not be a party to any agreement
with any such Custodian;
D. establish procedures to monitor the nature and the quality of the
services provided by the Custodians;
E. continuously monitor the nature and the quality of services
provided by the Custodians; and
F. periodically provide to the Trust (i) written reports on the
activities and services of the Custodians; (ii) the nature and
amount of disbursement made on account of the Trust with respect
to each custodial agreement; and (iii) such other information as
the Board shall reasonably request to enable it to fulfill its
duties and obligations under Sections 17(f) and 36(b) of the 1940
Act and other duties and obligations thereof.
Article 11. Fees and Expenses.
A. Annual Fee
For the performance by the Company pursuant to Section Three of
this Agreement, the Trust and/or the Fund agree to pay the
Company an annual fee as agreed upon between the parties.
B. Reimbursements
In addition to the fee paid under Section 11A above, the Trust
and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed
upon between the parties, as may be added to or amended from time
to time. In addition, any other expenses incurred by the Company
at the request or with the consent of the Trust and/or the Fund,
will be reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by
the Fund and shall be paid to the Company no less frequently than
monthly, and shall be paid daily upon request of the Company.
The Company will maintain detailed information about the
compensation and out-of-pocket expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as may be
adjusted from time to time, shall be dated and signed by a duly
authorized officer of the Trust and/or the Funds and a duly
authorized officer of the Company.
Article 12. Representations.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to
enter into this arrangement and to provide the services contemplated in
Section Three of this Agreement.
SECTION FOUR: General Provisions.
Article 13. Documents.
A. In connection with the appointment of the Company under this
Agreement, the Trust shall file with the Company the following
documents:
(1) A copy of the Charter and By-Laws of the Trust and all
amendments thereto;
(2) A copy of the resolution of the Board of the Trust
authorizing this Agreement;
(3) Specimens of all forms of outstanding Share certificates of
the Trust or the Funds in the forms approved by the Board
of the Trust with a certificate of the Secretary of the
Trust as to such approval;
(4) All account application forms and other documents relating
to Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following
documents:
(1) Each resolution of the Board of the Trust authorizing the
original issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and
amendments thereof and orders relating thereto in effect
with respect to the sale of Shares of any Fund, and/or
Class;
(3) A certified copy of each amendment to the governing document
and the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing
officers to give Proper Instructions to the Custodian and
agents for fund accountant, custody services procurement,
and shareholder recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares
of any Fund, accompanied by Board resolutions approving
such forms;
(6) Such other certificates, documents or opinions which the
Company may, in its discretion, deem necessary or
appropriate in the proper performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
Article 14. Representations and Warranties.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in
good standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State
of Delaware.
(3) It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to
authorize it to enter into and perform its obligations
under this Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties
and obligations under this Agreement.
(6) It is in compliance with federal securities law requirements
and in good standing as a transfer agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and
in good standing under the laws of its state of
organization;
(2) It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform its obligations under
this Agreement;
(3) All corporate proceedings required by said Charter and By-
Laws have been taken to authorize it to enter into and
perform its obligations under this Agreement;
(4) The Trust is an open-end investment company registered under
the 1940 Act; and
(5) A registration statement under the 1933 Act will be
effective, and appropriate state securities law filings
have been made and will continue to be made, with respect
to all Shares of each Fund being offered for sale.
Article 15. Standard of Care and Indemnification.
A. Standard of Care
The Company shall be held to a standard of reasonable care in
carrying out the provisions of this Contract. The Company shall be
entitled to rely on and may act upon advice of counsel (who may be
counsel for the Trust) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to
such advice, provided that such action is not in violation of
applicable federal or state laws or regulations, and is in good
faith and without negligence.
B. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund
shall indemnify and hold the Company, including its officers,
directors, shareholders and their agents employees and
affiliates, harmless against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising
out of or attributable to:
(1) The acts or omissions of any Custodian, Adviser, Sub-adviser
or other party contracted by or approved by the Trust or
Fund,
(2) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in
proper form which
(a) are received by the Company or its agents or
subcontractors and furnished to it by or on behalf of
the Fund, its Shareholders or investors regarding the
purchase, redemption or transfer of Shares and
Shareholder account information;
(b) are received by the Company from independent pricing
services or sources for use in valuing the assets of
the Funds; or
(c) are received by the Company or its agents or
subcontractors from Advisers, Sub-advisers or other
third parties contracted by or approved by the Trust
of Fund for use in the performance of services under
this Agreement;
(d) have been prepared and/or maintained by the Fund or
its affiliates or any other person or firm on behalf
of the Trust.
(3) The reliance on, or the carrying out by the Company or its
agents or subcontractors of Proper Instructions of the
Trust or the Fund.
(4) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the
securities laws or regulations of any state that such
Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of
such Shares in such state.
Provided, however, that the Company shall not be protected
by this Article 15.A. from liability for any act or
omission resulting from the Company's willful misfeasance,
bad faith, negligence or reckless disregard of its duties
of failure to meet the standard of care set forth in 15.A.
above.
C. Reliance
At any time the Company may apply to any officer of the Trust or
Fund for instructions, and may consult with legal counsel with
respect to any matter arising in connection with the services to
be performed by the Company under this Agreement, and the Company
and its agents or subcontractors shall not be liable and shall be
indemnified by the Trust or the appropriate Fund for any action
reasonably taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel provided such
action is not in violation of applicable federal or state laws or
regulations. The Company, its agents and subcontractors shall be
protected and indemnified in recognizing stock certificates which
are reasonably believed to bear the proper manual or facsimile
signatures of the officers of the Trust or the Fund, and the
proper countersignature of any former transfer agent or
registrar, or of a co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 shall apply, upon the assertion of a claim for which
either party may be required to indemnify the other, the party
seeking indemnification shall promptly notify the other party of
such assertion, and shall keep the other party advised with
respect to all developments concerning such claim. The party who
may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such
claim. The party seeking indemnification shall in no case
confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other
party's prior written consent.
Article 16. Termination of Agreement.
This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other. Should the Trust exercise
its rights to terminate, all out-of-pocket expenses associated with the
movement of records and materials will be borne by the Trust or the
appropriate Fund. Additionally, the Company reserves the right to charge
for any other reasonable expenses associated with such termination. The
provisions of Article 15 shall survive the termination of this Agreement.
Article 17. Amendment.
This Agreement may be amended or modified by a written agreement
executed by both parties.
Article 18. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Company and
the Trust may from time to time agree on such provisions interpretive of
or in addition to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement. Any such
interpretive or additional provisions shall be in a writing signed by
both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Charter. No
interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
Article 19. Governing Law.
This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts
Article 20. Notices.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company
at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to
such other address as the Trust or the Company may hereafter specify,
shall be deemed to have been properly delivered or given hereunder to the
respective address.
Article 21. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
Article 22. Limitations of Liability of Trustees and Shareholders of
the Trust.
The execution and delivery of this Agreement have been authorized by
the Trustees of the Trust and signed by an authorized officer of the
Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any
of them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or Shareholders of the Trust, but bind only the
appropriate property of the Fund, or Class, as provided in the
Declaration of Trust.
Article 23. Limitations of Liability of Trustees and Shareholders of
the Company.
The execution and delivery of this Agreement have been authorized by
the Trustees of the Company and signed by an authorized officer of the
Company, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any
of them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or Shareholders of the Company, but bind only
the property of the Company as provided in the Declaration of Trust.
Article 24. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to the Trust or the Funds by either of the
parties hereto except by the specific written consent of the other party.
Article 25. Merger of Agreement.
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
Article 26. Successor Agent.
If a successor agent for the Trust shall be appointed by the Trust,
the Company shall upon termination of this Agreement deliver to such
successor agent at the office of the Company all properties of the Trust
held by it hereunder. If no such successor agent shall be appointed, the
Company shall at its office upon receipt of Proper Instructions deliver
such properties in accordance with such instructions.
In the event that no written order designating a successor agent or
Proper Instructions shall have been delivered to the Company on or before
the date when such termination shall become effective, then the Company
shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the 1940 Act, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $2,000,000, all properties held by the
Company under this Agreement. Thereafter, such bank or trust company
shall be the successor of the Company under this Agreement.
Article 27. Force Majeure.
The Company shall have no liability for cessation of services
hereunder or any damages resulting therefrom to the Fund as a result of
work stoppage, power or other mechanical failure, natural disaster,
governmental action, communication disruption or other impossibility of
performance.
Article 28. Assignment; Successors.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign
to a successor all of or a substantial portion of its business, or to a
party controlling, controlled by, or under common control with such
party. Nothing in this Article 28 shall prevent the Company from
delegating its responsibilities to another entity to the extent provided
herein.
Article 29. Severability.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and
through their duly authorized officers, as of the day and year first
above written.
ATTEST: INVESTMENT COMPANIES (listed on Exhibit 1)
/s/ John W. McGonigle_______ By:__/s/ John F. Donahue___
John W. McGonigle John F. Donahue
Secretary Chairman
ATTEST: FEDERATED SERVICES COMPANY
/s/ Jeannette Fisher-Garber By:_/s/ James J. Dolan_____
Jeannette Fisher-Garber James J. Dolan
Secretary President
EXHIBIT 1
INVESTMENT SERIES FUNDS, INC.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> CAPITAL GROWTH FUND-CLASS A
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 10,153,275
<INVESTMENTS-AT-VALUE> 10,999,157
<RECEIVABLES> 38,762
<ASSETS-OTHER> 1,413
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,039,332
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 95,828
<TOTAL-LIABILITIES> 95,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,174,897
<SHARES-COMMON-STOCK> 873,523
<SHARES-COMMON-PRIOR> 867,599
<ACCUMULATED-NII-CURRENT> 4,230
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (81,505)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 845,882
<NET-ASSETS> 9,879,565
<DIVIDEND-INCOME> 202,322
<INTEREST-INCOME> 276,602
<OTHER-INCOME> 0
<EXPENSES-NET> 251,717
<NET-INVESTMENT-INCOME> 227,207
<REALIZED-GAINS-CURRENT> 1,057,990
<APPREC-INCREASE-CURRENT> (3,347,016)
<NET-CHANGE-FROM-OPS> (2,061,819)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 103,720
<DISTRIBUTIONS-OF-GAINS> 686,918
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 202,913
<NUMBER-OF-SHARES-REDEEMED> 254,546
<SHARES-REINVESTED> 57,557
<NET-CHANGE-IN-ASSETS> (15,815,379)
<ACCUMULATED-NII-PRIOR> 11,118
<ACCUMULATED-GAINS-PRIOR> 313,497
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 139,962
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 845,052
<AVERAGE-NET-ASSETS> 21,258,180
<PER-SHARE-NAV-BEGIN> 13.380
<PER-SHARE-NII> .130
<PER-SHARE-GAIN-APPREC> (1.260)
<PER-SHARE-DIVIDEND> .120
<PER-SHARE-DISTRIBUTIONS> .820
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 125
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CAPITAL GROWTH FUND-CLASS C
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 10,153,275
<INVESTMENTS-AT-VALUE> 10,999,157
<RECEIVABLES> 38,762
<ASSETS-OTHER> 1,413
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,039,332
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 95,828
<TOTAL-LIABILITIES> 95,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,174,897
<SHARES-COMMON-STOCK> 92,758
<SHARES-COMMON-PRIOR> 23,474
<ACCUMULATED-NII-CURRENT> 4,230
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (81,505)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 845,882
<NET-ASSETS> 1,049,068
<DIVIDEND-INCOME> 202,322
<INTEREST-INCOME> 276,602
<OTHER-INCOME> 0
<EXPENSES-NET> 251,717
<NET-INVESTMENT-INCOME> 227,207
<REALIZED-GAINS-CURRENT> 1,057,990
<APPREC-INCREASE-CURRENT> (3,347,016)
<NET-CHANGE-FROM-OPS> (2,061,819)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,570
<DISTRIBUTIONS-OF-GAINS> 60,511
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 75,971
<NUMBER-OF-SHARES-REDEEMED> 11,270
<SHARES-REINVESTED> 4,583
<NET-CHANGE-IN-ASSETS> (15,815,379)
<ACCUMULATED-NII-PRIOR> 11,118
<ACCUMULATED-GAINS-PRIOR> 313,497
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 139,962
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 845,052
<AVERAGE-NET-ASSETS> 21,258,180
<PER-SHARE-NAV-BEGIN> 13.360
<PER-SHARE-NII> .040
<PER-SHARE-GAIN-APPREC> (1.230)
<PER-SHARE-DIVIDEND> .040
<PER-SHARE-DISTRIBUTIONS> .820
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> CAPITAL GROWTH FUND-INVESTMENT SHARES
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 10,153,275
<INVESTMENTS-AT-VALUE> 10,999,157
<RECEIVABLES> 38,762
<ASSETS-OTHER> 1,413
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,039,332
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 95,828
<TOTAL-LIABILITIES> 95,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,174,897
<SHARES-COMMON-STOCK> 1,315
<SHARES-COMMON-PRIOR> 1,108,550
<ACCUMULATED-NII-CURRENT> 4,230
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (81,505)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 845,882
<NET-ASSETS> 14,871
<DIVIDEND-INCOME> 202,322
<INTEREST-INCOME> 276,602
<OTHER-INCOME> 0
<EXPENSES-NET> 251,717
<NET-INVESTMENT-INCOME> 227,207
<REALIZED-GAINS-CURRENT> 1,057,990
<APPREC-INCREASE-CURRENT> (3,347,016)
<NET-CHANGE-FROM-OPS> (2,061,819)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 127,805
<DISTRIBUTIONS-OF-GAINS> 705,563
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 225,412
<NUMBER-OF-SHARES-REDEEMED> 1,404,546
<SHARES-REINVESTED> 71,899
<NET-CHANGE-IN-ASSETS> (15,815,379)
<ACCUMULATED-NII-PRIOR> 11,118
<ACCUMULATED-GAINS-PRIOR> 313,497
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 139,962
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 845,052
<AVERAGE-NET-ASSETS> 21,258,180
<PER-SHARE-NAV-BEGIN> 13.380
<PER-SHARE-NII> .150
<PER-SHARE-GAIN-APPREC> (1.250)
<PER-SHARE-DIVIDEND> .150
<PER-SHARE-DISTRIBUTIONS> .820
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 103
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> FORTRESS BOND FUND
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 150,688,962
<INVESTMENTS-AT-VALUE> 142,830,111
<RECEIVABLES> 7,952,245
<ASSETS-OTHER> 19,855
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</TABLE>
