President's Message
- - - --------------------------------------------------------------------------------
Dear Shareholder:
I am pleased to present your Semi-Annual Report for
Fortress Bond Fund (the "Fund"). This Report features a
design that is easier to read. We have also included more
charts that show how investments in the Fund have grown
over time. I trust you will find this format both
informative and appealing.
This Report covers the six-month period ended April 30,
1994. It begins with an interview with the Fund's
portfolio manager, Joe Balestrino, Assistant Vice
President, Federated Advisers, detailing the corporate
market and recent portfolio activity. Also included are a
series of performance charts, a complete listing of the
Fund's holdings, its financial statements, and financial
highlights.
Reflecting the fact that, when interest rates rise, bond
prices fall, the Fund's net asset value decreased over
the period as rates rose during the first quarter of
1994. On November 1, 1993 the share price based on net
asset value was $10.30 compared to $9.36 on April 30,
1994. Over the entire six months, the Fund produced an
income stream of $0.51 per share, and a total return of
-4.37%* based on net asset value. The Fund's total return
outperformed the -4.89% total return of the Lipper
BBB-rated Corporate Index** during the same six-month
period. I urge you to review the series of charts at the
beginning of this Report, which show the Fund's record of
success over time.
As Mr. Balestrino explains, the Fund is managed with a
prudent approach to the corporate bond market. Its
well-researched portfolio is 63% invested in investment-
grade bonds rated BBB/Baa or higher, and can also invest
in lower quality corporate securities rated BB and B. The
portfolio does not hold the lowest quality issues that,
while offering higher returns, also involve an extremely
high level of risk.
The Fund is highly diversified among more than 100 issues
representing more than 30 different industries. Many of
its holdings are well known companies, like CHRYSLER,
FORD, J.C. PENNEY, REEBOK, REVLON, AND MCDONALD'S.
During the six month period, the Fund's total assets grew
from $125.8 million to $143.9 million.
We appreciate your confidence in Fortress Bond Fund. I
encourage you to add to your investment in the Fund. And,
by reinvesting your dividends, you can increase your
share balance on which future dividends will be paid.
We welcome your comments or suggestions.
Very sincerely yours,
J. Christopher Donahue
President
June 7, 1994
* Performance quoted represents past performance.
Investment return and principal value will fluctuate,
so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
** This index is unmanaged. Lipper figures do not include
the effect of any sales charges.
Investment Review
- - - --------------------------------------------------------------------------------
WITH THE RECENT RISE IN INTEREST RATES AFFECTING
THE ENTIRE FINANCIAL MARKETPLACE, HOW HAS THE
FUND'S PORTFOLIO, CONSISTING PRIMARILY OF
INVESTMENT-GRADE CORPORATE BONDS, PERFORMED
COMPARED TO APPROPRIATE FIXED INCOME INDICES?
Since early February 1994, the Federal Reserve
has moved toward a steady policy of higher
interest rates. This is an attempt to avoid
potentially rising inflationary pressures caused by the
continuing economic recovery. In the three-month period
ended April 30, 1994, the one-year Treasury and 30-year
Treasury securities have risen 1.63% and 1.10%,
respectively.
These rising rates have had an obviously negative price
impact on virtually all bonds. After producing superior
returns over the past two years in a positive market, the
Fund has produced an average market return in this
negative environment.
LAST YEAR, THE FUND RANKED WELL COMPARED TO
OTHER FUNDS IN LIPPER'S BBB-RATED CORPORATE
INDEX. HAS IT CONTINUED TO RANK WELL FOR THE
YEAR ENDING APRIL 30, 1994, AND THIS YEAR TO
DATE?
For calendar year 1993, Fortress Bond Fund
significantly outperformed the Lipper BBB-rated
Corporate Index.* The Fund earned a positive
total return of 16.3% while the average fund in the index
earned 12.3%. In early 1993, Fund management felt
strongly that interest rates would continue to decline,
so we positioned the Fund in longer, non-callable
securities to enable the net asset value to rise as
interest rates fell.
* This index is unmanaged. Lipper figures do not include
the effect of any sales charges.
- - - --------------------------------------------------------------------------------
Since Autumn 1993, the Fund has shortened its average
maturity position. Even though year-to-date 1994
performance has been negative, the Fund has remained a
strong performer on a relative basis. Its one-year
rolling total return was 3.4% for the 12 months ended
April 30, 1994, placing it 10th of 58 funds in the Lipper
BBB-rated Corporate Index.* Over the 12 months ended
April 30, 1994, the average fund in this index had a
total return of 1.5%.
IN THE FUND'S LAST REPORT, YOU MENTIONED THAT
YOU USE A BARBELL STRATEGY IN MANAGING THE
FUND'S MATURITY AND QUALITY. IS THIS STRATEGY
STILL IN PLACE?
CAN YOU GIVE US A BRIEF DESCRIPTION OF ITS
ADVANTAGES?
Throughout much of the past two years the Fund
has used a barbell maturity strategy that
entailed purchasing a combination of long
maturity and short maturity bonds to achieve a target
average maturity. This strategy typically works well in
periods when the yield curve flattens--that is to say,
the yield spread between long and short dated bonds
narrows over time.
In recent months, short maturity bonds' yields have
increased much more than those of long maturity bonds.
Since the yield curve has already flattened quite a bit,
the advantages of a barbell strategy are somewhat
reduced, so the Fund has moved away from it. In an effort
to add incremental value for the Fund's shareholders,
management is currently taking advantage of the current
domestic economic recovery by focusing on corporate bonds
with medium-to-lower quality ratings.
* This index is unmanaged. Lipper figures do not include
the effect of any sales charges.
- - - --------------------------------------------------------------------------------
DURING THE LAST REPORT PERIOD, THE FUND'S
HOLDINGS, RATED BBB AND LOWER PERFORMED
EXTREMELY WELL. WHAT PERCENTAGE OF ASSETS ARE
NOW INVESTED IN BBB AND LOWER BONDS, AND HOW
HAVE THESE HOLDINGS PERFORMED?
The Fund will at all times invest at least 65%
of its assets in the investment-grade
categories--those rated BBB/Baa or higher. By
definition, this implies that we can invest up to 35% of
assets in lower rated, high yield corporate securities
rated BB and B. These securities offer higher yields in
return for a greater degree of risk. At this time, we
view these categories as very attractive and thus hold
approximately one-third of the Fund in them.
During stronger economic periods, interest rates
generally rise, which reduces total return in most high
quality bonds. With high yield
corporates, however, we can take advantage of a
stronger economic
environment, because these lower rated companies are
becoming
much stronger financially as the recovery continues.
Also, there is
much less correlation between interest rate
movements and
high yield corporate bonds than there is between
rates and
high quality corporates.
It is the Fund's one-third allocation to high
yield bonds over
the past six months that has allowed it to
maintain such
a high relative ranking, given the negative
interest rate
activity in the market.
- - - --------------------------------------------------------------------------------
WHAT IS YOUR OUTLOOK FOR FORTRESS BOND FUND
BASED ON YOUR OUTLOOK FOR INTEREST RATES?
Given that Fortress Bond Fund represents an
average investment grade portfolio on the
intermediate part of the maturity curve, its
future performance will largely be dictated by
the direction of interest rates. However, the
Fund has the flexibility to adjust both average
maturity and quality depending on our view of the
economy.
The Fund's current position reflects a shorter average
maturity than in past years to reduce exposure to
potentially higher interest rates. At the same time, we
have our high yield basket nearly full to allow the Fund
to benefit in an environment of stronger growth. Taken
together, the Fund is in a more defensive posture in
accordance with our view of continued economic growth and
interest rate volatility.
Two Ways You May Seek to Invest for Success In
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
Initial Investment:
A $7,000 INVESTMENT (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO
$13,431.
If you had invested $7,000 in Fortress Bond Fund,* reinvested dividends and
capital gains, and didn't redeem any shares, your account would have been worth
$13,431 on 4/30/94. You would have earned a 9.84%** average annual total return
for the 7-year investment life span.
One key to investing wisely is to reinvest all distributions in Fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 3/31/94, the Fund's average one-year, five-year and since inception
(5/20/87) total returns were 3.01%, 10.90%, and 10.14%, respectively.
"Graphic representation A1 omitted. See Appendix."
* On June 15, 1992, at a Special Meeting of Shareholders, the shareholders
approved a change to the name of the Fund from High Income Securities Fund to
Fortress Bond Fund, and a change to the Fund's fundamental investment
objective to pursue as high a level of current income as is consistent with
the preservation of capital. This resulted in shifting the Fund's focus from
investing not less than 65% of its assets in high yield, low quality
securities to 65% of its assets in investment grade securities.
** Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1% sales
charge and 1% redemption fee prior to 48 months.
Data quoted represent past performance and do not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
One Step at a Time:
$1,000 INVESTED EACH YEAR FOR 7 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL
GAINS) GREW TO $10,687.
With this approach, the key is consistency.
If you had started investing $1,000 annually in Fortress Bond Fund* on 5/20/87,
reinvested your dividends and capital gains and didn't redeem any shares, you
would have invested only $7,000, but your account would have reached a total
value of $10,687 by 4/30/94. You would have earned an average annual total
return of 10.69%**.
A practical investment plan helps you pursue a high level of income through
corporate bonds. Through systematic investing, you buy shares on a regular basis
and reinvest all earnings. An investment plan works for you when you invest only
$1,000 annually. You can take it one step at a time. Put time and compounding to
work!
"Graphic representation A2 omitted. See Appendix."
* On June 15, 1992, at a Special Meeting of Shareholders, the shareholders
approved a change to the name of the Fund from High Income Securities Fund to
Fortress Bond Fund, and a change to the Fund's fundamental investment
objective to pursue as high a level of current income as is consistent with
the preservation of capital. This resulted in shifting the Fund's focus from
investing not less than 65% of its assets in high yield, low quality
securities to 65% of its assets in investment grade securities.
** No method of investing can guarantee a profit or protect against loss in down
markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
Fortress Bond Fund--
Serving a Wide Range of Investors
- - - --------------------------------------------------------------------------------
FORTRESS BOND FUND APPEALS TO A BROAD RANGE OF INVESTORS SEEKING CURRENT INCOME.
The Fund invests primarily in a diversified portfolio of investment grade
corporate bonds covering more than 100 companies across 30 industries. Fund
shares are not guaranteed, and the value of your investment may fluctuate.
Mutual funds involve risk, including possible loss of principal.
"Graphic representation A3 omitted. See Appendix."
"Graphic representation A4 omitted. See Appendix."
Fortress Bond Fund
Hypothetical Investor Profile: Investing for High Monthly Income
- - - --------------------------------------------------------------------------------
John and Joan Wicker are a fictional
couple who, like many other
shareholders, look for high monthly
income opportunities.
John is an attorney in his late
forties with an established client
base. On April 30, 1987, the Wickers
invested $20,000 in Fortress Bond
Fund.
As this chart shows, over seven
years their original investment has
grown to $38,375. This represents a
9.82% average annual total return.
For John and Joan, that means extra
money to supplement their daughter's
college tuition.
"Graphic representation A5 omitted. See Appendix."
This hypothetical scenario is provided for illustrative purposes only and does
not represent the result obtained by
any particular shareholder.
Past performance does not guarantee future results.
Fortress Bond Fund
Financial Highlights
- - - --------------------------------------------------------------------------------
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
-------------------------------- ----------------------------------------
1994* 1993 1992** 1991 1990 1989 1988***
- - - ----------------------------------- -------- -------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.30 $9.23 $8.81 $6.89 $8.79 $9.86 $10.06
- - - ----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- - - ----------------------------------
Net investment income 0.37 0.77 0.59 1.01 1.08 1.23 0.61
- - - ----------------------------------
Net realized and unrealized gain
(loss) on investments (0.80) 1.07 0.43 1.92 (1.84) (1.07) (0.16 )
- - - ---------------------------------- ----- ----- ----- ----- ----- ----- ------
Total from investment operations (0.43) 1.84 1.02 2.93 (0.76) 0.16 0.45
- - - ----------------------------------
LESS DISTRIBUTIONS
- - - ----------------------------------
Dividends to shareholders from
net investment income (0.37) (0.77) (0.60) (1.01) (1.14) (1.23) (0.65 )
- - - ----------------------------------
Distributions from capital gains (0.14) -- -- -- -- -- --
- - - ---------------------------------- ----- ----- ----- ----- ----- ----- ------
NET ASSET VALUE, END OF PERIOD $9.36 $10.30 $9.23 $8.81 $6.89 $8.79 $9.86
- - - ---------------------------------- ----- ----- ----- ----- ----- ----- ------
TOTAL RETURN**** (4.37)% 20.61% 11.79% 44.62% (9.59%) 1.32% 4.62 %
- - - ----------------------------------
RATIOS TO AVERAGE NET ASSETS
- - - ----------------------------------
Expenses 1.05%(a) 1.04% 0.49%(a) 1.00% 1.01% 1.14% 1.00 %(a)
- - - ----------------------------------
Net investment income 7.64%(a) 7.69% 8.05%(a) 12.17% 13.43% 12.81% 12.58 %(a)
- - - ----------------------------------
Expense waiver/reimbursement(b) 0.42%(a) 0.61% 2.01%(a) 1.50% 1.49% 1.36% 1.00 %(a)
- - - ----------------------------------
SUPPLEMENTAL DATA
- - - ----------------------------------
Net assets, end of period
(000 omitted) $143,862 $125,762 $54,886 $6,068 $7,484 $4,734 $4,968
- - - ----------------------------------
Portfolio turnover rate 23% 51% 49% 33% 28% 38% 31 %
- - - ----------------------------------
</TABLE>
* Six months ended April 30, 1994 (unaudited).
** For the ten months ended October 31, 1992.
*** For the period from July 8, 1988 (date of initial public investment) to
December 31, 1988.
**** 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 expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 4).
(See Notes which are an integral part of the Financial Statements)
Fortress Bond Fund
Portfolio of Investments
- - - --------------------------------------------------------------------------------
April 30, 1994
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--83.1%
- - - ----------------------------------------------------------------------------------
AEROSPACE & DEFENSE--0.7%
-------------------------------------------------------------------
$1,000,000 Grumman Corp., Deb., 10.375%, 1/1/99 $ 1,057,920
------------------------------------------------------------------- ------------
AIR TRANSPORTATION--2.0%
-------------------------------------------------------------------
1,000,000 AMR Corp., Deb., 10.00%, 2/1/2001 1,069,910
-------------------------------------------------------------------
1,000,000 AMR Corp., Deb., 9.75%, 8/15/2021 1,021,740
-------------------------------------------------------------------
1,000,000 USAir, Inc., Pass Thru Cert., Series 1993--A, 10.375%, 3/1/2013 865,000
------------------------------------------------------------------- ------------
Total 2,956,650
------------------------------------------------------------------- ------------
AUTOMOTIVE--3.5%
-------------------------------------------------------------------
1,000,000 Chrysler Auburn Hills Trust Cert., 12.375%, 5/1/2020 1,377,500
-------------------------------------------------------------------
1,900,000 Chrysler Corp., Note, 10.40%, 8/1/99 2,073,375
-------------------------------------------------------------------
1,000,000 Ford Motor Co., Medium Term Note, 9.90%, 11/6/97 1,099,470
-------------------------------------------------------------------
500,000 Motor Wheel Corp., Sr. Note, 11.50%, 3/1/2000 522,500
------------------------------------------------------------------- ------------
Total 5,072,845
------------------------------------------------------------------- ------------
BANKING--0.8%
-------------------------------------------------------------------
1,000,000 Barclays North America, Deb., 11.625%, 5/1/2003 1,158,320
------------------------------------------------------------------- ------------
BROADCAST RADIO & TV--2.7%
-------------------------------------------------------------------
500,000 Allbritton Communication Co., Sr. Sub. Note, 11.50%, 8/15/2004 505,000
-------------------------------------------------------------------
2,000,000 CBS, Inc., Sr. Deb., 8.875%, 6/1/2022 2,085,480
-------------------------------------------------------------------
1,000,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 985,000
-------------------------------------------------------------------
250,000 Sinclair Broadcast Group, Sr. Sub. Note, 10.00%, 12/15/2003 239,375
------------------------------------------------------------------- ------------
Total 3,814,855
------------------------------------------------------------------- ------------
BUSINESS EQUIPMENT & SERVICES--0.7%
-------------------------------------------------------------------
500,000 Anacomp, Inc., Sr. Sub. Note, 15.00%, 11/1/2000 555,000
-------------------------------------------------------------------
500,000 Bell & Howell Co., Sr. Sub. Note, 10.75%, 10/1/2002 512,500
------------------------------------------------------------------- ------------
Total 1,067,500
------------------------------------------------------------------- ------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- - - ----------------------------------------------------------------------------------
CABLE TV--3.6%
-------------------------------------------------------------------
$ 500,000 Cablevision Systems Co., Sr. Sub. Deb., 9.875%, 2/15/2013 $ 462,500
-------------------------------------------------------------------
1,000,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 935,000
-------------------------------------------------------------------
1,500,000 International Cabletel, Inc., Sr. Defd. Note, 0/10.875%, 10/15/2003 892,500
-------------------------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Sr. Secd. Note, 9.65%, 1/15/2014 654,564
-------------------------------------------------------------------
2,000,000 TKR Cable, Inc., Sr. Note, 10.50%, 10/30/2007 2,205,000
------------------------------------------------------------------- ------------
Total 5,149,564
------------------------------------------------------------------- ------------
CHEMICALS & PLASTICS--3.9%
-------------------------------------------------------------------
1,500,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 1,477,500
-------------------------------------------------------------------
500,000 Foamex Capital Corp., Sr. Sub. Deb., 11.875%, 10/1/2004 517,500
-------------------------------------------------------------------
2,500,000 G-I Holdings, Inc., Sr. Disc. Note, 11.375%, 10/1/98 1,525,000
-------------------------------------------------------------------
1,250,000 Harris Chemical, Sr. Secd. Disc. Note, 0/10.25%, 7/15/2001 1,018,750
-------------------------------------------------------------------
1,000,000 UCC Investors Holdings, Inc., Sr. Sub. Note, 11.00%, 5/1/2003 1,015,000
------------------------------------------------------------------- ------------
Total 5,553,750
------------------------------------------------------------------- ------------
CLOTHING/TEXTILES--2.6%
-------------------------------------------------------------------
1,000,000 Phillips Van--Heusen, Deb., 7.75%, 11/15/2023 886,340
-------------------------------------------------------------------
1,800,000 Reebok International Ltd., Deb., 9.75%, 9/15/98 1,890,594
-------------------------------------------------------------------
1,000,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 917,500
------------------------------------------------------------------- ------------
Total 3,694,434
------------------------------------------------------------------- ------------
CONGLOMERATES--4.3%
-------------------------------------------------------------------
2,000,000 Leucadia National Corp., Sr. Sub., 10.375%, 6/15/2002 2,150,000
-------------------------------------------------------------------
1,000,000 Noranda Inc., Deb., 8.625%, 7/15/2002 1,018,900
-------------------------------------------------------------------
1,000,000 Sherritt Gordon Ltd., Sr. Note, 9.75%, 4/1/2003 965,000
-------------------------------------------------------------------
2,000,000 Textron, Inc., Deb., 8.75%, 7/1/2022 2,019,380
------------------------------------------------------------------- ------------
Total 6,153,280
------------------------------------------------------------------- ------------
CONTAINERS & GLASS PRODUCTS--2.7%
-------------------------------------------------------------------
750,000 Owens Corning Fiberglass, Deb., 9.375%, 6/1/2012 790,905
-------------------------------------------------------------------
500,000 Owens Illinois, Inc., Sr. Sub. Note, 10.50%, 6/15/2002 513,750
-------------------------------------------------------------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- - - ----------------------------------------------------------------------------------
CONTAINERS & GLASS PRODUCTS--CONTINUED
-------------------------------------------------------------------
$1,000,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 $ 945,000
-------------------------------------------------------------------
750,000 Silgan Holdings, Inc., Sr. Disc. Deb., 0/13.25%, 12/15/2002 573,750
-------------------------------------------------------------------
1,000,000 U.S. Can Co., Sr. Sub. Note, 13.50%, 1/15/2002 1,115,000
------------------------------------------------------------------- ------------
Total 3,938,405
------------------------------------------------------------------- ------------
COSMETICS & TOILETRIES--0.6%
-------------------------------------------------------------------
2,000,000 Revlon Worldwide Corp., Sr. Secd. Note, Series B, 12.00% accrual,
3/15/98 885,000
------------------------------------------------------------------- ------------
ECOLOGICAL SERVICES & EQUIPMENT--1.8%
-------------------------------------------------------------------
500,000 Allied Waste Industries, Inc., Sr. Sub. Note, 10.75%, 2/1/2004 495,000
-------------------------------------------------------------------
1,000,000 Browning Ferris Industries, Inc., Deb., 9.25%, 5/1/2021 1,091,600
-------------------------------------------------------------------
1,000,000 ICF Kaiser International, Sr. Sub. Note, 12.00%, 12/31/2003 965,000
------------------------------------------------------------------- ------------
Total 2,551,600
------------------------------------------------------------------- ------------
ELECTRONICS/ELECTRIC--0.4%
-------------------------------------------------------------------
500,000 Harman International Industries, Sr. Sub. Note, 12.00%, 8/1/2002 547,500
------------------------------------------------------------------- ------------
FINANCIAL INTERMEDIARIES--0.4%
-------------------------------------------------------------------
500,000 Coldwell Banker Corp., Sr. Sub. Note, 10.25%, 6/30/2003 496,250
------------------------------------------------------------------- ------------
FOOD/DRUG RETAILER--1.3%
-------------------------------------------------------------------
1,000,000 Grand Union Co., Sr. Note, 12.25%, 7/15/2002 992,500
-------------------------------------------------------------------
1,000,000 Pathmark Stores, Inc., Sr. Sub. Note. 9.625%, 5/1/2003 931,250
------------------------------------------------------------------- ------------
Total 1,923,750
------------------------------------------------------------------- ------------
FOOD PRODUCTS--3.1%
-------------------------------------------------------------------
500,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 460,000
-------------------------------------------------------------------
1,000,000 PMI Acquisition Corp., Sr. Sub. Note, 10.25%, 9/1/2003 1,000,000
-------------------------------------------------------------------
3,000,000 Specialty Foods Acquisition Corp., Sr. Secd. Disc. Deb., 0/13.00%,
8/15/2005 1,447,500
-------------------------------------------------------------------
1,500,000 SuperValue Inc., Deb., 8.875%, 11/15/2022 1,534,245
------------------------------------------------------------------- ------------
Total 4,441,745
------------------------------------------------------------------- ------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- - - ----------------------------------------------------------------------------------
FOOD SERVICE--2.3%
-------------------------------------------------------------------
$1,000,000 Americold Corp., FMB Series B, 11.50%, 3/1/2005 $ 970,000
-------------------------------------------------------------------
1,000,000 Flagstar Corp., Sr. Note, 10.75%, 9/15/2001 985,000
-------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 490,000
-------------------------------------------------------------------
1,000,000 McDonald's Corp., Deb., 7.375%, 7/15/2033 911,790
------------------------------------------------------------------- ------------
Total 3,356,790
------------------------------------------------------------------- ------------
FOREST PRODUCTS--3.6%
-------------------------------------------------------------------
1,000,000 Domtar, Inc., Note, 12.00%, 4/15/2001 1,067,500
-------------------------------------------------------------------
1,000,000 Georgia-Pacific Corp., Deb., 10.125%, 5/15/2000 1,040,210
-------------------------------------------------------------------
1,500,000 Georgia-Pacific Corp., Deb., 9.50%, 5/15/2022 1,603,785
-------------------------------------------------------------------
500,000 Riverwood International Corp., Sr. Sub. Note, 11.25%, 6/15/2002 515,000
-------------------------------------------------------------------
1,000,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 940,000
------------------------------------------------------------------- ------------
Total 5,166,495
------------------------------------------------------------------- ------------
HEALTHCARE--1.4%
-------------------------------------------------------------------
1,052,000 Alco Health Distribution Corp., Sr. PIK Deb., 11.25%, 7/15/2005 1,062,520
-------------------------------------------------------------------
1,000,000 Hillhaven Corp., Sr. Sub. Note, 10.125%, 9/1/2001 990,000
------------------------------------------------------------------- ------------
Total 2,052,520
------------------------------------------------------------------- ------------
HOME PRODUCTS & FURNISHINGS--1.0%
-------------------------------------------------------------------
2,500,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 1,462,500
------------------------------------------------------------------- ------------
INDUSTRIAL PRODUCTS & EQUIPMENT--5.3%
-------------------------------------------------------------------
1,000,000 Caterpillar, Inc., Deb., 9.75%, 6/1/2019 1,128,700
-------------------------------------------------------------------
500,000 Essex Group, Inc., Sr. Note, 10.00%, 5/1/2003 482,500
-------------------------------------------------------------------
2,000,000 Praxair, Inc., Deb., 8.70%, 7/15/2022 2,037,120
-------------------------------------------------------------------
3,135,000 Varity Corp., Sr. Note, 11.375%, 11/15/98 3,401,475
-------------------------------------------------------------------
500,000 Wolverine Tube, Sr. Sub. Note, 10.125%, 9/1/2002 515,000
------------------------------------------------------------------- ------------
Total 7,564,795
------------------------------------------------------------------- ------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- - - ----------------------------------------------------------------------------------
INSURANCE--2.9%
-------------------------------------------------------------------
$ 500,000 Americo Life, Inc., Sr. Sub. Note, 9.25%, 6/1/2005 $ 472,500
-------------------------------------------------------------------
2,000,000 Delphi Financial Group, Inc., Note, 8.00%, 10/1/2003 1,831,860
-------------------------------------------------------------------
2,000,000 Sunamerica, Inc., Deb., 8.125%, 4/28/2023 1,924,620
------------------------------------------------------------------- ------------
Total 4,228,980
------------------------------------------------------------------- ------------
LEISURE & ENTERTAINMENT--0.6%
-------------------------------------------------------------------
1,000,000 Paramount Communications, Inc., Deb., 8.25%, 8/1/2022 865,740
------------------------------------------------------------------- ------------
OIL & GAS--6.8%
-------------------------------------------------------------------
2,000,000 Ashland Oil, Inc., Deb., 11.125%, 10/15/2017 2,290,860
-------------------------------------------------------------------
750,000 California Energy Co., Inc., Sr. Disc. Note, 0/10.25%, 1/15/2004 553,125
-------------------------------------------------------------------
1,000,000 Falcon Drilling Co., Inc., Sr. Note, 9.75%, 1/15/2001 950,000
-------------------------------------------------------------------
1,000,000 Giant Industries, Sr. Sub. Note, 9.75%, 11/15/2003 935,000
-------------------------------------------------------------------
1,000,000 H.S. Resources, Inc., Sr. Sub. Note, 9.875%, 12/1/2003 965,000
-------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Deb., 11.125%, 6/1/2019 1,168,570
-------------------------------------------------------------------
1,000,000 Triton Energy Corp., Sr. Sub. Disc. Note, 0/9.75%, 12/15/2000 705,000
-------------------------------------------------------------------
1,000,000 Triton Energy Corp., Sr. Sub. Disc. Note, 12.50%, 11/1/97 695,000
-------------------------------------------------------------------
1,000,000 USX Corp., Deb. Note, 9.125%, 1/15/2013 986,440
-------------------------------------------------------------------
500,000 USX Corp., Deb., 9.625%, 8/15/2003 530,290
------------------------------------------------------------------- ------------
Total 9,779,285
------------------------------------------------------------------- ------------
PRINTING & PUBLISHING--4.3%
-------------------------------------------------------------------
2,000,000 News America Holdings, Sr. Note, 8.50%, 2/15/2005 2,006,480
-------------------------------------------------------------------
1,000,000 News Corp., Sr. Note, 12.00%, 12/15/2001 1,160,180
-------------------------------------------------------------------
1,000,000 Valassis Inserts, Inc., Sr. Sub. Note, 9.375%, 3/15/99 1,032,110
-------------------------------------------------------------------
2,000,000 Valassis Inserts, Inc., Sr. Note, 8.875%, 3/15/99 2,038,500
------------------------------------------------------------------- ------------
Total 6,237,270
------------------------------------------------------------------- ------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- - - ----------------------------------------------------------------------------------
RETAILERS--2.9%
-------------------------------------------------------------------
$1,000,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 $ 977,500
-------------------------------------------------------------------
1,000,000 J.C. Penney & Co., Inc., S.F. Deb., 9.75%, 6/15/2021 1,128,750
-------------------------------------------------------------------
1,000,000 May Dept. Stores Co., Deb., 8.375%, 10/1/2022 993,620
-------------------------------------------------------------------
1,000,000 Sears Roebuck Co., Deb., 9.50%, 6/1/99 1,080,820
------------------------------------------------------------------- ------------
Total 4,180,690
------------------------------------------------------------------- ------------
SOVEREIGN GOVERNMENT--4.4%
-------------------------------------------------------------------
2,000,000 Freeport Terminal Republic of Malta, Global Note, 7.50%, 3/29/2009 1,896,260
-------------------------------------------------------------------
1,400,000 New Zealand Government, Deb., 10.50%, 7/16/2000 1,561,686
-------------------------------------------------------------------
1,500,000 Quebec Province, Deb., 13.25%, 9/15/2014 1,926,315
-------------------------------------------------------------------
1,000,000 Quebec Province, Deb., 7.50%, 7/15/2023 911,380
------------------------------------------------------------------- ------------
Total 6,295,641
------------------------------------------------------------------- ------------
STEEL--3.2%
-------------------------------------------------------------------
500,000 Armco, Inc., Sr. Note, 11.375%, 10/15/99 518,750
-------------------------------------------------------------------
1,000,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 945,000
-------------------------------------------------------------------
1,000,000 Carbide/Graphite Group, Sr. Note, 11.50%, 9/1/2003 1,037,500
-------------------------------------------------------------------
1,250,000 Envirosource, Inc., Sr. Note, 9.75%, 6/15/2003 1,150,000
-------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 11.125%, 3/15/2001 520,000
-------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 9.50%, 1/15/2004 474,375
------------------------------------------------------------------- ------------
Total 4,645,625
------------------------------------------------------------------- ------------
SURFACE TRANSPORTATION--2.0%
-------------------------------------------------------------------
2,000,000 American President Co. Ltd., Sr. Unsecd. Note, 7.125%, 11/15/2003 1,850,460
-------------------------------------------------------------------
1,000,000 Trism, Inc., Sr. Sub. Note, 10.75%, 12/15/2000 995,000
------------------------------------------------------------------- ------------
Total 2,845,460
------------------------------------------------------------------- ------------
TELECOMMUNICATIONS/CELLULAR--3.3%
-------------------------------------------------------------------
1,000,000 AT&T Corp., Deb., 8.625%, 12/1/2031 1,056,990
-------------------------------------------------------------------
2,000,000 GTE Corp., Deb., 8.50%, 4/1/2017 1,991,740
-------------------------------------------------------------------
1,000,000 GTE South Corp., Deb., 9.375%, 6/15/2030 1,073,420
-------------------------------------------------------------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- - - ----------------------------------------------------------------------------------
TELECOMMUNICATIONS/CELLULAR--CONTINUED
-------------------------------------------------------------------
$1,000,000 PanAmSat, L.P., Sr. Sub. Disc. Note, 0/11.375%, 8/1/2003 $ 625,000
------------------------------------------------------------------- ------------
Total 4,747,150
------------------------------------------------------------------- ------------
UTILITIES--4.0%
-------------------------------------------------------------------
500,000 Long Island Lighting, Deb., 9.00%, 11/1/2022 473,690
-------------------------------------------------------------------
1,000,000 Niagara Mohawk Power Co., First Mortgage, 9.50%, 3/1/2021 1,064,180
-------------------------------------------------------------------
3,000,000 Ontario Hydro, Govt. Gtd. Note, 9.25%, 5/1/95 3,105,000
-------------------------------------------------------------------
1,000,000 Southern California Edison, Mtg. Bonds, 8.875%, 6/1/2024 1,049,340
------------------------------------------------------------------- ------------
Total 5,692,210
------------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $125,308,615) 119,584,519
------------------------------------------------------------------- ------------
STRUCTURED PRODUCTS--11.7%
- - - ----------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--4.9%
-------------------------------------------------------------------
1,000,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/98 1,048,320
-------------------------------------------------------------------
1,000,000 GE Capital Mortgage Services, Inc. 1991-1, Class B, 8.70%,
8/30/2011 1,022,830
-------------------------------------------------------------------
1,000,000 Green Tree Financial Corp. 1992-2 Mfg. Hsg. Sub. Pass Thru,
9.15%, 1/15/2018 1,008,440
-------------------------------------------------------------------
2,00,000 MBNA Master Credit Card Trust, Series 1992 2-A, 6.20% 8/15/99 1,960,860
-------------------------------------------------------------------
1,000,000 Merrill Lynch Mortgage Investment, Inc., Series 1988-H, Class B,
9.70%, 6/15/2008 1,046,560
-------------------------------------------------------------------
1,000,000 Residential Funding Mtg., Sec. I 1993-S26, Class A-10, 7.50%,
7/25/2023 971,380
------------------------------------------------------------------- ------------
Total 7,058,390
------------------------------------------------------------------- ------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
STRUCTURED PRODUCTS--CONTINUED
- - - ----------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES--6.8%
-------------------------------------------------------------------
$1,191,234 Federal National Mortgage Association, Pool 266639,
6.50%, 1/1/2001 $ 1,165,170
-------------------------------------------------------------------
3,322,668 Government National Mortgage Association, Pool 364870,
7.00%, 1/15/2024 3,116,032
-------------------------------------------------------------------
3,312,955 Government National Mortgage Association, Pool 371012,
7.00%, 1/15/2024 3,106,922
-------------------------------------------------------------------
2,494,490 Government National Mortgage Association, Pool 379983
7.50%, 2/15/2024 2,417,310
------------------------------------------------------------------- ------------
Total 9,805,434
------------------------------------------------------------------- ------------
TOTAL STRUCTURED PRODUCTS (IDENTIFIED COST $17,756,146) 16,863,824
------------------------------------------------------------------- ------------
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- - - ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
PREFERRED STOCKS--2.4%
- - - ----------------------------------------------------------------------------------
BANKING--2.1%
-------------------------------------------------------------------
150,000 Citicorp, Pfd. Series 15, $1.217 $ 2,981,250
------------------------------------------------------------------- ------------
UTILITIES--0.3%
-------------------------------------------------------------------
18,000 Long Island Lighting Co., Pfd., Series AA, $1.99 450,000
------------------------------------------------------------------- ------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $3,461,000) 3,431,250
------------------------------------------------------------------- ------------
COMMON STOCKS--0.0%
- - - ----------------------------------------------------------------------------------
ECOLOGICAL SERVICES & EQUIPMENT--0.0%
-------------------------------------------------------------------
4,800 ICF Kaiser International, Warrants 2,400
------------------------------------------------------------------- ------------
*REPURCHASE AGREEMENT--0.5%
- - - ----------------------------------------------------------------------------------
$ 705,000 J.P. Morgan Securities, Inc., 3.80%, dated 4/29/94, due 5/2/94 705,000
------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $147,230,761) $140,586,993+
------------------------------------------------------------------- ------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations, based on market prices at the date of the portfolio. The
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 $147,232,412. The
net unrealized depreciation of investments on a federal tax basis amounts to
$6,645,419, which is comprised of $365,770 appreciation and $7,011,189
depreciation at April 30, 1994.
<TABLE>
<S> <C>
ABS-- Asset Backed Securities
PIK-- Payment in kind
</TABLE>
Note: The categories of investments are shown as a percentage of net assets
($143,862,190) at
April 30, 1994.
(See Notes which are an integral part of the Financial Statements)
Fortress Bond Fund
Statement of Assets and Liabilities
- - - --------------------------------------------------------------------------------
April 30, 1994
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
- - - --------------------------------------------------------------------------------
Investments at value (Notes 2A and 2B)
(identified cost, $147,230,761 and tax cost, $147,232,412) $140,586,993
- - - --------------------------------------------------------------------------------
Cash 1,901
- - - --------------------------------------------------------------------------------
Receivable for investments sold 4,101,813
- - - --------------------------------------------------------------------------------
Dividends and interest receivable 3,286,022
- - - --------------------------------------------------------------------------------
Receivable for capital stock sold 594,921
- - - -------------------------------------------------------------------------------- ------------
Total assets 148,571,650
- - - --------------------------------------------------------------------------------
LIABILITIES:
- - - --------------------------------------------------------------------------------
Payable for investments purchased $3,582,162
- - - -------------------------------------------------------------------
Dividends payable 606,495
- - - -------------------------------------------------------------------
Payable for capital stock redeemed 400,811
- - - -------------------------------------------------------------------
Accrued expenses and other liabilities 119,992
- - - ------------------------------------------------------------------- ----------
Total liabilities 4,709,460
- - - -------------------------------------------------------------------------------- ------------
NET ASSETS for 15,366,995 shares of capital stock outstanding $143,862,190
- - - -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- - - --------------------------------------------------------------------------------
Paid-in capital $150,436,918
- - - --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (6,643,768)
- - - --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments 11,678
- - - --------------------------------------------------------------------------------
Undistributed net investment income 57,362
- - - -------------------------------------------------------------------------------- ------------
Total $143,862,190
- - - -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, and Redemption Proceeds Per Share
($143,862,190 / 15,366,995 shares of capital stock outstanding) $9.36
- - - -------------------------------------------------------------------------------- ------------
COMPUTATION OF OFFERING PRICE:
OFFERING PRICE PER SHARE (100/99 OF $9.36)* $9.45
- - - -------------------------------------------------------------------------------- ------------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
Fortress Bond Fund
Statement of Operations
- - - --------------------------------------------------------------------------------
Six months ended April 30, 1994
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- - - --------------------------------------------------------------------------------
Interest $ 6,145,018
- - - --------------------------------------------------------------------------------
Dividends 26,831
- - - -------------------------------------------------------------------------------- ------------
Total investment income (Note 2C) 6,171,849
- - - --------------------------------------------------------------------------------
EXPENSES--
- - - --------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 532,716
- - - -------------------------------------------------------------------
Directors' fees 2,500
- - - -------------------------------------------------------------------
Administrative personnel and services (Note 4) 125,057
- - - -------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses
(Note 4) 111,156
- - - -------------------------------------------------------------------
Capital stock registration costs 21,085
- - - -------------------------------------------------------------------
Auditing fees 14,250
- - - -------------------------------------------------------------------
Legal fees 5,600
- - - -------------------------------------------------------------------
Printing and postage 22,000
- - - -------------------------------------------------------------------
Insurance premiums 3,400
- - - -------------------------------------------------------------------
Taxes 32,624
- - - -------------------------------------------------------------------
Shareholder services fee (Note 4) 172,896
- - - -------------------------------------------------------------------
Miscellaneous 2,250
- - - ------------------------------------------------------------------- ----------
Total expenses 1,045,534
- - - -------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 4) 301,000
- - - ------------------------------------------------------------------- ----------
Net expenses 744,534
- - - -------------------------------------------------------------------------------- ------------
Net investment income 5,427,315
- - - -------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
- - - --------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (10,872)
- - - --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (12,062,079)
- - - -------------------------------------------------------------------------------- ------------
Net realized and unrealized loss on investments (12,072,951)
- - - -------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ (6,645,636)
- - - -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
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 $ 5,427,315 $ 6,888,178
- - - -----------------------------------------------------------------
Net realized gain (loss) from investment transactions ($10,872
net loss and $2,084,112 net gain, respectively, as computed for
federal tax purposes) (10,872) 2,082,462
- - - -----------------------------------------------------------------
Change in unrealized appreciation (depreciation)
of investments (12,062,079) 6,719,114
- - - ----------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations (6,645,636) 15,689,754
- - - ----------------------------------------------------------------- ------------ ------------
NET EQUALIZATION CREDITS (NOTE 2E) 48,205 116,945
- - - ----------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)
- - - -----------------------------------------------------------------
Dividends to shareholders from net investment income (5,392,308) (7,005,123)
- - - -----------------------------------------------------------------
Distributions in excess of net investment income -- (20,955)
- - - -----------------------------------------------------------------
Distributions paid from net realized gains on investment
transactions (1,863,673) --
- - - ----------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (7,255,981) (7,026,078)
- - - ----------------------------------------------------------------- ------------ ------------
CAPITAL STOCK (PRINCIPAL) TRANSACTIONS (EXCLUSIVE OF
AMOUNTS ALLOCATED TO NET INVESTMENT INCOME) (NOTE 3)
- - - -----------------------------------------------------------------
Proceeds from sale of shares 56,972,328 84,195,992
- - - -----------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in capital stock 1,955,406 2,669,825
- - - -----------------------------------------------------------------
Cost of shares redeemed (26,974,091) (24,770,792)
- - - ----------------------------------------------------------------- ------------ ------------
Change in net assets from capital stock transactions 31,953,643 62,095,025
- - - ----------------------------------------------------------------- ------------ ------------
Change in net assets 18,100,231 70,875,646
- - - ----------------------------------------------------------------- ------------ ------------
NET ASSETS:
- - - -----------------------------------------------------------------
Beginning of period 125,761,959 54,886,313
- - - ----------------------------------------------------------------- ------------ ------------
End of period $143,862,190 $125,761,959
- - - ----------------------------------------------------------------- ------------ ------------
</TABLE>
* Six months ended April 30, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
Fortress Bond Fund
Notes to Financial Statements
- - - --------------------------------------------------------------------------------
April 30, 1994
(unaudited)
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company with two investment portfolios. The financial statements
included herein present only those of Fortress Bond Fund (the "Fund"), which was
previously operated as an investment portfolio of Investment Series Trust, a
Massachusetts business trust. The financial statements of the other portfolio is
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles (GAAP).
On June 15, 1992, the shareholders approved a change to the name of the
predecessor investment portfolio to the Fund to Fortress Bond Fund, and a change
to the investment objective of the Fund to provide as high a level of current
income as is consistent with the preservation of capital. On February 3, 1993,
the Fund was reorganized into a portfolio of Investment Series Funds, Inc. Prior
to that date, the Fund was operated as a portfolio of Investment Series Trust.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at the mean
between the over-the-counter bid and asked prices as furnished by an independent pricing
service. Corporate bonds (and other fixed income securities/asset backed securities) are
valued at the last sale price reported on national securities exchanges on that day, if
available. Otherwise, corporate bonds (and other fixed income securities/asset backed
securities) and short-term obligations are 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.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian bank's vault, all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor on a daily basis, the market value of each repurchase
agreement's underlying collateral to ensure the value at least equals the principal
amount of the repurchase agreement, 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.
</TABLE>
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 adviser to be
creditworthy pursuant to guidelines established by 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 are amortized as required by the Internal Revenue Code,
as amended (the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its taxable income. Accordingly, no provisions for federal tax are
necessary.
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.
</TABLE>
(3) CAPITAL STOCK
At April 30, 1994, there were 1,000,000,000,000 shares of ($.0001 per share) par
value capital stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- - - -----------------------------------------------------------------------------------------------
1994* 1993
---------- ----------
- - - --------------------------------------------------------------------
<S> <C> <C>
Shares outstanding, beginning of period 12,211,700 5,943,685
- - - --------------------------------------------------------------------
Shares sold 5,703,184 8,508,866
- - - --------------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in
Fund shares 198,492 269,258
- - - --------------------------------------------------------------------
Shares redeemed (2,746,381) (2,510,109)
- - - -------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 15,366,995 12,211,700
- - - -------------------------------------------------------------------- ---------- ----------
</TABLE>
* Six months ended April 30, 1994.
Fortress Bond Fund
- - - --------------------------------------------------------------------------------
(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. Adviser may voluntarily choose
to waive a portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the 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 any fiscal year shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
SERVICE PLAN--Under the terms of a shareholder service agreement with Federated
Securities Corp. ("FSC") the Fund will pay "FSC" up to .25 of 1% of average net
assets for the fund for the period. This fee is to obtain certain personal
services for shareholders and the maintenance of shareholder accounts.
TRANSFER AGENT FEES--Federated Services Company ("FServ") 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.
Certain of the Officers and Directors of the Fund are Officers and Directors of
the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities, for the
six months ended April 30, 1994, were as follows:
<TABLE>
<S> <C>
- - - ------------------------------------------------------------------------------
PURCHASES $68,271,224
- - - ------------------------------------------------------------------------------ -----------
SALES $32,358,367
- - - ------------------------------------------------------------------------------ -----------
</TABLE>
<TABLE>
<S> <C>
Directors Officers
- - - -----------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland J. Christopher Donahue
J. Christopher Donahue President
James E. Dowd Richard B. Fisher
Lawrence D. Ellis, M.D. Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts John A. Staley, IV
Vice President
David M. Taylor
Assistant Treasurer
Robert C. Rosselot
Assistant Secretary
</TABLE>
Mutual funds are not obligations of or insured by any bank nor are they insured
by the federal government or any of its agencies. Investment in these shares
involves risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Fund's prospectus which contains facts concerning its
objective and policies, management fees, expenses and other information.
A1. The graphic presentation here displayed consists of a
boxed legend in the upper left quadrant indicating the
components of the corresponding mountain chart. The color-
coded mountain chart is a visual representation of the
narrative text above it, which shows that an initial
investment of $7,000 in Fortress Bond Fund would have grown
to $13,431 on April 30, 1994. The "x" axis reflects
computation periods from 1988 to 1994, the "y" axis reflects
the cost of the investment, and the right margin reflects a
total investment range from $0 to $15,000. The chart
further indicates the ending market value attributable to
principal, as well as the ending market value attributable
to capital gains and reinvested dividends.
A2. The graphic presentation here displayed consists of a
boxed legend in the upper left quadrant indicating the
components of the corresponding mountain chart. The color-
coded mountain chart is a visual representation of the
narrative text above it, which shows that an initial
investment of $1,000 in Fortress Bond Fund on May 20, 1987
would have grown to $10,687 by April 30, 1994. The "x" axis
reflects computation periods from 1988 to 1994, the "y" axis
reflects the cost of the investment, and the right margin
reflects a total investment range from $0 to $15,000. The
chart further indicates the ending market value attributable
to principal, as well as the ending market value
attributable to capital gains and reinvested dividends.
A3. The chart is a visual representation of some of the
Fund's major shareholder groups. It lists two columns. One
shows the shareholder groups, and the other shows the dollar
amount invested by these groups. The information is as
follows: Individual and Joint Tenants, $35,658,133; IRAs,
$22,216,250; Trusts, $5,672,120; Corporations, $2,756,331;
Clubs/Fraternal Organizations, $1,230,746; Custodians (under
Uniform Gift to Minors Act), $608,568; Keogh/Profit-Sharing,
$508,060; Churches/Religious Organizations, $342,365;
Pension Plans, $218,438.
A4. The bar chart is a visual representation of Fortress
Bond Fund portfolio rating distribution. The information is
as follows: AAA/Aaa, 9.6%; AA/Aa, 6.9%; A/A, 18.4%;
BBB/Baa, 29.0%; BB/Ba, 5.9%; B/B, 26.7%; and Cash/Other,
3.5%. Underneath this bar chart is another chart showing
the largest holding of Fortress Bond Fund. It shows three
categories entitled, Holdings, Ratings, and Percentage of
Assets. The information listed is as follows: GNMA 7%
Mortgage Pools, AAA/Aaa, 4.3%; Chrysler Corp., BBB+/A3,
2.4%; Varity Corp., BBB-/Ba1, 2.4%; News Corp., BBB-/Ba1,
2.2%; Ontario Hydro, AA-/Aa3, 2.2%; Valassis Inserts,
BBB/Baa3, 2.1%; and Citicorp, BBB/A2, 2.1%. Adjacent to
these two charts is another chart showing the largest
industry sectors. It lists two columns consisting of
Holdings and Percentage of Assets. The information is as
follows: U.S. Gov't. Mortgage Securities, 6.8%; Oil & Gas,
6.8%; Industrial Products & Equipment, 5.3%; Asset-Backed
Securities, 4.9%; Sovereign Government, 4.4%; Printing &
Publishing, 4.3%; Conglomerates, 4.3%; Chemicals & Plastics,
3.9%; Forest Products, 3.6%; Cable TV, 3.6%; and Automotive,
3.5%.
A5. The graphic presentation here displayed consists of a
boxed legend in the upper left quadrant indicating the
components of the corresponding mountain chart. The color-
coded mountain chart is a visual representation of the
narrative text above it, which shows that an initial
investment of $20,000 in Fortress Bond Fund on April 30,
1987, would have grown to $38,375. The "x" axis reflects
computation periods from 1988 to 1994, the "y" axis reflects
the cost of the investment, and the right margin reflects a
total investment range from $0 to $50,000. The chart
further indicates the ending market value attributable to
capital gains and reinvested dividends.
