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
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS--CLASS A SHARES 2
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GENERAL INFORMATION 3
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LIBERTY FAMILY OF FUNDS 3
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Liberty Family Retirement Program 4
INVESTMENT INFORMATION 5
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Investment Objective 5
Investment Policies 5
Portfolio Turnover 8
Investment Limitations 8
INVESTMENT SERIES FUNDS, INC. INFORMATION 9
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Management of the Corporation 9
Distribution of Class A Shares 10
Administration of the Fund 11
Brokerage Transactions 12
NET ASSET VALUE 12
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INVESTING IN CLASS A SHARES 12
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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
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Reduced Sales Load 17
Requirements for Exchange 17
Tax Consequences 17
Making an Exchange 17
REDEEMING CLASS A SHARES 18
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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
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Voting Rights 21
TAX INFORMATION 21
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Federal Income Tax 21
Pennsylvania Corporate and Personal
Property Taxes 21
PERFORMANCE INFORMATION 22
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OTHER CLASSES OF SHARES 22
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FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 24
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FINANCIAL HIGHLIGHTS--CLASS C SHARES 25
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FINANCIAL STATEMENTS 26
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 37
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APPENDIX 38
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ADDRESSES 40
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SUMMARY OF FUND EXPENSES--CLASS A SHARES
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<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
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<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
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(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,
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1994 1993 1992*
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<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.38 $11.84 $12.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.12 0.09 0.11
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Net realized and unrealized gain (loss) on investments (1.25) 1.71 (0.18)
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Total from investment operations (1.13) 1.80 (0.07)
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.12) (0.10) (0.09)
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Distributions to shareholders from net realized gain on
investment transactions (0.82) (0.16) --
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Total distributions (0.94) (0.26) (0.09)
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NET ASSET VALUE, END OF PERIOD $11.31 $13.38 $11.84
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TOTAL RETURN** (8.43%) 15.34% (0.61%)
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.25% 1.25% 1.17%(a)
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Net investment income 1.00% 0.73% 1.19%(a)
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Expense waiver/reimbursement(b) 2.79% 2.37% 1.33%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $9,880 $11,609 $6,540
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Portfolio turnover rate 86% 74% 29%
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</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
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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
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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
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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
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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)
CAPITAL GROWTH FUND
(CLASS A SHARES, CLASS C SHARES AND INVESTMENT SHARES)
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
At the end of the first quarter of this year, adjustments were made to the
management style of Capital Growth Fund (the "Fund" or "CGF"). These
adjustments were intended to address the historically volatile performance
of the Fund. Instituting the new disciplines required that substantial
changes had to be made to the portfolio. One change was the adjustment in
the Fund's exposures in underweighted and overweighted industry sectors, as
shown in the following chart:
<TABLE>
<CAPTION>
Graphic representation "A" omitted. See appendix.
STANDARD AND
CGF CGF POOR'S
RELATIVE WEIGHT RELATIVE WEIGHT 500 INDEX
SECTOR 3/31/94 11/30/94 RELATIVE WEIGHT*
------------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C>
Basic Industries 29.7% 76.4% 8.4%
Consumer Durables 134.1% 176.5% 4.7%
Consumer Non Durables 54.5% 72.5% 11.0%
Consumer Services 142.9% 57.9% 11.7%
Energy 103.2% 64.2% 9.6%
Finance 119.1% 123.3% 11.0%
Health Care 137.2% 76.7% 7.8%
Industrial/Manufacturing 230.7% 104.5% 9.0%
Technology 66.0% 131.2% 9.3%
Transportation 405.9% 111.7% 1.8%
Utilities 0.0% 63.3% 13.4%
</TABLE>
At the end of the first quarter, the average relative sector underweighting
was 38%, while the average relative sector overweighting (excluding cash)
was 182%. As of November, 1994, these relative averages were 69% and 129%,
respectively. The Fund has moved from making sizable sector bets to more
moderate over and under sector weightings.
Since the end of the first quarter, 18 of the Fund's 37 positions (49%)
were eliminated, and almost all of the remaining positions were reduced. As
of November 30, 1994, the Fund has replaced exited holdings and has added
five more positions to increase the number of securities in the Fund's
portfolio to 42. The Fund has gone from averaging 4.8 in the Columbine
Growth Decile (the Fund's primary model for ranking stocks; 1-most
attractive, 10-least attractive) and 5.8 in ZEI (Zack's earnings estimate
momentum model and one of the Fund's veto screens; 1-good estimate
momentum, 10-weak estimate momentum) to 3.7 and 4.8, respectively.
* This index is unmanaged. Relative weightings for the Standard and Poor's
500 Index are for the period from April 1, 1994 to November 30, 1994.
The average and median market capitalizations have moved from $4.2 and $1.1
billion to $5.1 and $2.0 billion. This has had a couple of positive
effects: 1) for marketing purposes, the Fund will no longer be confused
with a small stock fund, which have median market capitalizations of around
$1 billion and below; 2) as the Fund moves up the size ladder, the
volatility of its holdings should decline--which should help moderate the
volatility of returns for the Fund; and 3) the stocks the Fund holds should
be more liquid. The Fund has now reached a market capitalization that is
between mid- and large-market capitalizations, which should permit the
liquidity the Fund needs in stocks that still have plenty of growth left in
them.
Making these changes allowed the Fund's average relative price/earnings
ratio to decrease from 110% of the Standard and Poor's 500 ("S&P 500") to
92%, while only decreasing the Fund's average expected long-term earnings
growth rate, relative to the S&P 500, from 159% to 144%. In other words,
the Fund was able to get growth at a better price.
While the Fund still has changes yet to come (i.e., continue to reduce its
smaller, more thinly traded holdings and add 13 to 18 new positions), it is
materially different from what it was at the end of the first quarter of
1994. The changes already made should have a meaningful impact on the
Fund's performance into 1995.
On a broader note, about a year ago, we had anticipated the return of
growth style outperformance. As shown in the chart on the following page,
there was only a decline in the momentum of value's outperformance over
growth. Now it appears as though the times have finally changed--growth,
according to the performance of the Russell 1000 Growth Index,* has been
outperforming value on a 12-month moving average basis. Whether this is a
sign of a trend to come or just the growth style coming up for a breath is
difficult to say.
The driving factor here will probably be the economy. While the economy
continues to grow, the rate of its growth has begun to moderate. This
moderation, some believe, portends the coming of the next economic slow
down. We believe that such a slow down should provide a favorable
environment for growth stocks, which by most definitions tend to grow their
earnings due to secular forces (or influences outside that of the broader
economy) as opposed to cyclical ones. As investors begin to anticipate a
slow down, they move from value stocks, whose earnings are usually more
sensitive to cyclical economic growth, to growth stocks.
* This Index is unmanaged.
The current demographics of the United States could continue to foster a
favorable environment for growth stocks. For the next five or more years,
the number of people turning 25 years old and setting up a household (an
event which provides considerable growth to the economy) will be increasing
at a declining rate. This situation, along with the expansion of the older
and less consumptive segment of our population, should provide a damper on
the nominal growth of the economy for the next several years. We believe
growth stocks should do well in this environment.
12 MONTH MOVING AVG OF THE RUSSELL GROWTH INDEX VERSUS THE
RUSSELL VALUE INDEX*
* This Index is unmanaged.
CAPITAL GROWTH FUND (CLASS A SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN CAPITAL GROWTH FUND (CLASS A SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
Capital Growth Fund (Class A Shares) (the "Fund") from January 17, 1992 (start
of performance) to October 31, 1994, compared to the Standard and Poor's 500
Index (SP500)+ and the Lipper Growth Fund Index (LGF).+
<TABLE>
<CAPTION>
Graphic representation "B" omitted. See appendix.
Standard and
Measurement Period Capital Poor's 500 Lipper Growth
(Fiscal Year Covered) Growth Fund-A Index Fund Index
<S> <C> <C> <C>
1/17/92 9450 10000 10000
10/31/92 9031 10477 10129
10/31/93 10416 12037 12286
10/31/94 9538 12492 12484
AVERAGE ANNUAL TOTAL RETURN FOR
THE PERIOD ENDED OCTOBER 31, 1994
1 Year............................................................. (13.48)%
Start of Performance (01/17/92).................................... (1.69)%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT WHEN SHARES ARE REDEEMED THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
December 31, 1994, and together with the financial statements contained therein,
constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 5.50% ($10,000 investment minus $550 sales load =
$9,450). The Fund's performance assumes the reinvestment of all dividends and
distributions. The SP500 and LGF have been adjusted to reflect reinvestment of
dividends on securities in the index.
+ SP500 and LGF are not adjusted to reflect sales loads, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance.
CAPITAL GROWTH FUND (CLASS C SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN CAPITAL GROWTH FUND (CLASS C SHARES)
The graph below illustrates the hypothetical investment of $10,000 in the
Capital Growth Fund (Class C Shares) (the "Fund") from April 14, 1993 (start of
performance) to October 31, 1994, compared to the Standard and Poor's 500 Index
(SP500)+ and the Lipper Growth Fund Index (LGF).+
<TABLE>
<CAPTION>
Graphic representation "C" omitted. See appendix.
Standard and
Measurement Period Capital Poors 500 Lipper Growth
(Fiscal Year Covered) Growth Fund-C Index Fund Index
<S> <C> <C> <C>
4/14/93 10000 10000 10000
10/31/93 10783 10506 10949
10/31/94 9823 10903 11125
AVERAGE ANNUAL TOTAL RETURN FOR
THE PERIOD ENDED OCTOBER 31, 1994
1 Year.............................................................. (9.79)%
Start of Performance (04/14/93)..................................... (1.15)%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT WHEN SHARES ARE REDEEMED THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
December 31, 1994, and, together with the financial statements contained
therein, constitutes the Fund's annual report.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. SP500 and LGF have been adjusted to reflect reinvestment of
dividends on securities in the index.
+ SP500 and LGF are not adjusted to reflect sales loads, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
461444200
461444408
461444101
1102503-ARS (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]
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED OCTOBER 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
Fortress Bond Fund (the "Fund") represents an investment grade corporate
bond portfolio that generally invests at least 65% of its assets in fixed
income securities rated BBB or higher by a nationally recognized statistical
rating organization. The Fund may also invest in other fixed income
securities including U.S. government obligations, asset-backed securities,
and high-yield, lower quality bonds.
Over the 12-month reporting period ended October 31, 1994, the domestic
economic recovery transformed from modest growth to increasingly stronger
activity, with each subsequent quarter resulting in higher than expected
growth. Starting in February 1994, the Federal Reserve Board continually
raised short-term interest rates in an effort to fight potentially mounting
inflationary pressures. As a result, all U.S. Treasury securities along the
yield curve experienced higher rates over the 12-month period ended October
31, 1994. The short end, as is to be expected, demonstrated the highest
degree of absolute volatility with the 2-year Treasury rising 283 basis
points. At the long end, the 30-year Treasury rose 200 basis points in
yield.
The end result of higher interest rates is that the U.S. Treasury bond
market experienced one of its worst bear markets in decades with negative
total returns representing the norm for most fixed income securities.
Relative to Fortress Bond Fund shareholders, it was a good news/bad news
scenario. The Fund significantly reduced overall duration in the fall of
1993 and into 1994, thus cushioning part of, but certainly not all of, the
effects of rising interest rates. At the same time, the Fund placed greater
emphasis on corporate bonds in the medium-to lower-rated categories to take
advantage of a stronger economic recovery. Thus, while the Fund generated an
average annual return of -3.41% total return for the 12-month period ended
October 31, 1994*, it significantly outperformed the returns of both the
Lipper Corporate Debt Funds BBB Rated Average** category of -5.37% and the
Lehman Brothers Corporate Bond Index** at -5.18%.
In recognition of the fact that the domestic economic recovery is now
over 3 1/2 years in length, Fund management will be closely monitoring
economic developments for signs of potentially slowing growth
characteristics (i.e., housing, auto sales, etc.). Should it become apparent
that the growth cycle is peaking, the Fund will move to a more
neutral-to-positive position by gradually lengthening the Fund's overall
duration by purchasing longer dated, high-quality securities.
*BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT A SALES LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE. PERFORMANCE QUOTED REPRESENTS PAST
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
**THESE INDICES ARE UNMANAGED.
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN FORTRESS BOND FUND.
The graph below illustrates the hypothetical investment of $10,000 in
Fortress Bond Fund* (the "Fund") from May 20, 1987 (start of performance) to
October 31, 1994, compared to the Lehman Brothers Corporate Bond Index (LCBI)+
and the Lipper Corporate Debt Funds BBB Rated Average (LCDBBB).++
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Graphic representation "D" omitted. See appendix.
LEHMAN BROTHERS LIPPER CORPORATE DEBT FUNDS
FORTRESS BOND FUND CORPORATE BOND INDEX BBB RATED AVERAGE
<S> <C> <C> <C>
5/20/87 9900 10000 10000
10/31/87 10183 10103 10042
10/31/88 11096 11443 11237
10/31/89 11549 12862 12298
10/31/90 10183 13398 12621
10/31/91 14621 15760 14778
10/31/92 16633 17511 16374
10/31/93 20061 20167 18848
10/31/94 19002 19122 17836
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED OCTOBER 31, 1994
<TABLE>
<S> <C>
1 Year.................................................................... (5.28)%
5 Year.................................................................... 10.69%
Start of Performance (5/20/87)............................................ 9.29%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT WHEN SHARES ARE REDEEMED THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
December 31, 1994, and, together with the financial statements contained
therein, constitutes the Fund's annual report.
*The Fund changed its investment policy from investing primarily in lower-rated
bonds to investing primarily in investment-grade bonds effective July 1, 1992.
**Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 1.00% ($10,000 investment minus $100 sales load =
$9,900). The Fund's performance assumes the reinvestment of all dividends and
distributions. LCBI and LCDBBB have been adjusted to reflect reinvestment of
dividends on securities in the indices.
+The LCBI is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance.
++The LCDBBB is a compilation of a specified category of mutual fund total
returns reported to Lipper Analytical Services, Inc. Each fund is reported net
of sales loads, expenses, or other fees that the Securities and Exchange
Commission requires to be reflected in a fund's performance.
[LOGO]
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Distributor
461444309
3110812-ARS (12/94) [LOGO]
RECYCLED
PAPER
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 9
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 11
Redeeming Shares 12
Tax Status 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
Total Return 12
Yield 12
Performance Comparisons 13
Appendix 14
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:
oinstruments of domestic and foreign banks and savings
and loans if they have capital, surplus, and
undivided profits of over $100,000,000, or if the
principal amount of the instrument is insured in full
by the Federal Deposit Insurance Corporation; and
oprime 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:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to
purchase certain securities of agencies or
instrumentalities; or
othe 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:
oFederal Farm Credit Banks;
oFederal Home Loan Banks;
oFederal National Mortgage Association;
oStudent Loan Marketing Association; and
oFederal 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:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the
security and the number of other potential buyers;
odealer undertakings to make a market in the security;
and
othe nature of the security and the nature of the
marketplace trades.
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:
oduring 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
onot 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
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 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:
oadvice as to the advisability of investing in
securities;
osecurity analysis and reports;
oeconomic studies;
oindustry studies;
oreceipt of quotations for portfolio evaluations; and
osimilar services.
The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They
determine in good faith that commissions charged by such
persons are reasonable in 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:
oaccording to the last sale price on a national
securities exchange, if available;
oin the absence of recorded sales for equity securities,
according to the mean between the last closing bid and
asked prices, and for bonds and other fixed income
securities, as determined by an independent pricing
service;
ofor unlisted equity securities, the latest bid prices;
ofor 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
oat 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:
oderive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
oderive less than 30% of its gross income from the sale
of securities held less than three months;
oinvest in securities within certain statutory limits;
and
odistribute to its shareholders at least 90% of its net
income earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends
and capital gains received as cash or additional Shares. 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:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in the Fund's or a class of Shares' expenses;
and
ovarious 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:
oLipper 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.
oDow 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.
oStandard & 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.
oMorningstar, Inc., an independent rating service, is
the publisher of the bi-weekly Mutual Fund Values.
Mutual Fund Values rates more than 1,000 NASDAQ-listed
mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
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 11
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:
odomestically-issued corporate debt obligations;
oasset-backed securities;
oobligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; and
orepurchase 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:
oduring 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
onot 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:
oadvice as to the advisability of investing in
securities;
osecurity analysis and reports;
oeconomic studies;
oindustry studies;
oreceipt of quotations for portfolio evaluations; and
osimilar services.
The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They
determine in good faith that commissions charged by such
persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the
Adviser or by affiliates of Federated Investors in advising
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:
oaccording to the last sale price on a national
securities exchange, if available;
oin the absence of recorded sales for equity securities,
according to the mean between the last closing bid and
asked prices, and for bonds and other fixed income
securities as determined by an independent pricing
service;
ofor 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
oat 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:
oyield;
oquality;
ocoupon rate;
omaturity;
otype of issue;
otrading characteristics; and
oother 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:
oderive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
oderive less than 30% of its gross income from the sale
of securities held less than three months;
oinvest in securities within certain statutory limits;
and
odistribute to its shareholders at least 90% of its net
income earned during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends
and capital gains received as cash or additional shares. 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:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in Fund's expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely
because net earnings and offering price per share fluctuate
daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
Investors may use financial publications and/or indices to
obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all
relevant 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:
oLehman 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.
oSalomon 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.
oMerrill 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.
oMerrill 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.
oLipper 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.
oThe 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.
oMorningstar, Inc., an independent rating service, is
the publisher of the bi-weekly Mutual Fund Values.
Mutual Fund Values rates more than 1,000 NASDAQ-listed
Mutual Funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
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)
APPENDIX
A. The graphic presentation here displayed consists of the
components of a line graph. The 12 month moving average of
the Russell Growth Index versus the Russell Value Index (the
"Indices") is represented by a bold solid line. The "y" axis
reflects the relative performance of the Indices. If the
average is greater than zero, growth outperforms; if the
average is less than zero, value outperforms. The "x" axis
reflects computation periods from 12/79 through 6/94.
B. The graphic presentation here displayed consists of the
components of a line graph. Capital Growth Fund - Class A
Shares (the "Fund") is represented by a bold solid line. The
Lipper Growth Fund Index ("LGFI") is represented by a bold
broken line and the Standard and Poor's 500 Index ("S&P
500") is represented by a dotted line. The "y" axis reflects
the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance,
1/17/92 through 10/31/94. The right margin reflects the
ending value of the hypothetical investment in the Fund as
compared to LGFI and S&P 500; the ending values were $9,538,
$12,492, and $12,484, respectively. The Average Annual Total
Return for the period ended October 31, 1994; beginning with
the start of performance date of the Fund, 1/17/92, and the
one-year period was -1.69% and -13.48%, respectively.
C. The graphic presentation here displayed consists of the
components of a line graph. Capital Growth Fund - Class C
Shares (the "Fund") is represented by a bold solid line. The
Lipper Growth Fund Index ("LGFI") is represented by a bold
broken line and the Standard and Poor's 500 Index ("S&P
500") is represented by a dotted line. The "y" axis reflects
the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance,
4/14/93 through 10/31/94. The right margin reflects the
ending value of the hypothetical investment in the Fund as
compared to LGFI and S&P 500; the ending values were $9,823,
$11,125, and $10,903, respectively. The Average Annual Total
Return for the period ended October 31, 1994; beginning with
the start of performance date of the Fund, 1/17/92, and the
one-year period was -1.15% and -9.79%, respectively.
D. The graphic presentation here displayed consists of the
components of a line graph. Fortress Bond Fund (the "Fund")
is represented by a bold broken line. The Lehman Brothers
Corporate Bond Index ("LBCBI") is represented by a bold
solid line and the Lipper Corporate Debt Funds BBB Rated
Average ("LCDBBB") is represented by a dotted line. The "y"
axis reflects the cost of the investment. The "x" axis
reflects computation periods from the Fund's start of
performance, 5/20/87 through 10/31/94. The right margin
reflects the ending value of the hypothetical investment in
the Fund as compared to LBCBI and LCDBBB; the ending values
were $19,002, $19,122, and $17,836, respectively. The
Average Annual Total Return for the period ended October 31,
1994; beginning with the start of performance date of the
Fund, 5/20/87, and the one-year and five-year periods was
9.29%, -5.28%, and 10.69%, respectively.
