CAPITAL GROWTH FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
PROSPECTUS
The Class A Shares (formerly, Liberty 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, Class C Shares, and Investment Shares dated December 31, 1993, 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, 1993
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
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INVESTMENT INFORMATION 4
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Investment Objective 4
Investment Policies 5
Acceptable Investments 5
Corporate Debt Obligations 5
Repurchase Agreements 5
Restricted and Illiquid Securities 6
When-Issued and Delayed
Delivery Transactions 6
Foreign Securities 6
Investing in Securities of
Other Investment Companies 6
Put and Call Options 7
Risks 7
Lending of Portfolio Securities 7
Portfolio Turnover 7
Investment Limitations 7
INVESTMENT SERIES FUNDS, INC. INFORMATION 8
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Management of the Corporation 8
Board of Directors 8
Officers and Directors 8
Investment Adviser 12
Advisory Fees 12
Adviser's Background 12
Distribution of Class A Shares 13
Distribution Plan 13
Administrative Service Arrangements 14
Other Payments to Financial Institutions 14
Administration of the Fund 14
Administrative Services 14
Custodian 14
Transfer Agent, and
Dividend Disbursing Agent 14
Legal Counsel 14
Independent Auditors 14
Expenses of the Fund and
Class A Shares 14
Brokerage Transactions 15
NET ASSET VALUE 15
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INVESTING IN CLASS A SHARES 15
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Share Purchases 15
Through a Financial Institution 16
Directly from the Distributor 16
By Wire 16
Minimum Investment Required 16
What Shares Cost 17
Dealer Concession 17
Reducing the Sales Charge 17
Quantity Discounts and
Accumulated Purchases 18
Letter of Intent 18
Reinvestment Privilege 18
Purchases with Proceeds from Redemptions
of Unaffiliated Mutual Fund Shares 18
Concurrent Purchases 19
Systematic Investment Program 19
Certificates and Confirmations 19
Dividends and Distributions 19
Retirement Plans 19
EXCHANGE PRIVILEGE 19
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Reduced Sales Charge 20
Requirements for Exchange 20
Tax Consequences 20
Making an Exchange 20
Telephone Instructions 20
REDEEMING CLASS A SHARES 21
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Through a Financial Institution 21
Directly from the Fund 21
By Telephone 21
By Mail 22
Signatures 22
Receiving Payment 22
Redemption Fee 22
Redemption Before Purchase
Instruments Clear 23
Systematic Withdrawal Program 23
Accounts with Low Balances 23
SHAREHOLDER INFORMATION 24
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Voting Rights 24
TAX INFORMATION 24
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Federal Income Tax 24
Pennsylvania Corporate and Personal
Property Taxes 24
PERFORMANCE INFORMATION 25
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OTHER CLASSES OF SHARES 25
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Financial Highlights--Class C Shares 27
Financial Highlights--Investment Shares 28
FINANCIAL STATEMENTS 29
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REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 39
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES--CLASS A SHARES
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................. 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds as applicable).................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable) (1).................................. 0.00%
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............................................................................................... 0.25%
Other Expenses (after expense reimbursement)............................................................ 1.00%
Total Class A Shares Operating Expenses (3)......................................................... 1.25%
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(1) A redemption fee of 0.50% applies only to Shares which are purchased with
proceeds from redemptions of shares of an unaffiliated mutual fund in which
a sales load has been paid and which are redeemed within one year of
purchase. For a more complete description, see "Redeeming Class A Shares."
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser 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 or losses.
(3) The Total Class A Shares Operating Expenses would have been 3.62% absent the
voluntary waiver of the management 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.
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EXAMPLE 1 year 3 years 5 years 10 years
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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......................... $57 $83 $111 $189
You would pay the following expenses on the same investment, assuming
no sales load, when purchasing Class A Shares of the Fund with the
proceeds from the redemption of unaffiliated
mutual fund shares and the imposition of a redemption fee under
the circumstances described in footnote (1) above..................... $18 $40 $69 $151
</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 two additional classes of
shares called Investment Shares and Class C Shares. Investment Shares, Class A
Shares, and Class C Shares are all subject to certain of the same expenses.
However, Investment Shares are subject to a maximum sales load of 5.75%, but are
not subject to a redemption fee, a shareholder servicing fee, or a 12b-1 fee.
Class C Shares are not subject to a sales load but are subject to a 12b-1 fee of
0.75%, a shareholder servicing fee of .25%, 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, Independent Auditors on page
39.
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YEAR ENDED
OCTOBER 31,
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1993 1992**
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.84 $ 12.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.09 0.11
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Net realized and unrealized gain (loss) on investments 1.71 (0.18)
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Total from investment operations 1.80 (0.07)
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.10) (0.09)
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Distributions to shareholders from net realized gain
on investment transactions (0.16) --
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TOTAL DISTRIBUTIONS (0.26) (0.09)
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NET ASSET VALUE, END OF PERIOD $ 13.38 $ 11.84
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TOTAL RETURN* 15.34% -0.61%(b)
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.25% 1.17%(a)
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Net investment income 0.73% 1.19%(a)
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Expense waiver/reimbursement (c) 2.37% 1.33%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $ 11,609 $ 6,540
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Portfolio turnover rate 74% 29 %
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</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from January 16, 1992 (date of initial
public investment) to October 31, 1992.
(a) Computed on an annualized basis.
(b) Cumulative total return.
(c) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, 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 ("Directors") has established three classes of shares,
known as Class A Shares (formerly, Liberty Shares), Class C Shares, and
Investment Shares. This prospectus relates only to the Class A Shares ("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 charge and are redeemed at net
asset value; however, a redemption fee 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 "Liberty Family Funds."
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 communication
utilities;
Stock and Bond Fund, Inc. (Class C Shares), providing relative safety of
capital with the possiblity of long-term growth of capital and income
through equity securities, convertible securities, debt securities, and
short-term obligations; and
Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities.
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.; 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; and Stock and Bond Fund, Inc.
No sales charge 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 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 investment 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 investment 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 Fund's investment 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 Corporation or Fitch Investors Service, Inc., or Baa or
higher by Moody's Investors Service, Inc.) are high-yield, high-risk 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 Statement of
Additional Information.
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 investment adviser of the Fund, 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 acceptable
investments on a when-issued or delayed delivery basis. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
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 investment 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 investment adviser to the Fund 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 investment 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
investment 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.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held.
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; or
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; or
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.
OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including any affiliation with
Federated Advisers, Federated Investors, Federated Securities Corp., Federated
Administrative Services, Inc., and the Funds described in the Statement of
Additional Information.
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POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE CORPORATION DURING PAST FIVE YEARS
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John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman
Federated Investors Tower Director and Trustee, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Director, AEtna
Life and Casualty Company; Chief Executive Officer
and Director, Trustee, or Managing General Partner
of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J.
Christopher Donahue, President and Director of the
Corporation.
John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior
Wood/IPC Vice-President, John R. Wood and Associates, Inc.,
Commercial Department Realtors; President, Northgate Village Development
John R. Wood and Corporation; General Partner or Trustee in private
Associates, Inc., Relators real estate ventures in Southwest Florida; Director,
3255 Tamiami Trail North Trustee, or Managing General Partner of the Funds;
Naples, FL formerly President, Naples Property Management, Inc.
William J. Copeland Director Director and Member of the Executive Committee,
One PNC Plaza-23rd Floor Michael Baker, Inc.; Director, Trustee, or Managing
Pittsburgh, PA 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* President and President and Trustee, Federated Investors; Trustee,
Federated Investors Tower Director Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; President and Director,
Federated Administrative Services, Inc.; 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 Director Attorney-at-law; Director, The Emerging Germany
571 Hayward Mill Road Fund, Inc.; Director, Trustee, or Managing General
Concord, MA Partner of the Funds; formerly, Director, Blue Cross
of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist,
3471 Fifth Avenue Presbyterian and Montefiore Hospitals; Clinical
Suite 1111 Professor of Medicine and Trustee, University of
Pittsburgh, PA Pittsburgh; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc., and
Pittsburgh, PA Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A., Western
Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing
Boston, MA General Partner of the Funds; formerly, President,
State Street Bank and Trust Company, State Street
Boston Corporation, and Trustee Lahey Clinic
Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty;
5916 Penn Mall Chairman, Meritcare, Inc.; Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Learning Trustee, Carnegie Endowment for International Peace,
University of Pittsburgh RAND Corporation; Online Computer Library Center
Pittsburgh, PA 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 Director Public relations/marketing consultant; Director,
4905 Bayard Street Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated
Federated Investors Tower Investors; Chairman and Director, Federated
Pittsburgh, PA Securities Corp.; President or Vice
President of the Funds; Director or Trustee of some
of the Funds.
Edward C. Gonzales Vice President Vice President, Treasurer, and Trustee, Federated
Federated Investors Tower and Treasurer Investors; Vice President and Treasurer, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated
Research; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Chairman,
Treasurer, and Director, Federated Administrative
Services, Inc.; Trustee or Director of some of the
Funds; Vice President and Treasurer of the Funds.
John W. McGonigle Vice President and Vice President, Secretary, General Counsel, and
Federated Investors Tower Secretary Trustee, Federated Investors; Vice President,
Pittsburgh, PA Secretary and Trustee, Federated Advisers, Federated
Management, and Federated Research; Executive Vice
President, Secretary, and Director, Federated
Administrative Services, Inc.; Director and Executive Vice
President, Federated Securities Corp.; Vice
President and Secretary of the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors;
Federated Investors Tower Executive Vice President, Federated Securities
Pittsburgh, PA Corp.; President and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice
President of the Funds; Director, Trustee, or
Managing General Partner of the Funds; formerly,
Vice President, The Standard Fire Insurance Company
and President of its Federated Research Division.
*This Director is deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
\Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Directors 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 (the "Adviser"),
subject to direction by the Directors. The Adviser continually conducts
investment research and supervision for the Fund and is responsible for the
purchase or sale of portfolio instruments, for which it receives an annual fee
from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .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 approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Gregory M. Melvin has been the Fund's portfolio manager since December,
1989. 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.
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 PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "Plan"), Shares will pay an amount computed at an annual rate of .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.
The distributor may select financial institutions (such as a broker/dealer or
bank) to provide sales support services as agents for their clients or customers
who beneficially own Shares. Financial institutions will receive fees from the
distributor 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 distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, including
interest, carrying, or other financing charges in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor may
be able to recover such amounts or may earn a profit from future payments made
by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the 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 laws.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan.
ADMINISTRATIVE SERVICE ARRANGEMENTS. The distributor may select brokers and
dealers to provide distribution and administrative services. The distributor may
also select administrators to provide administrative services. These
administrative services include, but are not limited to, distributing
prospectuses and other information, providing accounting assistance and
communicating or facilitating purchases and redemptions of Shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon Shares owned by their clients or customers. The fees are calculated
as a percentage of the average aggregate net asset value of shareholder accounts
during the period for which the brokers, dealers, and administrators provide
services. Any fees paid for these services by the distributor will be reimbursed
by the Adviser.
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 charge on Shares.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), P.O. Box
8604, Boston, Massachusetts 02266-8604, 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, 2101 L Street, N.W. , Washington, DC 20037.
INDEPENDENT AUDITORS. Independent auditing services are provided by Ernst &
Young, Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND CLASS A SHARES
Holders of each class of shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares each pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Distribution Plan. However, the Directors
reserve the right to allocate certain other expenses to holders of Shares as it
deems appropriate ("Class Expenses"). In any case, Class Expenses would be
limited to: distribution fees; transfer agent fees as identified by the transfer
agent as attributable to holders of Shares; printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Directors' fees incurred as
a result of issues relating solely to Shares.
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 Investment Shares and 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 Investment Series Funds, Inc., P.O. Box 8604, Boston,
Massachusetts 02266-8604.
Orders by mail are considered received after payment by check is converted by
State Street Bank into federal funds. This is generally the next business day
after State Street 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: 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 charge as follows:
</TABLE>
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $750,000 2.00% 2.04%
$750,000 but less than $1 million 1.00% 1.01%
$1 million or more 0.00% 0.00%
</TABLE>
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 charge is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.
DEALER CONCESSION. For sales of Shares, a dealer will normally receive up to
90% of the applicable sales charge. Any portion of the sales charge which is not
paid to a dealer will be retained by the distributor. However, the distributor,
in its sole discretion, may uniformly offer to pay all dealers selling Shares
additional amounts, all or a portion of which may be paid from the sales charge
it normally retains or any other source available to it. Such additional
payments, if accepted by the dealer, may be in the form of cash or promotional
incentives, and will be predicated upon the amount of Shares or of the Liberty
Family of Funds sold by the dealer.
The sales charge 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 charge 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.
REDUCING THE SALES CHARGE
The sales charge can be 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 in the table above,
larger purchases reduce the sales charge 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 charge. To receive the sales charge 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 charge on
the additional purchase according to the schedule now in effect would be 3.75%,
not 4.50%.
To receive the sales charge 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 reduce the sales charge after it confirms the
purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Liberty Family of Funds over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold 4.50% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The 4.50% 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 charge.
This letter of intent will not obligate the shareholder to purchase Shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. This letter may be
dated as of a prior date to include any purchases made within the past 90 days
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 charge. 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 charge. 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 charge, with
the proceeds from the redemption of shares of a mutual fund which was sold with
a sales charge or commission and was not distributed by Federated Securities
Corp. (This does not include shares which were or would be subject to a
contingent deferred sales charge upon redemption.) 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. Federated Securities Corp. will offer to pay dealers
an amount equal to .50 of 1% of the net asset value of Shares purchased by their
clients or customers in this manner.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Liberty Family of Funds, the purchase price of which includes a
sales charge. For example, if a shareholder concurrently invested $30,000 in one
of the other Liberty Funds which includes a sales charge, and $70,000 in this
Fund, the sales charge would be calculated based on a $100,000 investment.
To receive this sales charge 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 reduce the sales charge
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once an account has been opened, shareholders may add to their investment on a
regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the transfer agent, plus the applicable sales charge. 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 charge, 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, including prototype retirement plans, contact
the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
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 charge different from that of the Fund's or
with no sales charge; exchanges into these Funds are made at net asset value
plus the difference between the Fund's sales and redemption fee charge already
paid and any sales charge 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 redemption fee.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction of the sales
charge, 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
of at least $500. 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.
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 Boston Financial Data
Services, Inc., Attention: Federated Division, P.O. Box 8604, Boston,
Massachusetts 02266-8604.
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 redemption
fee, 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 redemption fee, 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.
REDEMPTION FEE
Shareholders who purchased Shares with the proceeds of a redemption of shares of
a mutual fund sold with a sales charge or commission and not distributed by
Federated Securities Corp. will be charged a redemption fee by the Fund's
distributor of .50 of 1% for redemptions made within one year from the date of
purchase. The redemption fee 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 redemption fee will not be imposed on Shares acquired through reinvestment
of dividends or distribution of 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 redemption fee 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 redemption fee 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 redemption fee 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 redemption fee will be charged for redemption from the Liberty
Family Retirement Program.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check or through the Automated Clearing House, the
proceeds from the redemption of those Shares are not available, and the Shares
may not be exchanged, until the Fund or its agents are reasonably certain that
the purchase check has cleared, which could take up to ten calendar days.
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 charge, 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 of November 29, 1993, Liberty Bank & Trust, custodian for
IRM Retirement Plans, may be deemed to control the Fund due to its record
ownership of Investment Shares of the Fund.
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 redemption fee, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares,
Investment Shares, and Class C Shares. Because Class A Shares are subject to a
12b-1 fee, total return and yield for Investment Shares may exceed that of Class
A Shares for the same period. Because Class C Shares are subject to a
shareholder services fee and a higher 12b-1 fee than that of the Class A Shares,
total return and yield for Class A Shares may 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 charge. 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 .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.
Investment Shares are sold to accounts for which financial institutions act in
an agency capacity at net asset value plus a maximum sales charge of 5.75% and
are distributed without a 12b-1 fee, a shareholder services fee, a redemption
fee or a contingent deferred sales charge. Investment Shares are subject to a
minimum initial investment of $500, except for retirement accounts, in which
case the minimum initial investment is $50.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares of the Fund
than from another class of shares. The distributor may pay an administrative fee
to a financial institution or broker for administrative services provided to the
Investment Shares class, and may pay such a fee for administrative services
provided to the Class A Shares class, in addition to fees paid pursuant to the
Rule 12b-1 Plan. Any fee paid by the distributor
for administrative services will not be an expense of the class, but will be
reimbursed to the distributor by the investment adviser.
The amount of dividends payable to holders of Investment Shares will generally
exceed that of Class A Shares and of Class C Shares by the difference between
Class Expenses borne by shares of each respective class.
The stated advisory fee is the same for all classes of the Fund.
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to Report of Ernst & Young, Independent Auditors, on page 39.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1993**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.39
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------
Net investment income (0.01)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.98
- -------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.97
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.36
- -------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 7.83%(b)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 2.00%(a)
- --------------------------------------------------------------------------------------------------
Net investment income (0.18)%(a)
- --------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 2.37%(a)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 314
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate %74
- --------------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
** Reflects operations from April 13, 1993 (date of initial public investment)
to October 31, 1993.
(a) Computed on an annualized basis.
(b) Cumulative total return.
(c) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to Report of Ernst & Young, Independent Auditors, on page 39.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1993 1992*** 1991 1990 1989**
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.84 $ 12.00 $ 9.11 $ 9.97 $ 10.00
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.13 0.12 0.31 0.32 0.03
- ----------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.71 (0.18) 2.91 (0.86) (0.04)
- ---------------------------------------------------------- ------------- ----------- --------- --------- -----------
Total from investment operations 1.84 (0.06) 3.22 (0.54) (0.01)
- ---------------------------------------------------------- ------------- ----------- --------- --------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.14) (0.10) (0.30) (0.32) (0.02)
- ----------------------------------------------------------
Distributions for shareholders from net realized gain on
investment transactions (0.16) -- (0.02) -- --
- ----------------------------------------------------------
Distributions in excess of net investment income -- -- (0.01)(a) -- --
- ---------------------------------------------------------- ------------- ----------- --------- --------- -----------
TOTAL DISTRIBUTIONS (0.30 ) (0.10) (0.33) (0.32) (0.02)
- ---------------------------------------------------------- ------------- ----------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 13.38 $ 11.84 $ 12.00 $ 9.11 $ 9.97
- ---------------------------------------------------------- ------------- ----------- --------- --------- -----------
TOTAL RETURN* 15.70% -0.53%(c) 35.68% -5.43% -0.02%(c)
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 1.00% 1.00%(b) 1.00% 1.00% 1.19%(b)
- ----------------------------------------------------------
Net investment income 0.98% 1.28%(b) 2.73% 3.54% 4.21%(b)
- ----------------------------------------------------------
Expense waiver/reimbursement (d) 2.37% 1.50%(b) 1.50% 1.50% 0.78%(b)
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $14,836 $18,161 $13,513 $7,484 $5,525
- ----------------------------------------------------------
Portfolio turnover rate 74 % 29 % 57% 83% 0 %
- ----------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** 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 in fiscal year-end from
December 31 to October 31.
(a) Distributions in excess of net investment income for the period ended
December 31, 1991 were a result of certain book and tax timing differences.
These distributions did not represent a return of capital for federal
income tax purposes.
(b) Computed on an annualized basis.
(c) Cumulative total return.
(d) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
<CAPTION>
COMMON STOCKS--79.6%
<C> <S> <C>
- --------------------------------------------------------------------------------------------------
AUTOMOTIVE PARTS--3.4%
-----------------------------------------------------------------------------------
40,000 Allen Group, Inc. $ 900,000
----------------------------------------------------------------------------------- --------------
BANKING & FINANCE--10.0%
-----------------------------------------------------------------------------------
30,000 MBNA Corp. 1,023,750
-----------------------------------------------------------------------------------
15,000 NationsBank Corp. 699,375
-----------------------------------------------------------------------------------
36,500 AT&T Capital Corp. 953,562
----------------------------------------------------------------------------------- --------------
Total 2,676,687
----------------------------------------------------------------------------------- --------------
BASIC INDUSTRY--6.6%
-----------------------------------------------------------------------------------
20,000 Cleveland-Cliffs, Inc. 720,000
-----------------------------------------------------------------------------------
15,000 Harsco Corp. 630,000
-----------------------------------------------------------------------------------
15,000 Medusa Corp. 412,500
----------------------------------------------------------------------------------- --------------
Total 1,762,500
----------------------------------------------------------------------------------- --------------
CAPITAL GOODS--17.6%
-----------------------------------------------------------------------------------
35,000 Alliant Techsystems, Inc.** 1,019,375
-----------------------------------------------------------------------------------
15,000 Dover Corp. 862,500
-----------------------------------------------------------------------------------
30,000 Genlyte Group, Inc.** 112,500
-----------------------------------------------------------------------------------
25,000 Greenfield Industries, Inc. 412,500
-----------------------------------------------------------------------------------
30,000 Kenetech Corp.** 468,750
-----------------------------------------------------------------------------------
25,000 MagneTek, Inc.** 378,125
-----------------------------------------------------------------------------------
10,000 Sensormatic Electronics Corp. 465,000
-----------------------------------------------------------------------------------
10,000 Stewart & Stevenson Services, Inc. 452,500
-----------------------------------------------------------------------------------
25,000 Valence Technology, Inc.** 531,250
----------------------------------------------------------------------------------- --------------
Total 4,702,500
----------------------------------------------------------------------------------- --------------
CONSUMER GOODS--RETAIL--6.8%
-----------------------------------------------------------------------------------
25,000 Blockbuster Entertainment Corp. 709,375
-----------------------------------------------------------------------------------
75,000 Service Merchandise, Inc.** 750,000
-----------------------------------------------------------------------------------
CONSUMER GOODS--RETAIL--CONTINUED
-----------------------------------------------------------------------------------
25,000 Showbiz Pizza Time, Inc.** $ 362,500
----------------------------------------------------------------------------------- --------------
Total 1,821,875
----------------------------------------------------------------------------------- --------------
CONSUMER PRODUCTS--13.1%
-----------------------------------------------------------------------------------
15,000 Dial Corp. 575,625
-----------------------------------------------------------------------------------
75,000 Dr. Pepper/7-Up Holding Co.** 1,565,625
-----------------------------------------------------------------------------------
75,000 ADT, Limited** 675,000
-----------------------------------------------------------------------------------
10,000 Nike, Inc. 483,750
-----------------------------------------------------------------------------------
10,000 Starter Corp.** 202,500
----------------------------------------------------------------------------------- --------------
Total 3,502,500
----------------------------------------------------------------------------------- --------------
ENERGY--2.3%
-----------------------------------------------------------------------------------
25,000 Valero Energy Corp. 628,125
----------------------------------------------------------------------------------- --------------
HEALTH CARE--12.5%
-----------------------------------------------------------------------------------
20,000 Genentech, Inc.** 922,500
-----------------------------------------------------------------------------------
25,000 Genetics Institute, Inc.** 1,062,500
-----------------------------------------------------------------------------------
40,000 National Health Laboratories, Inc. 545,000
-----------------------------------------------------------------------------------
15,000 Spacelabs Medical, Inc.** 356,250
-----------------------------------------------------------------------------------
10,000 U.S. Healthcare, Inc. 463,750
----------------------------------------------------------------------------------- --------------
Total 3,350,000
----------------------------------------------------------------------------------- --------------
INSURANCE--2.0%
-----------------------------------------------------------------------------------
15,000 Travelers Corp. 528,750
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--3.1%
-----------------------------------------------------------------------------------
15,000 American President Companies, Ltd. 832,500
----------------------------------------------------------------------------------- --------------
WASTE DISPOSAL--2.2%
-----------------------------------------------------------------------------------
150,000 Chambers Development, Inc.** 600,000
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $17,710,139) 21,305,437
----------------------------------------------------------------------------------- --------------
CONVERTIBLE SECURITIES--15.5%
- --------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--9.0%
-----------------------------------------------------------------------------------
$ 3,000,000 Coleman Worldwide Corp. LYON's, 5/27/2013 $ 825,000
-----------------------------------------------------------------------------------
400,000 Mattel, Inc., Conv. Deb., 8.00%, 3/15/2001 728,000
-----------------------------------------------------------------------------------
20,000 Sun America Inc. $2.68 PERCs, 3/15/2001 850,000
----------------------------------------------------------------------------------- --------------
Total 2,403,000
----------------------------------------------------------------------------------- --------------
HEALTH CARE--2.6%
-----------------------------------------------------------------------------------
1,000,000 Roche Holdings Inc. 4.75% LYON, 9/23/2008 523,750
-----------------------------------------------------------------------------------
974 Schering-Plough Corp., Warrant Units, 12/2/96** 176,294
----------------------------------------------------------------------------------- --------------
Total 700,044
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--3.9%
-----------------------------------------------------------------------------------
800,000 Greyhound Lines, Inc., Conv. Deb., 8.56% 3/31/2007 1,048,000
----------------------------------------------------------------------------------- --------------
TOTAL CONVERTIBLE SECURITIES (IDENTIFIED COST, $3,553,444) 4,151,044
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--2.6%
- --------------------------------------------------------------------------------------------------
685,000 J.P. Morgan Securities, Inc., 2.99%, dated 10/29/93, due 11/1/93
(at amortized cost) (Note 2B) 685,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $21,948,583) $ 26,141,481\
----------------------------------------------------------------------------------- --------------
</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.
** Non-income producing.
\ The cost of investments for federal tax purposes amounts to $21,948,583. The
net unrealized appreciation of investments on a federal tax basis amounts to
$4,192,898, which is comprised of $5,755,663 appreciation and $1,562,765
depreciation at October 31, 1993.
LYON--Liquid Yield Option Note
Note: The categories of investments are shown as a percentage of net assets
($26,758,883) at October 31, 1993.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments, at value (Notes 2A and 2B) (identified and tax cost, $21,948,583) $ 26,141,481
- ---------------------------------------------------------------------------------------------------
Cash 5,998
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 528,442
- ---------------------------------------------------------------------------------------------------
Receivable for capital stock sold 83,104
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 21,836
- ---------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 434
- --------------------------------------------------------------------------------------------------- -------------
Total assets 26,781,295
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for capital stock redeemed $ 5,497
- ----------------------------------------------------------------------------------------
Accrued expenses 16,915
- ---------------------------------------------------------------------------------------- ---------
Total liabilities 22,412
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 1,999,623 shares of capital stock outstanding $ 26,758,883
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 22,241,370
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,192,898
- ---------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 313,497
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income 11,118
- --------------------------------------------------------------------------------------------------- -------------
Total $ 26,758,883
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE AND REDEMPTION PRICE Per Share:
Investment Shares (net assets of $14,836,418 / 1,108,550 SHARES OF CAPITAL
STOCK OUTSTANDING) $13.38
- --------------------------------------------------------------------------------------------------- -------------
CLASS A SHARES (NET ASSETS OF $11,608,735 / 867,599 SHARES OF CAPITAL STOCK OUTSTANDING) $13.38
- --------------------------------------------------------------------------------------------------- -------------
CLASS C SHARES (NET ASSETS OF $313,730 / 23,474 SHARES OF CAPITAL STOCK OUTSTANDING) $13.36
- --------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF OFFERING PRICE:
Investment Shares Offering Price Per Share (100/94.25 of $13.38)* $14.20
- --------------------------------------------------------------------------------------------------- -------------
Class A Shares Offering Price Per Share (100/95.50 of $13.38)* $14.01
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* On sales of $10,000 or more, the offering price is reduced as stated under
"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, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Dividends $ 285,993
- ----------------------------------------------------------------------------------------------------
Interest 225,715
- ---------------------------------------------------------------------------------------------------- -----------
Total investment income (Note 2C) 511,708
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 165,261
- ---------------------------------------------------------------------------------------
Directors fees 5,265
- ---------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 240,157
- ---------------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses 192,808
- ---------------------------------------------------------------------------------------
Fund share registration costs 111,451
- ---------------------------------------------------------------------------------------
Auditing fees 18,067
- ---------------------------------------------------------------------------------------
Legal fees 14,841
- ---------------------------------------------------------------------------------------
Distribution services fees (Note 5) 26,209
- ---------------------------------------------------------------------------------------
Printing and postage 112,187
- ---------------------------------------------------------------------------------------
Insurance premiums 7,662
- ---------------------------------------------------------------------------------------
Taxes 480
- ---------------------------------------------------------------------------------------
Miscellaneous 2,548
- --------------------------------------------------------------------------------------- -----------
Total expenses 896,936
- ---------------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 165,261
- ---------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 5) 446,749 612,010
- --------------------------------------------------------------------------- ---------- -----------
Net expenses 284,926
- ---------------------------------------------------------------------------------------------------- -----------
Net investment income 226,782
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized gain on investment transactions (identified cost basis) 303,564
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation on investments 3,026,413
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 3,329,977
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 3,556,759
- ---------------------------------------------------------------------------------------------------- -----------
</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,
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS: 1993 1992*
- ----------------------------------------------------------------------------------- -------------- -------------
OPERATIONS--
- -----------------------------------------------------------------------------------
Net investment income $ 226,782 $ 205,334
- -----------------------------------------------------------------------------------
Net realized gain on investment transactions ($303,564 and $340,685 net gain,
respectively, as computed for federal income tax purposes) 303,564 293,810
- -----------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 3,026,413 (932,519)
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets resulting from operations 3,556,759 (433,375)
- ----------------------------------------------------------------------------------- -------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Investment Shares (174,344) (132,621)
- -----------------------------------------------------------------------------------
Class A Shares (76,306) (27,448)
- -----------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on investment transactions:
Investment Shares (245,773) --
- -----------------------------------------------------------------------------------
Class A Shares (95,185) --
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets from distributions to shareholders (591,608) (160,069)
- ----------------------------------------------------------------------------------- -------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------------
Proceeds from sale of shares 11,839,537 13,308,632
- -----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 531,548 150,206
- -----------------------------------------------------------------------------------
Cost of shares redeemed (13,278,176) (1,677,459)
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets from Fund share transactions (907,091) 11,781,379
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets 2,058,060 11,187,935
- -----------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------
Beginning of period 24,700,823 13,512,888
- ----------------------------------------------------------------------------------- -------------- -------------
End of period (including undistributed net investment
income of $11,118 and $34,986, respectively) $ 26,758,883 $ 24,700,823
- ----------------------------------------------------------------------------------- -------------- -------------
</TABLE>
* Ten months ended October 31, 1992.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end,
management investment company with two portfolios. The financial statements
included herein present only those of Capital Growth Fund (the "Fund"). The
financial statements of the other portfolios 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.
Capital Growth Fund provides three classes of Shares ("Investment Shares",
"Class A Shares", and "Class C Shares"). Class A and Class C Shares are
identical in all respects to Investment Shares except that Class A and Class C
Shares are sold pursuant to a distribution plan ("Plan") adopted in accordance
with the Investment Company Act of 1940 Rule 12b-1. Class A Shares are subject
to a maximum sales load of 4.50%, a 12b-1 fee of 0.25% and may be subject to a
redemption fee but are not subject to a shareholder servicing fee. Class C
Shares are not subject to a sales load but are subject to a 12b-1 fee of 0.75%,
a shareholder servicing fee of 0.25%, and a contingent deferred sales charge of
1.00%.
On December 18, 1992, Shareholders of the Fund met and approved the
reorganization of the Fund as a portfolio of Investment Series Funds, Inc., a
Maryland Corporation.
(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 principals.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at last sale
prices reported on national securities exchanges. Unlisted securities or
listed securities for which there were no sales on the valuation date are
generally valued at the mean between bid and asked prices. Short-term
obligations are valued at the mean between bid and asked prices furnished
by an independent pricing service. However, short-term obligations with
maturities of sixty days or less are valued at amortized cost, which
approximates value.
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 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 the value 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 Directors. Risks may arise from
the potential inability of counterparties to honor the terms of a
repurchase agreements. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis and includes discount earned, less
any premium.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities 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--Costs incurred by the Fund with respect to registration
of its shares in the first fiscal year, excluding the initial expenses of
registering the shares, have been deferred and are being amortized using
the straight-line method over a period of five years from the Funds
commencement date.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
(4) CAPITAL STOCK
At October 31, 1993, there were 1,000,000,000 of ($.0001) par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 10/31/93 YEAR ENDED 10/31/92*
<S> <C> <C> <C> <C>
INVESTMENT SHARES SHARES AMOUNT SHARES AMOUNT
Shares outstanding, beginning of period 1,533,399 $ 16,319,992 1,125,747 $ 11,367,082
- ------------------------------------------------------
Shares sold 341,272 4,316,048 484,535 5,894,279
- ------------------------------------------------------
Shares issued to shareholders electing to
receive payment of dividends in Fund shares 30,603 380,718 10,536 129,297
- ------------------------------------------------------
Shares redeemed (796,724) (9,811,729) (87,419) (1,070,666)
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Shares outstanding, end of period 1,108,550 $ 11,205,029 1,533,399 $ 16,319,992
- ------------------------------------------------------ ----------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 10/31/93 YEAR ENDED 10/31/92*
<S> <C> <C> <C> <C>
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
Shares outstanding, beginning of period 552,251 $ 6,828,469 -- $ --
- ------------------------------------------------------
Shares sold 575,342 7,204,386 599,919 7,414,353
- ------------------------------------------------------
Shares issued to shareholders electing to
receive payment of dividends in Fund shares 12,091 150,830 1,714 20,909
- ------------------------------------------------------
Shares redeemed (272,085) (3,450,895) (49,382) (606,793)
- ------------------------------------------------------ ---------- -------------- --------- -------------
Shares outstanding, end of period 867,599 $ 10,732,790 552,251 $ 6,828,469
- ------------------------------------------------------ ---------- -------------- --------- -------------
</TABLE>
* For the ten months ended October 31, 1992.
<TABLE>
<CAPTION>
YEAR ENDED 10/31/93**
<S> <C> <C> <C> <C>
CLASS C SHARES SHARES AMOUNT
Shares outstanding, beginning of period -- $ --
- -------------------------------------------------
Shares sold 24,661 319,103
- -------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares -- --
- -------------------------------------------------
Shares redeemed (1,187) (15,552)
- ------------------------------------------------- ---------- --------------
Shares outstanding, end of period 23,474 $ 303,551
- ------------------------------------------------- ---------- --------------
</TABLE>
** For the period from April 13, 1993 (date of initial public investment) to
October 31, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers ("Adviser"), the Fund's investment adviser, receives for its
services an annual investment advisory fee equal to (a) 0.55% of the average
daily net assets of the Fund, and (b) 4.5% of the gross income of the Fund. The
Adviser has voluntarily agreed to waive a portion or all of its fee and
reimburse the Fund a portion of its annual operating expenses. The Adviser can
terminate this voluntary waiver and reimbursement at any time at its sole
discretion. For the period ended October 31, 1993, the investment advisory fee
amounted to $165,261, all of which was voluntarily waived. In addition, the
Adviser voluntarily reimbursed $446,749 of the Fund's other operating expenses.
Organization expenses ($13,190) and start-up administrative service expenses
($92,451) were borne initially by the Adviser. The Fund has agreed to pay the
Adviser, at an annual rate of .005 of 1% of average daily net assets and .01 of
1% of average daily net assets for organization expenses and start-up
administrative service expenses, respectively, until expenses borne by the
Adviser are reimbursed. This commitment will expire five years from the date the
Corporation's portfolio became effective. For the period ended October 31, 1993,
the Fund paid the Adviser $736 for organization expenses and $1,471 for start-up
administrative services pursuant to this agreement.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Certain of the Officers and Directors of
the Fund are Officers and Directors of the above corporations.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp., the principal distributor, from the assets of the Class A and Class C
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Class A and Class C Shares. The Plan provides that
the Fund may incur distribution expenses of up to 0.25 of 1% for Class A Shares,
and 0.75 of 1% for Class C Shares of the average daily net assets, annually, to
pay commissions, maintenance fees, and to compensate FSC. For the period ended
October 31, 1993, FSC earned $25,677 and $532 for Class A and Class C Shares,
respectively.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities for the
fiscal year ended October 31, 1993, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 18,804,799
- -------------------------------------------------------------------------------------------------- --------------
SALES AND MATURITIES $ 20,808,325
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
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 the Investment Series Funds, Inc.) as of October 31, 1993, and the
related statement of operations for the year then ended, the statement of
changes in net assets for the year ended October 31, 1993 and for the ten months
ended October 31, 1992 and the financial highlights (see pages 2, 27 and 28 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 gain
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, 1993, by correspondence with the custodian. 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 of Investment Series Funds, Inc. at October 31, 1993, the
results of its operations for the year then ended, the changes in its net assets
for the year ended October 31, 1993 and for the ten months ended October 31,
1992, and the financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
December 10, 1993
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 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young 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, 1993
FEDERATED SECURITIES CORP.
[LOGO]
DISTRIBUTOR
A Subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
1102503A-A (12/93)
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, Class A Shares (formerly, Liberty Shares), and Investment Shares dated
December 31, 1993, 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, 1993
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 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Acceptable Investments 5
Corporate Debt Obligations 5
Repurchase Agreements 5
Restricted and Illiquid Securities 5
When-Issued and Delayed
Delivery Transactions 6
Foreign Securities 6
Investing in Securities of Other
Investment Companies 6
Put and Call Options 7
Risks 7
Lending of Portfolio Securities 7
Portfolio Turnover 7
Investment Limitations 7
INVESTMENT SERIES FUNDS, INC. INFORMATION 8
- ------------------------------------------------------
Management of the Corporation 8
Board of Directors 8
Officers and Directors 8
Investment Adviser 11
Advisory Fees 12
Adviser's Background 12
Distribution of Class C Shares 12
Distribution Plan 12
Other Payments to Financial Institutions 13
Administration of the Fund 13
Administrative Services 13
Shareholder Services Plan 13
Custodian 14
Transfer Agent and Dividend
Disbursing Agent 14
Legal Counsel 14
Independent Auditors 14
Expenses of the Fund and Class C Shares 14
Brokerage Transactions 14
NET ASSET VALUE 15
- ------------------------------------------------------
INVESTING IN CLASS C SHARES 15
- ------------------------------------------------------
Share Purchases 15
Through a Financial Institution 15
Directly From the Distributor 15
By Wire 16
Minimum Investment Required 16
What Shares Cost 16
Systematic Investment Program 16
Certificates and Confirmations 16
Dividends and Distributions 16
Retirement Plans 17
EXCHANGE PRIVILEGE 17
- ------------------------------------------------------
Requirements for Exchange 17
Tax Consequences 17
Making an Exchange 17
Telephone Instructions 18
REDEEMING CLASS C SHARES 18
- ------------------------------------------------------
Through a Financial Institution 18
Directly from the Fund 18
By Telephone 18
By Mail 19
Signatures 19
Receiving Payment 19
Contingent Deferred Sales Charge 19
Redemption Before Purchase
Instruments Clear 20
Systematic Withdrawal Program 20
Accounts with Low Balances 20
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
TAX INFORMATION 21
- ------------------------------------------------------
Federal Income Tax 21
Pennsylvania Corporate and Personal
Property Taxes 21
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
OTHER CLASSES OF SHARES 22
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 23
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES 24
- ------------------------------------------------------
FINANCIAL STATEMENTS 25
- ------------------------------------------------------
REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 36
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--CLASS C SHARES
- ------------------------------------------------------
<TABLE>
<S> <C> <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 Load (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 assessed 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 "Redeeming
Class C Shares."
(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser 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 or
losses.
(3) The Total Class C Shares Operating Expenses would have been 4.37% absent
the voluntary waiver of the management 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 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 charge permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period....................... $31 $63
You would pay the following expenses on the same investment,
assuming no redemption....................................................................... $20 $63
</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 two additional classes of
shares called Investment Shares and Class A Shares. Investment Shares, Class A
Shares, and Class C Shares are all subject to certain of the same expenses.
However, Investment Shares are subject to a maximum sales load of 5.75% but are
not subject to a redemption fee, a contingent deferred sales charge, a
shareholder servicing fee, or a 12b-1 fee. Class A Shares are subject to a
maximum sales load of 4.50%, a 12b-1 fee of 0.25% and may be subject to a
redemption fee but are not subject to a shareholder servicing fee. See "Other
Classes of Shares."
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to Report of Ernst & Young, Independent Auditors, on page 36.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1993**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.39
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------
Net investment income (0.01)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.98
- -------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.97
- -------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 13.36
- -------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 7.83%(b)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 2.00%(a)
- --------------------------------------------------------------------------------------------------
Net investment income (0.18)%(a)
- --------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 2.37%(a)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $314
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate 74 %
- --------------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
** Reflects operations from April 13, 1993 (date of initial public investment)
to October 31, 1993.
(a) Computed on an annualized basis.
(b) Cumulative total return.
(c) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, 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 ("Directors") has established three classes of shares,
known as Class C Shares, Class A Shares (formerly, Liberty Shares), and
Investment Shares. This prospectus relates only to the Class C Shares ("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 "Liberty Family Funds."
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 communication
utilities;
Stock and Bond Fund, Inc. (Class C Shares), providing relative safety of
capital with the possibility of long-term growth of capital and income
through equity securities, convertible securities, debt securities, and
short-term obligations; and
Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities.
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.; 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.; and
Prime Cash Series; and Stock and Bond Fund, Inc. 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 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 investment 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 investment 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 Fund's investment 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 Corporation or Fitch Investors Service, Inc., or Baa or
higher by Moody's Investors' Service, Inc.) are high-yield, high-risk 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 Statement of
Additional Information.
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 investment adviser of the Fund, 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 acceptable
investments on a when-issued or delayed delivery basis. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
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 investment 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 investment adviser to the Fund 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 investment 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
investment 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.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held.
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; or
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; or
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.
OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including any affiliation with
Federated Advisers, Federated Investors, Federated Securities Corp., Federated
Administrative Services, Inc., and the Funds described in the Statement of
Additional Information.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE CORPORATION DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman
Federated Investors Tower Director and Trustee, Federated Advisers, Federated
Pittsburgh, PA Management, and Federated Research; Director, AEtna
Life and Casualty Company; Chief Executive Officer
and Director, Trustee, or Managing General Partner
of the Funds; formerly, Director, The Standard Fire
Insurance Company. Mr. Donahue is the father of J.
Christopher Donahue, President and Director of the
Corporation.
John T. Conroy, Jr. Director President, Investment Properties Corporation;
Wood/IPC Senior Vice-President, John R. Wood and Associates,
Commercial Department Inc., Realtors; President, Northgate Village
John R. Wood and Development Corporation; General Partner or Trustee
Associates, Inc., Realtors in private real estate ventures in Southwest
3255 Tamiami Trail North Florida; Director, Trustee, or Managing General
Naples, FL Partner of the Funds; formerly, President, Naples
Property Management, Inc..
William J. Copeland Director Director and Member of the Executive Committee,
One PNC Plaza Michael Baker, Inc.; Director, Trustee, or Managing
23rd Floor General Partner of the Funds; formerly, Vice
Pittsburgh, PA Chairman and Director, PNC Bank, N.A. and PNC Bank
Corp. and Director, Ryan Homes, Inc.
J. Christopher Donahue* President and President and Trustee, Federated Investors;
Federated Investors Tower Director Trustee, Federated Advisers, Federated Management,
Pittsburgh, PA and Federated Research; President and Director,
Federated Administrative Services, Inc.; 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 Director Attorney-at-law; Director, The Emerging Germany
571 Hayward Mill Road Fund, Inc.; Director, Trustee, or Managing General
Concord, MA Partner of the Funds; formerly, Director, Blue
Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist,
3471 Fifth Avenue Presbyterian and Montefiore Hospitals; Clinical
Suite 1111 Professor of Medicine and Trustee, University of
Pittsburgh, PA Pittsburgh; Director, Trustee, or Managing General
Partner of the Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty;
5916 Penn Mall Director, Eat'N Park Restaurants, Inc., and
Pittsburgh, PA Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A., Western
Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing
Boston, MA General Partner of the Funds; formerly, President,
State Street Bank and Trust Company, State Street
Boston Corporation, and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty;
5916 Penn Mall Chairman, Meritcare, Inc.; Director, Eat'N Park
Pittsburgh, PA Restaurants, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management
1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for
University of Pittsburgh International Peace; RAND Corporation; Online
Pittsburgh, PA 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 Director Public relations/marketing consultant; Director,
4905 Bayard Street Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated
Federated Investors Tower Investors; Chairman and Director, Federated
Pittsburgh, PA Securities Corp.; President or Vice President of
the Funds; Director or Trustee of some of the
Funds.
Edward C. Gonzales Vice President Vice President, Treasurer, and Trustee, Federated
Federated Investors Tower and Treasurer Investors; Vice President and Treasurer, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated
Research; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Chairman,
Treasurer, and Director, Federated Administrative
Services, Inc.; Trustee or Director of some of the
Funds; Vice President and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and
Federated Investors Tower and Secretary Trustee, Federated Investors; Vice President,
Pittsburgh, PA Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research;
Executive Vice President, Secretary, and Director,
Federated Administrative Services, Inc.; Director
and Executive Vice President, Federated Securities
Corp.; Vice President and Secretary of the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors;
Federated Investors Tower Executive Vice President, Federated Securities
Pittsburgh, PA Corp.; President and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice
President of the Funds; Director, Trustee, or
Managing General Partner of the Funds; formerly,
Vice President, The Standard Fire Insurance Company
and President of its Federated Research
Division.
</TABLE>
*This Director is deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
\Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Directors 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 (the "Adviser"), subject to direction by the
Directors. The Adviser continually conducts investment research and supervision
for the Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .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.
Gregory M. Melvin has been the Fund's portfolio manager since December,
1989. 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.
/R>
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 PLAN. Pursuant to the provisions of a distribution plan adopted in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "Plan"), Shares will pay an amount computed at an annual rate of .75% of
the average daily net asset value of Shares to finance any activity which is
principally intended to result in the sale of Shares.
The distributor may select financial institutions (such as a broker/dealer or
bank) to provide sales support services as agents for their clients or customers
who beneficially own Shares. Financial institutions will receive fees from the
distributor 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 distributor.
The Fund's Plan is a compensation type plan. As such, the Fund makes no payments
to the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, including
interest, carrying, or other financing charges in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor may
be able to recover such amounts or may earn a profit from future payments made
by the Fund under the Plan.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the 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 laws.
The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan.
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 charge 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 redemption
fee.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") with respect to the Class C Shares. Under the Services
Plan, financial institutions will enter into shareholder service agreements with
the Fund to provide administrative support services to their customers who from
time to time may be owners of record or beneficial owners of Class C Shares. In
return for providing these support services, a financial institution may receive
payments from the Fund at a rate not exceeding .25% of the average daily net
assets of the Class C Shares beneficially owned by the financial institution's
customers for whom it is holder of record or with whom it has a servicing
relationship. These administrative services may include, but are not limited to,
the following functions: providing office space, equipment, telephone
facilities, and various personnel, including clerical, supervisory, and
computer, 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 regarding the Fund; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), P.O. Box
8604, Boston, Massachusetts 02266-8604, 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, 2101 L Street, N.W., Washington, DC 20037.
INDEPENDENT AUDITORS. Independent auditing services are provided by Ernst &
Young, Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND CLASS C SHARES
Holders of each class of shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Shares as a
class are expenses under the Fund's Shareholder Services Plan and Distribution
Plan. However, the Directors reserve the right to allocate certain other
expenses to holders of Shares as it deems appropriate ("Class Expenses"). In any
case, Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Shares; fees
under the Fund's Shareholder Services Plan, printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Directors' fees incurred as
a result of issues relating solely to Shares.
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 Investment Shares and 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 Investment Series Funds, Inc., P.O. Box 8604, Boston,
Massachusetts 02266-8604.
Orders by mail are considered received after payment by check is converted by
State Street Bank into federal funds. This is generally the next business day
after State Street 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: 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 charge, 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, including prototype retirement plans, contact
the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class 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 redemption fee. 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
contigent 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
of at least $1,500. 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.
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 Boston Financial Data
Services, Inc., Attention: Federated Division, P.O. Box 8604, Boston,
Massachusetts 02266-8604.
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," 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 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. For additional
information, see "Other Payments to Financial Institutions."
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."
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check or through the Automated Clearing House, the
proceeds from the redemption of those Shares are not available, and the Shares
may not be exchanged, until the Fund or its agents are reasonably certain that
the purchase check has cleared, which could take up to ten calendar days.
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 of November 29, 1993, Liberty Bank & Trust, custodian for
IRM Retirement Plans, may be deemed to control the Fund due to its record
ownership of Investment Shares of the Fund.
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,
Investment Shares, and Class A Shares. Because Class C Shares are subject to a
shareholder services fee and a 12b-1 fee, total return and yield for Investment
Shares may exceed that of Class C Shares for the same period. Because Class A
Shares are subject to a lower 12b-1 fee than are Class C Shares and no
shareholder services plan fee, total return and yield for Class A Shares may
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 are sold to customers of financial institutions with a maximum
sales charge of 4.50% 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.
Investment Shares are sold to accounts for which financial institutions act in
an agency capacity at net asset value plus a maximum sales charge of 5.75% and
are distributed without a 12b-1 fee, a shareholder services fee, a redemption
fee or a contingent deferred sales charge. Investment Shares are subject to a
minimum initial investment of $500, except for retirement accounts, in which
case the minimum initial investment is $50.
The amount of dividends payable to holders of Investment Shares will generally
exceed that of Class C Shares and of Class A Shares by the difference between
Class Expenses borne by shares of each respective class.
The stated advisory fee is the same for all classes of the Fund.
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to Report of Ernst & Young, Independent Auditors, on page 36.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
1993 1992*** 1991 1990 1989**
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.84 $ 12.00 $ 9.11 $ 9.97 $ 10.00
- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------
Net investment income 0.13 0.12 0.31 0.32 0.03
- -------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 1.71 (0.18) 2.91 (0.86) (0.04)
- ------------------------------------------------------- ------------- ----------- --------- --------- -----------
Total from investment operations 1.84 (0.06) 3.22 (0.54) (0.01)
- -------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------
Dividends to shareholders from net investment income (0.14) (0.10) (0.30) (0.32) (0.02)
- -------------------------------------------------------
Distributions to shareholders from net realized gain
on investment transactions (0.16) -- (0.02) -- --
- -------------------------------------------------------
Distributions in excess of net investment income -- -- (0.01)(a) -- --
- ------------------------------------------------------- ------------- ----------- --------- --------- -----------
TOTAL DISTRIBUTIONS (0.30 ) (0.10) (0.33) (0.32) (0.02)
- ------------------------------------------------------- ------------- ----------- --------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 13.38 $ 11.84 $ 12.00 $ 9.11 $ 9.97
- ------------------------------------------------------- ------------- ----------- --------- --------- -----------
TOTAL RETURN* 15.70% -0.53%(c) 35.68% -5.43% -0.02%(c)
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------
Expenses 1.00% 1.00%(b) 1.00% 1.00% 1.19%(b)
- -------------------------------------------------------
Net investment income 0.98% 1.28%(b) 2.73% 3.54% 4.21%(b)
- -------------------------------------------------------
Expense waiver/reimbursement (d) 2.37% 1.50%(b) 1.50% 1.50% 0.78%(b)
- -------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets, end of period (000 omitted) $14,836 $18,161 $13,513 $7,484 $5,525
- -------------------------------------------------------
Portfolio turnover rate 74 % 29 % 57% 83% 0 %
- -------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** 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.
(a) Distributions in excess of net investment income for the period ended
December 31, 1991 were a result of certain book and tax timing differences.
These distributions did not represent a return of capital for federal
income tax purposes.
(b) Computed on an annualized basis.
(c) Cumulative total return.
(d) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(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 Report of Ernst & Young, Independent Auditors on page 36.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
<S> <C> <C>
1993 1992**
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.84 $ 12.00
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------
Net investment income 0.09 0.11
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.71 (0.18)
- -------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 1.80 (0.07)
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.10) (0.09)
- --------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.16) --
- -------------------------------------------------------------------------------------------- --------- -----------
Total distributions (0.26) (0.09 )
- -------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 13.38 $ 11.84
- -------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN* 15.34% -0.61 %(b)
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Expenses 1.25% 1.17 %(a)
- --------------------------------------------------------------------------------------------
Net investment income 0.73% 1.19 %(a)
- --------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 2.37% 1.33 %(a)
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 11,609 $ 6,540
- --------------------------------------------------------------------------------------------
Portfolio turnover rate 74% 29 %
- --------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from January 16, 1992 (date of initial
public investment) to October 31, 1992.
(a) Computed on an annualized basis.
(b) Cumulative total return.
(c) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--79.6%
<C> <S> <C>
- --------------------------------------------------------------------------------------------------
AUTOMOTIVE PARTS--3.4%
-----------------------------------------------------------------------------------
40,000 Allen Group, Inc. $ 900,000
----------------------------------------------------------------------------------- --------------
BANKING & FINANCE--10.0%
-----------------------------------------------------------------------------------
30,000 MBNA Corp. 1,023,750
-----------------------------------------------------------------------------------
15,000 NationsBank Corp. 699,375
-----------------------------------------------------------------------------------
36,500 AT&T Capital Corp. 953,562
----------------------------------------------------------------------------------- --------------
Total 2,676,687
----------------------------------------------------------------------------------- --------------
BASIC INDUSTRY--6.6%
-----------------------------------------------------------------------------------
20,000 Cleveland-Cliffs, Inc. 720,000
-----------------------------------------------------------------------------------
15,000 Harsco Corp. 630,000
-----------------------------------------------------------------------------------
15,000 Medusa Corp. 412,500
----------------------------------------------------------------------------------- --------------
Total 1,762,500
----------------------------------------------------------------------------------- --------------
CAPITAL GOODS--17.6%
-----------------------------------------------------------------------------------
35,000 Alliant Techsystems, Inc.** 1,019,375
-----------------------------------------------------------------------------------
15,000 Dover Corp. 862,500
-----------------------------------------------------------------------------------
30,000 Genlyte Group, Inc.** 112,500
-----------------------------------------------------------------------------------
25,000 Greenfield Industries, Inc. 412,500
-----------------------------------------------------------------------------------
30,000 Kenetech Corp.** 468,750
-----------------------------------------------------------------------------------
25,000 MagneTek, Inc.** 378,125
-----------------------------------------------------------------------------------
10,000 Sensormatic Electronics Corp. 465,000
-----------------------------------------------------------------------------------
10,000 Stewart & Stevenson Services, Inc. 452,500
-----------------------------------------------------------------------------------
25,000 Valence Technology, Inc.** 531,250
----------------------------------------------------------------------------------- --------------
Total 4,702,500
----------------------------------------------------------------------------------- --------------
CONSUMER GOODS--RETAIL--6.8%
-----------------------------------------------------------------------------------
25,000 Blockbuster Entertainment Corp. 709,375
-----------------------------------------------------------------------------------
75,000 Service Merchandise, Inc.** 750,000
-----------------------------------------------------------------------------------
25,000 Showbiz Pizza Time, Inc.** 362,500
----------------------------------------------------------------------------------- --------------
Total 1,821,875
----------------------------------------------------------------------------------- --------------
CONSUMER PRODUCTS--13.1%
-----------------------------------------------------------------------------------
15,000 Dial Corp. $ 575,625
-----------------------------------------------------------------------------------
75,000 Dr. Pepper/7-Up Holding Co.** 1,565,625
-----------------------------------------------------------------------------------
75,000 ADT, Limited** 675,000
-----------------------------------------------------------------------------------
10,000 Nike, Inc. 483,750
-----------------------------------------------------------------------------------
10,000 Starter Corp.** 202,500
----------------------------------------------------------------------------------- --------------
Total 3,502,500
----------------------------------------------------------------------------------- --------------
ENERGY--2.3%
-----------------------------------------------------------------------------------
25,000 Valero Energy Corp. 628,125
----------------------------------------------------------------------------------- --------------
HEALTH CARE--12.5%
-----------------------------------------------------------------------------------
20,000 Genentech, Inc.** 922,500
-----------------------------------------------------------------------------------
25,000 Genetics Institute, Inc.** 1,062,500
-----------------------------------------------------------------------------------
40,000 National Health Laboratories, Inc. 545,000
-----------------------------------------------------------------------------------
15,000 Spacelabs Medical, Inc.** 356,250
-----------------------------------------------------------------------------------
10,000 U.S. Healthcare, Inc. 463,750
----------------------------------------------------------------------------------- --------------
Total 3,350,000
----------------------------------------------------------------------------------- --------------
INSURANCE--2.0%
-----------------------------------------------------------------------------------
15,000 Travelers Corp. 528,750
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--3.1%
-----------------------------------------------------------------------------------
15,000 American President Companies, Ltd. 832,500
----------------------------------------------------------------------------------- --------------
WASTE DISPOSAL--2.2%
-----------------------------------------------------------------------------------
150,000 Chambers Development, Inc.** 600,000
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $17,710,139) 21,305,437
----------------------------------------------------------------------------------- --------------
<CAPTION>
PRINCIPAL
AMOUNT
OR
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
CONVERTIBLE SECURITIES--15.5%
- --------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--9.0%
-----------------------------------------------------------------------------------
$ 3,000,000 Coleman Worldwide Corp. LYON's, 5/27/2013 $ 825,000
-----------------------------------------------------------------------------------
400,000 Mattel, Inc., Conv. Deb., 8.00%, 3/15/2001 728,000
-----------------------------------------------------------------------------------
20,000 Sun America Inc. $2.68 PERCs, 3/15/2001 850,000
----------------------------------------------------------------------------------- --------------
Total 2,403,000
----------------------------------------------------------------------------------- --------------
HEALTH CARE--2.6%
-----------------------------------------------------------------------------------
1,000,000 Roche Holdings Inc. 4.75% LYON, 9/23/2008 523,750
-----------------------------------------------------------------------------------
974 Schering-Plough Corp., Warrant Units, 12/2/96** 176,294
----------------------------------------------------------------------------------- --------------
Total 700,044
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--3.9%
-----------------------------------------------------------------------------------
800,000 Greyhound Lines, Inc., Conv. Deb., 8.56% 3/31/2007 1,048,000
----------------------------------------------------------------------------------- --------------
TOTAL CONVERTIBLE SECURITIES (IDENTIFIED COST, 3,553,444) 4,151,044
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--2.6%
- --------------------------------------------------------------------------------------------------
685,000 J.P. Morgan Securities, Inc., 2.99%, dated 10/29/93, due 11/1/93
(at amortized cost) (Note 2B) 685,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $21,948,583) $ 26,141,481\
----------------------------------------------------------------------------------- --------------
</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.
**_ Non-income producing.
\_ The cost of investments for federal tax purposes amounts to $21,948,583. The
net unrealized appreciation of investments on a federal tax basis amounts to
$4,192,898, which is comprised of $5,755,663 appreciation and $1,562,765
depreciation at October 31, 1993.
Note: The categories of investments are shown as a percentage of net assets
($26,758,883) at October 31, 1993.
LYON--Liquid Yield Option Note
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments, at value (Notes 2A and 2B) (identified and tax cost, $21,948,583) $ 26,141,481
- ---------------------------------------------------------------------------------------------------
Cash 5,998
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 528,442
- ---------------------------------------------------------------------------------------------------
Receivable for capital stock sold 83,104
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 21,836
- ---------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 434
- --------------------------------------------------------------------------------------------------- -------------
Total assets 26,781,295
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for capital stock redeemed $ 5,497
- ----------------------------------------------------------------------------------------
Accrued expenses 16,915
- ---------------------------------------------------------------------------------------- ---------
Total liabilities 22,412
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 1,999,623 shares of capital stock outstanding $ 26,758,883
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 22,241,370
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,192,898
- ---------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 313,497
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income 11,118
- --------------------------------------------------------------------------------------------------- -------------
Total $ 26,758,883
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE AND REDEMPTION PRICE Per Share:
Investment Shares (net assets of $14,836,418 / 1,108,550 SHARES OF
CAPITAL STOCK OUTSTANDING) $13.38
- --------------------------------------------------------------------------------------------------- -------------
CLASS A SHARES (NET ASSETS OF $11,608,735 / 867,599 SHARES OF CAPITAL STOCK OUTSTANDING) $13.38
- --------------------------------------------------------------------------------------------------- -------------
CLASS C SHARES (NET ASSETS OF $313,730 / 23,474 SHARES OF
CAPITAL STOCK OUTSTANDING) $13.36
- --------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF OFFERING PRICE:
Investment Shares Offering Price Per Share (100/94.25 of $13.38)* $14.20
- --------------------------------------------------------------------------------------------------- -------------
Class A Shares Offering Price Per Share (100/95.50 of $13.38)* $14.01
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* On sales of $10,000 or more, the offering price is reduced as stated under
"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, 1993
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Dividends $ 285,993
- ----------------------------------------------------------------------------------------------------
Interest 225,715
- ---------------------------------------------------------------------------------------------------- -----------
Total investment income (Note 2C) 511,708
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 165,261
- ---------------------------------------------------------------------------------------
Directors fees 5,265
- ---------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 240,157
- ---------------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses 192,808
- ---------------------------------------------------------------------------------------
Fund share registration costs 111,451
- ---------------------------------------------------------------------------------------
Auditing fees 18,067
- ---------------------------------------------------------------------------------------
Legal fees 14,841
- ---------------------------------------------------------------------------------------
Distribution services fees (Note 5) 26,209
- ---------------------------------------------------------------------------------------
Printing and postage 112,187
- ---------------------------------------------------------------------------------------
Insurance premiums 7,662
- ---------------------------------------------------------------------------------------
Taxes 480
- ---------------------------------------------------------------------------------------
Miscellaneous 2,548
- --------------------------------------------------------------------------------------- -----------
Total expenses 896,936
- ---------------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 165,261
- ---------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 5) 446,749 612,010
- --------------------------------------------------------------------------- ---------- -----------
Net expenses 284,926
- ---------------------------------------------------------------------------------------------------- -----------
Net investment income 226,782
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized gain on investment transactions (identified cost basis) 303,564
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation on investments 3,026,413
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 3,329,977
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 3,556,759
- ---------------------------------------------------------------------------------------------------- -----------
</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,
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS: 1993 1992*
- ----------------------------------------------------------------------------------- -------------- -------------
OPERATIONS--
- -----------------------------------------------------------------------------------
Net investment income $ 226,782 $ 205,334
- -----------------------------------------------------------------------------------
Net realized gain on investment transactions ($303,564 and $340,685 net gain,
respectively, as computed for federal income tax purposes) 303,564 293,810
- -----------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 3,026,413 (932,519)
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets resulting from operations 3,556,759 (433,375)
- ----------------------------------------------------------------------------------- -------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Investment Shares (174,344) (132,621)
- -----------------------------------------------------------------------------------
Class A Shares (76,306) (27,448)
- -----------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on investment transactions:
Investment Shares (245,773) --
- -----------------------------------------------------------------------------------
Class A Shares (95,185) --
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets from distributions to shareholders (591,608) (160,069)
- ----------------------------------------------------------------------------------- -------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------------
Proceeds from sale of shares 11,839,537 13,308,632
- -----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 531,548 150,206
- -----------------------------------------------------------------------------------
Cost of shares redeemed (13,278,176) (1,677,459)
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets from Fund share transactions (907,091) 11,781,379
- ----------------------------------------------------------------------------------- -------------- -------------
Change in net assets 2,058,060 11,187,935
- -----------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------
Beginning of period 24,700,823 13,512,888
- ----------------------------------------------------------------------------------- -------------- -------------
End of period (including undistributed net investment
income of $11,118 and $34,986, respectively) $ 26,758,883 $ 24,700,823
- ----------------------------------------------------------------------------------- -------------- -------------
</TABLE>
* Ten months ended October 31, 1992.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end,
management investment company with two portfolios. The financial statements
included herein present only those of Capital Growth Fund (the "Fund"). The
financial statements of the other portfolios 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.
Capital Growth Fund provides three classes of Shares ("Investment Shares" "Class
A Shares" and "Class C Shares"). Class A and Class C Shares are identical in all
respects to Investment Shares except that Class A and Class C Shares are sold
pursuant to a distribution plan ("Plan") adopted in accordance with the
Investment Company Act of 1940 Rule 12b-1. Class A Shares are subject to a
maximum sales load of 4.50%, a 12b-1 fee of 0.25% and may be subject to a
redemption fee but are not subject to a shareholders servicing fee. Class C
Shares are not subject to a sales load but are subject to a 12b-1 fee of 0.75%,
a shareholder servicing fee of 0.25%, and contingent deferred sales charge of
1.00%.
On December 18, 1992, Shareholders of the Fund met and approved the
reorganization of the Fund as a portfolio of Investment Series Funds, Inc., a
Maryland Corporation.
(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 principals.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at last sale
prices reported on national securities exchanges. Unlisted securities or
listed securities for which there were no sales on the valuation date are
generally valued at the mean between bid and asked prices. Short-term
obligations are valued at the mean between bid and asked prices furnished
by an independent pricing service. However, short-term obligations with
maturities of sixty days or less are valued at amortized cost, which
approximates value.
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 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 the value 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 Directors. Risks may arise from
the potential inability of counterparties to honor the terms of a
repurchase agreements. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis and includes discount earned, less
any premium.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, applicable to regulated investment companies and to
distribute to shareholders each year substantially, all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities 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--Costs incurred by the Fund with respect to registration
of its shares in its first fiscal year, excluding the initial expenses of
registering the shares, have been deferred and are being amortized using
the straight-line method over a period of five years from the Funds
commencement date.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
(4) CAPITAL STOCK
At October 31, 1993 there were 1,000,000,000 of ($.0001) par value capital stock
authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1993 OCTOBER 31, 1992*
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
INVESTMENT SHARES
Shares outstanding, beginning of period 1,533,399 $ 16,319,992 1,125,747 $ 11,367,082
- ------------------------------------------------------
Shares sold 341,272 4,316,048 484,535 5,894,279
- ------------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares 30,603 380,718 10,536 129,297
- ------------------------------------------------------
Shares redeemed (796,724) (9,811,729) (87,419) (1,070,666)
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Shares outstanding, end of period 1,108,550 $ 11,205,029 1,533,399 $ 16,319,992
- ------------------------------------------------------ ----------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1993 OCTOBER 31, 1992*
<S> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares outstanding, beginning of period 552,251 $ 6,828,469 -- $ --
- ----------------------------------------------------------
Shares sold 575,342 7,204,386 599,919 7,414,353
- ----------------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares 12,091 150,830 1,714 20,909
- ----------------------------------------------------------
Shares redeemed (272,085) (3,450,895) (49,382) (606,793)
- ---------------------------------------------------------- ---------- -------------- --------- -------------
Shares outstanding, end of period 867,599 $ 10,732,790 552,251 $ 6,828,469
- ---------------------------------------------------------- ---------- -------------- --------- -------------
</TABLE>
* For the ten months ended October 31, 1992.
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1993**
<S> <C> <C>
SHARES AMOUNT
CLASS C SHARES
Shares outstanding, beginning of period -- $ --
- ---------------------------------------------------------------------------------
Shares sold 24,661 319,103
- ---------------------------------------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares -- --
- ---------------------------------------------------------------------------------
Shares redeemed (1,187) (15,552)
- --------------------------------------------------------------------------------- --------------- --------------
Shares outstanding, end of period 23,474 $ 303,551
- --------------------------------------------------------------------------------- --------------- --------------
</TABLE>
** For the period from April 13, 1993 (date of initial public investment) to
October 31, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers ("Adviser"), the Fund's investment adviser, receives for its
services an annual investment advisory fee equal to (a) 0.55% of the average
daily net assets of the Fund, and (b) 4.5% of the gross income of the Fund. The
Adviser has voluntarily agreed to waive a portion or all of its fee and
reimburse the Fund a portion of its annual operating expenses. The Adviser can
terminate this voluntary waiver and reimbursement at any time at its sole
discretion. For the period ended October 31, 1993, the investment advisory fee
amounted to $165,261, all of which was voluntarily waived. In addition, the
Adviser voluntarily reimbursed $446,749 of the Fund's other operating expenses.
Organization expenses ($13,190) and start-up administrative service expenses
($92,451) were borne initially by the Adviser. The Fund has agreed to pay the
Adviser, at an annual rate of .005 of 1% of average daily net assets and .01 of
1% of average daily net assets for organization expenses and start-up
administrative service expenses, respectively, until expenses borne by the
Adviser are reimbursed. This commitment will expire five years from the date the
Corporation's portfolio became effective. For the period ended October 31, 1993,
the Fund paid the Adviser $736 for organization expenses and $1,471 for start-up
administrative services pursuant to this agreement.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Certain of the Officers and Directors of
the Fund are Officers and Directors of the above corporations.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp., the principal distributor, from the assets of the Class A and Class C
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Class A and Class C Shares. The Plan provides that
the Fund may incur distribution expenses of up to 0.25 of 1% for Class A Shares
and 0.75 of 1% of Class C Shares of the average daily net assets, annually, to
pay commissions, maintenance fees, and to compensate FSC. For the period ended
October 31, 1993, FSC earned $25,677 and $532 for Class A and Class C Shares,
respectively.
CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------
(6) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities for the
fiscal year ended October 31, 1993 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 18,804,799
- -------------------------------------------------------------------------------------------------- --------------
SALES AND MATURITIES $ 20,808,325
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
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 the Investment Series Funds, Inc.) as of October 31, 1993, and the
related statement of operations for the year then ended, the statement of
changes in net assets for the year ended October 31, 1993 and for the ten months
ended October 31, 1992 and the financial highlights (see pages 2, 23 and 24 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 gain
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, 1993, by correspondence with the custodian. 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 of Investment Series Funds, Inc. at October 31, 1993, the
results of its operations for the year then ended, the changes in its net assets
for the year ended October 31, 1993 and for the ten months ended October 31,
1992, and the financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
December 10, 1993
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 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young 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, 1993
FEDERATED SECURITEIS CORP.
[LOGO]
DISTRIBUTOR
A Subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
1102503A-C (12/93)
CAPITAL GROWTH FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
INVESTMENT SHARES
PROSPECTUS
The Investment 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.
This prospectus contains the information you should read and know before you
invest in Investment Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Combined Statement of Additional Information for
Investment Shares, Class A Shares (formerly, Liberty Shares), and Class C Shares
dated December 31, 1993, 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.
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.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES 2
- ------------------------------------------------------
INVESTMENT FAMILY OF FUNDS 3
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 4
Corporate Debt Obligations 4
Repurchase Agreements 4
Restricted and Illiquid Securities 5
When-Issued and Delayed
Delivery Transactions 5
Foreign Securities 5
Investing in Securities of
Other Investment Companies 5
Put and Call Options 6
Risks 6
Lending of Portfolio Securities 6
Portfolio Turnover 6
Investment Limitations 6
INVESTMENT SERIES FUNDS, INC. INFORMATION 7
- ------------------------------------------------------
Management of the Corporation 7
Board of Directors 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 7
Distribution of Investment Shares 8
Administrative Service Arrangements 8
Administration of the Fund 9
Administrative Services 9
Custodian 9
Transfer Agent and
Dividend Disbursing Agent 9
Legal Counsel 9
Independent Auditors 9
Expenses of the Fund and
Investment Shares 9
Brokerage Transactions 9
NET ASSET VALUE 10
- ------------------------------------------------------
INVESTING IN INVESTMENT SHARES 10
- ------------------------------------------------------
Share Purchases 10
Through a Financial Institution 10
Directly from the Distributor 10
Minimum Investment Required 11
What Shares Cost 11
Dealer Concession 12
Reducing the Sales Charge 12
Quantity Discounts and
Accumulated Purchases 12
Letter of Intent 12
Reinvestment Privilege 13
Concurrent Purchases 13
Systematic Investment Program 13
Subaccounting Services 13
Certificates and Confirmations 13
Dividends and Distributions 13
Retirement Plans 14
EXCHANGE PRIVILEGE 14
- ------------------------------------------------------
Reduced Sales Charge 14
Requirements for Exchange 14
Tax Consequences 14
Making an Exchange 15
Telephone Instructions 15
REDEEMING INVESTMENT SHARES 15
- ------------------------------------------------------
Through a Financial Institution 15
Directly from the Fund 16
By Telephone 16
By Mail 16
Signatures 16
Receiving Payment 17
Systematic Withdrawal Program 17
Redemption Before Purchase
Instruments Clear 17
Accounts with Low Balances 17
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Pennsylvania Corporate and Personal
Property Taxes 18
PERFORMANCE INFORMATION 18
- ------------------------------------------------------
OTHER CLASSES OF SHARES 19
- ------------------------------------------------------
Financial Highlights--Class A Shares 20
Financial Highlights--Class C Shares 21
FINANCIAL STATEMENTS 22
- ------------------------------------------------------
REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 32
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--INVESTMENT SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... 5.75%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................... None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds as applicable)................................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
ANNUAL INVESTMENT SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)......................................................................... 0.00%
12b-1 Fee................................................................................................. None
Other Expenses (after expense reimbursement).............................................................. 1.00%
Total Investment Shares Operating Expenses (2)............................................................ 1.00%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser 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 or losses.
(2) The Total Investment Shares Operating Expenses would have been 3.37% absent
the voluntary waiver of the management 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 INVESTMENT SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INVESTMENT SHARES" AND "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. As noted in the table above, the Fund charges
no redemption fees for Investment Shares.............................. $67 $88 $110 $173
</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
Investment Shares of the Fund. The Fund also offers two additional classes of
shares called Class A Shares and Class C Shares. Investment Shares, Class A
Shares, and Class C Shares are all subject to certain of the same expenses.
However, Class A Shares are subject to a maximum sales load of 4.50%, a 12b-1
fee of 0.25% and may be subject to a redemption fee but are not subject to a
shareholder servicing fee. Class C Shares are not subject to a sales load but
are subject to a 12b-1 fee of 0.75%, a shareholder servicing fee of 0.25%, and a
contingent deferred sales charge of 1.00%. See "Other Classes of Shares."
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors' on page
32.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1993 1992*** 1991 1990 1989**
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.84 $ 12.00 $ 9.11 $ 9.97 $ 10.00
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.13 0.12 0.31 0.32 0.03
- ----------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.71 (0.18) 2.91 (0.86) (0.04)
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total from investment operations 1.84 (0.06) 3.22 (0.54) (0.01)
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.14) (0.10) (0.30) (0.32) (0.02)
- ----------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.16) -- (0.02) -- --
- ----------------------------------------------------------
Distributions in excess of net investment income -- -- (0.01)(a) -- --
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
TOTAL DISTRIBUTIONS (0.30) (0.10) (0.33) (0.32 ) (0.02 )
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 13.38 $ 11.84 $ 12.00 $ 9.11 $ 9.97
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN* 15.70% -0.53%(c) 35.68% -5.43% -0.02%(c)
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 1.00% 1.00%(b) 1.00% 1.00% 1.19%(b)
- ----------------------------------------------------------
Net investment income 0.98% 1.28%(b) 2.73% 3.54% 4.21%(b)
- ----------------------------------------------------------
Expense waiver/reimbursement (d) 2.37% 1.50%(b) 1.50% 1.50% 0.78%(b)
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $14,836 $18,161 $13,513 $7,484 $5,525
- ----------------------------------------------------------
Portfolio turnover rate 74 % 29 % 57 % 83 % 0 %
- ----------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** 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.
(a) Distributions in excess of net investment income for the period ended
December 31, 1991 were a result of certain book and tax timing differences.
These distributions did not represent a return of capital for federal
income tax purposes.
(b) Computed on an annualized basis.
(c) Cumulative total return.
(d) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(See Notes which are an integral part of the financial statements)
INVESTMENT FAMILY OF FUNDS
- --------------------------------------------------------------------------------
The Investment Shares of the Fund are a member of a family of mutual funds,
collectively known as the Investment Family of Funds. The other funds in the
family are: High Quality Stock Fund, U.S. Government Bond Fund, and Municipal
Securities Income Fund, all portfolios of Investment Series Trust; Money Market
Management, a money market mutual fund; and Tax-Free Instruments Trust, a
tax-free money market mutual fund. All are advised by the same investment
adviser as the Fund.
The Investment 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 six investment vehicles, and by providing the
investment services of proven, professional investment advisers. Information on
the Investment Family of Funds and an application form may be obtained by
contacting the Corporation.
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 ("Directors") has established three classes of shares,
Investment Shares, Class A Shares (formerly, Liberty Shares), and Class C
Shares. This prospectus relates only to Investment Shares ("Shares") of the
Fund.
A minimum initial investment of $500 is required, except for retirement plans,
in which case the minimum initial investment is $50. Shares are sold at net
asset value plus a sales charge and are redeemed at net asset value.
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 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 investment 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 investment 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 Fund's investment 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 Corporation or Fitch Investors Service, Inc., or Baa or
higher by Moody's Investors Service, Inc.) are high-yield, high-risk 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 Statement of
Additional Information.
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 investment adviser of the Fund, 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 acceptable
investments on a when-issued or delayed delivery basis. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous.
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 investment 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 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 investment adviser to the Fund 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 investment 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 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
investment 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.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held.
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; or
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; or
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 (the "Adviser"), subject to direction by the
Directors. The Adviser continually conducts investment research and supervision
for the Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .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 approximately 3,500 client
institutions nationwide. Through these same client institutions, individual
shareholders also have access to this same level of investment expertise.
Gregory M. Melvin has been the Fund's portfolio manager since December,
1989. 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.
DISTRIBUTION OF INVESTMENT 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.
ADMINISTRATIVE SERVICE ARRANGEMENTS. The distributor may select brokers and
dealers to provide distribution and administrative services. The distributor may
also select administrators to provide administrative services. These
administrative services include, but are not limited to, distributing
prospectuses and other information, providing accounting assistance and
communicating or facilitating purchases and redemptions of Shares.
Brokers, dealers, and administrators will receive fees from the distributor
based upon Shares owned by their clients or customers. The fees are calculated
as a percentage of the average aggregate net asset value of shareholder accounts
during the period for which the brokers, dealers, and administrators provide
services. Any fees paid for these services by the distributor will be reimbursed
by the Adviser.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc. provides these at approximate cost.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), P.O. Box
8606, Boston, Massachusetts 02266-8606, 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, 2101 L Street, N.W., Washington, DC 20037.
INDEPENDENT AUDITORS. Independent auditing services are provided by Ernst &
Young, Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND INVESTMENT SHARES
Holders of each class of shares pay their allocable portion of Fund and
Corporation expenses.
The Corporation expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Corporation and
continuing its existence; registering the Corporation with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of meetings of
Directors; legal fees of the Corporation; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The Fund expenses for which holders of Shares each pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise from time to time.
In addition, the Directors reserve the right to allocate certain other expenses
to holders of Shares as it deems appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of Shares; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the Securities and Exchange Commission and to state securities
commissions; expenses related to administrative personnel and services as
required to support holders of Shares; legal fees relating solely to Shares; and
Directors' fees incurred as a result of issues relating solely to Shares.
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 Investment Shares in the market
value of all securities and other assets of the Fund, subtracting the interest
of the Investment Shares in the liabilities of the Fund and those attributable
to the Investment Shares, and dividing the remainder by the total number of
Investment Shares outstanding. The net asset value for Investment Shares may
differ from that of Class A Shares and 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 INVESTMENT 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. 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.
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--Investment Shares;
and
mail both to Investment Series Funds, Inc., P.O. Box 8606, Boston,
Massachusetts 02266-8606.
Orders by mail are considered received after payment by check is converted by
State Street Bank into federal funds. This is generally the next business day
after State Street Bank receives the check.
To purchase Shares of the Fund 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: State Street Bank and Trust Company, Boston,
Massachusetts 02105; Attention: EDGEWIRE; For Credit to: Capital Growth Fund--
Investment 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 plan, in which case the minimum initial investment is $50. Subsequent
investments must be in amounts of at least $100, except for retirement plans
which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
<S> <C> <C>
Less than $10,000 5.75% 6.10%
$10,000 but less than $50,000 4.75% 4.98%
$50,000 but less than $100,000 4.25% 4.43%
$100,000 but less than $250,000 3.75% 3.89%
$250,000 but less than $500,000 3.00% 3.09%
$500,000 or more 1.50% 1.52%
</TABLE>
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.
Shareholders in Investment Series Trust on September 1, 1989, individuals
investing life insurance proceeds through insurance benefit programs as approved
by the Corporation, qualified corporate employee benefit plans as approved by
the Corporation and members of affinity groups that have signed administrative
agreements with the distributor, are exempt from sales charges.
Additionally, no sales charge is imposed on Shares purchased through a financial
institution on behalf of a participant in a MemberBank Services retirement plan
or program. However, investors who purchase Shares through a financial
institution may be charged service or administrative fees by that institution.
When Shares are purchased through financial institutions which charge a service
or administrative fee, this prospectus should be read together with any such
agreement with regard to the services provided, the fees charged for those
services, and any restrictions or limitations imposed.
DEALER CONCESSION. For sales of Shares, a dealer will normally receive the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor may, in its
sole discretion, pay certain dealers all or part of the portion of the sales
charge it retains. If accepted by the dealer, such additional payments will be
predicated upon the amount of Fund shares sold. The sales charge for Shares sold
other than through registered broker/dealers will be retained by Federated
Securities Corp.
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Shares through:
quantity discounts and accumulated purchases;
a letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made in all funds in the Investment Family of Funds on the same day by the
investor, his spouse, and his children under age 21 when it calculates the sales
charge. To receive the sales charge 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 charge on
the additional purchase according to the schedule now in effect would be 3.75%,
not 4.75%.
To receive the sales charge 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 reduce the sales charge after it confirms the
purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $250,000 of
shares of any fund in the Investment Family of Funds over the next 13 months,
the sales charge may be reduced by signing a letter of intent to that effect.
This letter of intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold 5.75% of the total amount intended to be
purchased in escrow (in Shares) until such purchase is completed.
The 5.75% held in escrow will, at the expiration of the 13-month period, be
applied to the applicable sales charge as designated in the chart above, with
the balance of the escrowed Shares being deposited into the shareholder's
account.
This letter of intent will not obligate the shareholder to purchase the proposed
value of Shares, but if he or she does, each purchase during the period will be
at the sales charge applicable to the total amount intended to be purchased.
This letter may be dated as of a prior date to include any purchases made within
the past 90 days toward the dollar fulfillment of the letter of intent. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If shares in a fund in the Investment Family of Funds
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 charge. 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 charge. If the shareholder redeems his Shares in the Fund,
there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Investment Family of Funds, the purchase price of which includes a
sales charge. For example, if a shareholder concurrently invested $30,000 in one
of the funds which includes a sales charge, and $70,000 in this Fund, the sales
charge would be calculated based on a $100,000 investment.
To receive this sales charge 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 reduce the sales charge
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 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 charge. A shareholder
may apply for participation in this program through his financial institution.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts with the Fund and to
provide the recordkeeping for their own customers' accounts. Certain
institutions, however, may choose to use the Fund's transfer agent for
recordkeeping services. The transfer agent charges a fee based on the level of
recordkeeping services provided, which may be passed along to the shareholder.
The institution may charge other fees which may be related to the ownership of
Fund Shares. This prospectus should, therefore, be read together with any
agreement, or documents relating thereto, between the customer and the
institution with regard to the services provided, the fees charged for those
services, and any restrictions and limitations imposed, including minimum
investments. In certain instances, the Fund may reimburse brokers or dealers for
subaccounting services which they perform.
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 by the shareholder of record 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. Unless shareholders
request cash payments by writing to the dividend disbursing agent, 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 charge.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans or for
an IRA account. For further details, including prototype retirement plans,
contact the Fund and consult a tax adviser.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Fund shareholders are permitted to exchange all or some
of their Shares for shares in other funds in the Investment Family of Funds (see
"Investment Family of Funds"). These exchanges are made at net asset value plus
the difference between the Fund's sales charge already paid and any sales charge
of the fund into which the Shares are to be exchanged, if higher. Neither the
Fund nor any of the funds in the Investment Family of Funds imposes any
additional fees on exchanges. The exchange privilege does not apply to certain
shares of Money Market Management, Inc. which were acquired in exchange for
shares of funds in the Fortress Investment Program, as explained in the
prospectus for Money Market Management, Inc.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction of the sales
charge, 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
of at least $500. 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.
Further information on the exchange privilege and prospectuses for the
Investment Family of 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 upon the circumstances, a short-term or long-term
capital gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Investment Family of 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 Boston Financial Data Services, Inc.,
Attention: Federated Division, P.O. Box 8606, Boston, Massachusetts 02266-8606.
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 may be 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 INVESTMENT SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
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.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as an
investment dealer or custodian) to request the redemption. Shares will be
redeemed at the net asset value 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 (such as a
registered investment adviser or custodian) 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 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 addition, a shareholder who has chosen the Invest-by-Phone service may redeem
Shares with a net asset value of at least $1,000 and have the proceeds
transmitted electronically to a commercial bank that is an Automated Clearing
House member generally by the second business day after the redemption request.
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.
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.
SYSTEMATIC WITHDRAWAL PROGRAM
If a shareholder's account has a value of at least $10,000, a Systematic
Withdrawal Program may be established whereby automatic redemptions are made
from the account and transferred electronically to any commercial bank, savings
bank, or credit union that is an Automated Clearing House member. 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. Application forms and further information on
this program are available from the Fund. Due to the fact that Shares are sold
with a sales charge, it is not advisable for shareholders to be purchasing
Shares while participating in this program.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When Shares are purchased by check, the proceeds from the redemption of those
Shares are not available, and the Shares may not be exchanged, until the Fund or
its agents are reasonably certain that the purchase check has cleared, which
could take up to ten calendar days.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value of
$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 of November 29, 1993, Liberty Bank & Trust, custodian for
IRM Retirement Plans, may be deemed to control the Fund due to its record
ownership of Investment Shares of the Fund.
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 Investment
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Investment Shares 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 Investment Shares is calculated by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission) earned
by Investment 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 Investment 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 which,
if excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Investment Shares,
Class A Shares, and Class C Shares. Because both Class A Shares and Class C
Shares are subject to different 12b-1 fees, the total return and yield for
Investment Shares may exceed that of Class A Shares and of Class C Shares for
the same period.
From time to time, the Fund may advertise the performance of Investment Shares
using certain reporting services and/or compare the performance of Investment
Shares to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Class A Shares are sold with a maximum sales charge of 4.50% 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.
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 charge. Class C Shares may be subject to a contingent deferred
sales charge of up to 1.00%, as described 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 .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 administrative
services may receive different compensation from one class of shares of the Fund
than from another class of shares. While the distributor may, in addition to
fees paid pursuant to the Rule 12b-1 Plan, pay an administrative fee to a
financial institution or broker for administrative services provided to a class,
such a fee will not be an expense of the class, but will be reimbursed to the
distributor by the investment adviser.
The amount of dividends payable to holders of Investment Shares will generally
exceed that of Class A Shares and of Class C Shares by the difference between
Class Expenses borne by shares of each respective class.
The stated advisory fee is the same for all classes of the Fund.
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to Report of Ernst & Young, Independent Auditors, on page 32.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
<S> <C> <C>
1993 1992**
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.84 $ 12.00
- ---------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------
Net investment income 0.09 0.11
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.71 (0.18)
- --------------------------------------------------------------------------------------- ----------- -----------
Total from investment operations 1.80 (0.07)
- --------------------------------------------------------------------------------------- ----------- -----------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.10) (0.09)
- ---------------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (0.16) --
- --------------------------------------------------------------------------------------- ----------- -----------
TOTAL DISTRIBUTIONS (0.26) (0.09)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.38 $ 11.84
- --------------------------------------------------------------------------------------- ----------- -----------
TOTAL RETURN* 15.34% -0.61%(b)
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------
Expenses 1.25% 1.17%(a)
- ---------------------------------------------------------------------------------------
Net investment income 0.73% 1.19%(a)
- ---------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 2.37% 1.33%(a)
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------
Net assets, end of period (000 omitted)
$11,609 $6,540
- ---------------------------------------------------------------------------------------
Portfolio turnover rate 74 % 29 %
- ---------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or redemption
fee, if applicable.
** Reflects operations for the period from January 16, 1992 (date of initial
public investment) to October 31, 1992.
(a) Computed on an annualized basis.
(b) Cumulative total return.
(c) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to Report of Ernst & Young, Independent Auditors, on page 32.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1993**
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.39
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------
Net investment income (0.01)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.98
- -------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.97
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.36
- -------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 7.83%(b)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 2.00%(a)
- --------------------------------------------------------------------------------------------------
Net investment income (0.18)%(a)
- --------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 2.37%(a)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 314
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate %74
- --------------------------------------------------------------------------------------------------
</TABLE>
* Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
** Reflects operations from April 13, 1993 (date of initial public investment)
to October 31, 1993.
(a) Computed on an annualized basis.
(b) Cumulative total return.
(c) This expense decrease is reflected in both the expense and net investment
income ratios shown above (Note 5).
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1993, which can be obtained
free of charge.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--79.6%
- --------------------------------------------------------------------------------------------------
AUTOMOTIVE PARTS--3.4%
-----------------------------------------------------------------------------------
40,000 Allen Group, Inc. $ 900,000
----------------------------------------------------------------------------------- --------------
BANKING & FINANCE--10.0%
-----------------------------------------------------------------------------------
30,000 MBNA Corp. 1,023,750
-----------------------------------------------------------------------------------
15,000 NationsBank Corp. 699,375
-----------------------------------------------------------------------------------
36,500 AT&T Capital Corp. 953,562
----------------------------------------------------------------------------------- --------------
Total 2,676,687
----------------------------------------------------------------------------------- --------------
BASIC INDUSTRY--6.6%
-----------------------------------------------------------------------------------
20,000 Cleveland-Cliffs, Inc. 720,000
-----------------------------------------------------------------------------------
15,000 Harsco Corp. 630,000
-----------------------------------------------------------------------------------
15,000 Medusa Corp. 412,500
----------------------------------------------------------------------------------- --------------
Total 1,762,500
----------------------------------------------------------------------------------- --------------
CAPITAL GOODS--17.6%
-----------------------------------------------------------------------------------
35,000 Alliant Techsystems, Inc.** 1,019,375
-----------------------------------------------------------------------------------
15,000 Dover Corp. 862,500
-----------------------------------------------------------------------------------
30,000 Genlyte Group, Inc.** 112,500
-----------------------------------------------------------------------------------
25,000 Greenfield Industries, Inc. 412,500
-----------------------------------------------------------------------------------
30,000 Kenetech Corp.** 468,750
-----------------------------------------------------------------------------------
25,000 MagneTek, Inc.** 378,125
-----------------------------------------------------------------------------------
10,000 Sensormatic Electronics Corp. 465,000
-----------------------------------------------------------------------------------
10,000 Stewart & Stevenson Services, Inc. 452,500
-----------------------------------------------------------------------------------
25,000 Valence Technology, Inc.** 531,250
----------------------------------------------------------------------------------- --------------
Total 4,702,500
----------------------------------------------------------------------------------- --------------
CONSUMER GOODS--RETAIL--6.8%
-----------------------------------------------------------------------------------
25,000 Blockbuster Entertainment Corp. 709,375
-----------------------------------------------------------------------------------
75,000 Service Merchandise, Inc.** 750,000
-----------------------------------------------------------------------------------
25,000 Showbiz Pizza Time, Inc.** $ 362,500
----------------------------------------------------------------------------------- --------------
Total 1,821,875
----------------------------------------------------------------------------------- --------------
CONSUMER PRODUCTS--13.1%
-----------------------------------------------------------------------------------
15,000 Dial Corp. 575,625
-----------------------------------------------------------------------------------
75,000 Dr. Pepper/7-Up Holding Co.** 1,565,625
-----------------------------------------------------------------------------------
75,000 ADT, Limited** 675,000
-----------------------------------------------------------------------------------
10,000 Nike, Inc. 483,750
-----------------------------------------------------------------------------------
10,000 Starter Corp.** 202,500
----------------------------------------------------------------------------------- --------------
Total 3,502,500
----------------------------------------------------------------------------------- --------------
ENERGY--2.3%
-----------------------------------------------------------------------------------
25,000 Valero Energy Corp. 628,125
----------------------------------------------------------------------------------- --------------
HEALTH CARE--12.5%
-----------------------------------------------------------------------------------
20,000 Genentech, Inc.** 922,500
-----------------------------------------------------------------------------------
25,000 Genetics Institute, Inc.** 1,062,500
-----------------------------------------------------------------------------------
40,000 National Health Laboratories, Inc. 545,000
-----------------------------------------------------------------------------------
15,000 Spacelabs Medical, Inc.** 356,250
-----------------------------------------------------------------------------------
10,000 U.S. Healthcare, Inc. 463,750
----------------------------------------------------------------------------------- --------------
Total 3,350,000
----------------------------------------------------------------------------------- --------------
INSURANCE--2.0%
-----------------------------------------------------------------------------------
15,000 Travelers Corp. 528,750
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--3.1%
-----------------------------------------------------------------------------------
15,000 American President Companies, Ltd. 832,500
----------------------------------------------------------------------------------- --------------
WASTE DISPOSAL--2.2%
-----------------------------------------------------------------------------------
150,000 Chambers Development, Inc.** 600,000
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $17,710,139) 21,305,437
----------------------------------------------------------------------------------- --------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
CONVERTIBLE SECURITIES--15.5%
- --------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--9.0%
-----------------------------------------------------------------------------------
$ 3,000,000 Coleman Worldwide Corp. LYON's, 5/27/2013 $ 825,000
-----------------------------------------------------------------------------------
400,000 Mattel, Inc., Conv. Deb., 8.00%, 3/15/2001 728,000
-----------------------------------------------------------------------------------
20,000 Sun America Inc. $2.68 PERCs, 3/15/2001 850,000
----------------------------------------------------------------------------------- --------------
Total 2,403,000
----------------------------------------------------------------------------------- --------------
HEALTH CARE--2.6%
-----------------------------------------------------------------------------------
1,000,000 Roche Holdings Inc. 4.75% LYON, 9/23/2008 523,750
-----------------------------------------------------------------------------------
974 Schering-Plough Corp., Warrant Units, 12/2/96** 176,294
----------------------------------------------------------------------------------- --------------
Total 700,044
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--3.9%
-----------------------------------------------------------------------------------
800,000 Greyhound Lines, Inc., Conv. Deb., 8.56%, 3/31/2007 1,048,000
----------------------------------------------------------------------------------- --------------
TOTAL CONVERTIBLE SECURITIES (IDENTIFIED COST, $3,553,444) 4,151,044
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--2.6%
- --------------------------------------------------------------------------------------------------
685,000 J.P. Morgan Securities, Inc., 2.99%, dated 10/29/93, due 11/1/93
(at amortized cost) (Note 2B) 685,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $21,948,583) $ 26,141,481\
----------------------------------------------------------------------------------- --------------
</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.
** Non-income producing.
\ The cost of investments for federal tax purposes amounts to $21,948,583. The
net unrealized appreciation of investments on a federal tax basis amounts to
$4,192,898, which is comprised of $5,755,663 appreciation and $1,562,765
depreciation at October 31, 1993.
($26,758,883) at October 31, 1993.
LYON--Liquid Yield Option Note
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments, at value (Notes 2A and 2B) (identified and tax cost, $21,948,583) $ 26,141,481
- ---------------------------------------------------------------------------------------------------
Cash 5,998
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 528,442
- ---------------------------------------------------------------------------------------------------
Receivable for capital stock sold 83,104
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 21,836
- ---------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 434
- --------------------------------------------------------------------------------------------------- -------------
Total assets 26,781,295
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for capital stock redeemed $ 5,497
- ----------------------------------------------------------------------------------------
Accrued expenses 16,915
- ---------------------------------------------------------------------------------------- ---------
Total liabilities 22,412
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 1,999,623 shares of capital stock outstanding $ 26,758,883
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 22,241,370
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,192,898
- ---------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments 313,497
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income 11,118
- --------------------------------------------------------------------------------------------------- -------------
Total $ 26,758,883
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE AND REDEMPTION PRICE Per Share:
Investment Shares (net assets of $14,836,418 / 1,108,550 SHARES OF
CAPITAL STOCK OUTSTANDING) $13.38
- --------------------------------------------------------------------------------------------------- -------------
CLASS A SHARES (NET ASSETS OF $11,608,735 / 867,599 SHARES OF CAPITAL STOCK OUTSTANDING) $13.38
- --------------------------------------------------------------------------------------------------- -------------
CLASS C SHARES (NET ASSETS OF $313,730 / 23,474 SHARES OF CAPITAL STOCK OUTSTANDING) $13.36
- --------------------------------------------------------------------------------------------------- -------------
COMPUTATION OF OFFERING PRICE:
Investment Shares Offering Price Per Share (100/94.25 of $13.38)* $14.20
- --------------------------------------------------------------------------------------------------- -------------
Class A Shares Offering Price Per Share (100/95.50 of $13.38)* $14.01
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* On sales of $10,000 or more, the offering price is reduced as stated under
"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, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Dividends $ 285,993
- ----------------------------------------------------------------------------------------------------
Interest 225,715
- ---------------------------------------------------------------------------------------------------- -----------
Total investment income (Note 2C) 511,708
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 165,261
- ---------------------------------------------------------------------------------------
Directors fees 5,265
- ---------------------------------------------------------------------------------------
Administrative personnel and services (Note 5) 240,157
- ---------------------------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses 192,808
- ---------------------------------------------------------------------------------------
Fund share registration costs 111,451
- ---------------------------------------------------------------------------------------
Auditing fees 18,067
- ---------------------------------------------------------------------------------------
Legal fees 14,841
- ---------------------------------------------------------------------------------------
Distribution services fees (Note 5) 26,209
- ---------------------------------------------------------------------------------------
Printing and postage 112,187
- ---------------------------------------------------------------------------------------
Insurance premiums 7,662
- ---------------------------------------------------------------------------------------
Taxes 480
- ---------------------------------------------------------------------------------------
Miscellaneous 2,548
- --------------------------------------------------------------------------------------- -----------
Total expenses 896,936
- ---------------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 165,261
- ---------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 5) 446,749 612,010
- --------------------------------------------------------------------------- ---------- -----------
Net expenses 284,926
- ---------------------------------------------------------------------------------------------------- -----------
Net investment income 226,782
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized gain on investment transactions (identified cost basis) 303,564
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation on investments 3,026,413
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 3,329,977
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 3,556,759
- ---------------------------------------------------------------------------------------------------- -----------
</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,
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS: 1993 1992*
- ----------------------------------------------------------------------------------- ------------- -------------
OPERATIONS--
- -----------------------------------------------------------------------------------
Net investment income $ 226,782 $ 205,334
- -----------------------------------------------------------------------------------
Net realized gain on investment transactions ($303,564 and $340,685 net gain,
respectively, as computed for federal income tax purposes) 303,564 293,810
- -----------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments 3,026,413 (932,519)
- ----------------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations 3,556,759 (433,375)
- ----------------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)--
- -----------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Investment Shares (174,344) (132,621)
- -----------------------------------------------------------------------------------
Class A Shares (76,306) (27,448)
- -----------------------------------------------------------------------------------
Dividends to shareholders from net realized gain on investment transactions:
Investment Shares (245,773) --
- -----------------------------------------------------------------------------------
Class A Shares (95,185) --
- ----------------------------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (591,608) (160,069)
- ----------------------------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -----------------------------------------------------------------------------------
Proceeds from sale of shares 11,839,537 13,308,632
- -----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 531,548 150,206
- -----------------------------------------------------------------------------------
Cost of shares redeemed (13,278,176) (1,677,459)
- ----------------------------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions (907,091) 11,781,379
- ----------------------------------------------------------------------------------- ------------- -------------
Change in net assets 2,058,060 11,187,935
- -----------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------
Beginning of period 24,700,823 13,512,888
- ----------------------------------------------------------------------------------- ------------- -------------
End of period (including undistributed net investment
income of $11,118 and $34,986, respectively) $ 26,758,883 $ 24,700,823
- ----------------------------------------------------------------------------------- ------------- -------------
</TABLE>
* Ten months ended October 31, 1992.
(See Notes which are an integral part of the financial statements)
CAPITAL GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end,
management investment company with two portfolios. The financial statements
included herein present only those of Capital Growth Fund (the "Fund"). The
financial statements of the other portfolios 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.
Capital Growth Fund provides three classes of Shares ("Investment Shares, "
"Class A Shares" and "Class C Shares"). Class A Shares and Class C Shares are
identical in all respects to Investment Shares except that: (i) Class A Shares
and Class C Shares are sold pursuant to a distribution plan ("Plan") adopted in
accordance with the Investment Company Act of 1940 Rule 12b-1. Class A Shares
are subject to a maximum sales load of 4.50%, a 12b-1 fee of 0.25% and may be
subject to a redemption fee but are not subject to a shareholder servicing fee.
Class C Shares are not subject to a sales load but are subject to a 12b-1 fee of
0.75%, a shareholder servicing fee of 0.25%, and a contingent deferred sales
charge of 1.00%.
On December 18, 1992, Shareholders of the Fund met and approved the
reorganization of the Fund as a portfolio of Investment Series Funds, Inc., a
Maryland Corporation.
(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 principals.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at last sale
prices reported on national securities exchanges. Unlisted securities or
listed securities for which there were no sales on the valuation date are
generally valued at the mean between bid and asked prices. Short-term
obligations are valued at the mean between bid and asked prices furnished
by an independent pricing service. However, short-term obligations with
maturities of sixty days or less are valued at amortized cost, which
approximates value.
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 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 the value at least equals the principal amount of the repurchase
transactions, 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 Directors. Risks may arise from
the potential inability of counterparties to honor the terms of a
repurchase agreements. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis and includes discount earned, less
any premium.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Internal Revenue Code, applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities 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--Costs incurred by the Fund with respect to registration
of its shares in its first fiscal year, excluding the initial expense of
registering the shares, have been deferred and are being amortized using
the straight-line method over a period of five years from the Funds
commencement date.
G. OTHER--Investment transactions are accounted for on the date of the
transaction.
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
(4) CAPITAL STOCK
At October 31, 1993, there were 1,000,000,000 of ($.0001) par value capital
stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 10/31/93 YEAR ENDED 10/31/92*
<S> <C> <C> <C> <C>
INVESTMENT SHARES SHARES AMOUNT SHARES AMOUNT
Shares outstanding, beginning of period 1,533,399 $ 16,319,992 1,125,747 $ 11,367,082
- ------------------------------------------------------
Shares sold 341,272 4,316,048 484,535 5,894,279
- ------------------------------------------------------
Shares issued to shareholders electing to
receive payment of dividends in Fund shares 30,603 380,718 10,536 129,297
- ------------------------------------------------------
Shares redeemed (796,724) (9,811,729) (87,419) (1,070,666)
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Shares outstanding, end of period 1,108,550 $ 11,205,029 1,533,399 $ 16,319,992
- ------------------------------------------------------ ----------- -------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 10/31/93 YEAR ENDED 10/31/92*
<S> <C> <C> <C> <C>
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
Shares outstanding, beginning of period 552,251 $ 6,828,469 -- $ --
- ----------------------------------------------------
Shares sold 575,342 7,204,386 599,919 7,414,353
- ----------------------------------------------------
Shares issued to shareholders electing to
receive payment of dividends in Fund shares 12,091 150,830 1,714 20,909
- ----------------------------------------------------
Shares redeemed (272,085) (3,450,895) (49,382) (606,793)
- ---------------------------------------------------- ---------- -------------- ---------- -------------
Shares outstanding, end of period 867,599 $ 10,732,790 552,251 $ 6,828,469
- ---------------------------------------------------- ---------- -------------- ---------- -------------
</TABLE>
*_For the ten months ended October 31, 1992.
<TABLE>
<CAPTION>
YEAR ENDED 10/31/93**
<S> <C> <C> <C> <C>
CLASS C SHARES SHARES AMOUNT
Shares outstanding, beginning of period -- $ --
- ----------------------------------------------------
Shares sold 24,661 319,103
- ----------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares -- --
- ----------------------------------------------------
Shares redeemed (1,187) (15,552)
- ---------------------------------------------------- ---------- --------------
Shares outstanding, end of period 23,474 $ 303,551
- ---------------------------------------------------- ---------- --------------
</TABLE>
**_For the period from April 13, 1993 (date of initial public investment) to
October 31, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers (the "Adviser"), the Fund's investment adviser, receives for
its services an annual investment advisory fee equal to (a) 0.55% of the average
daily net assets of the Fund, and (b) 4.5% of the gross income of the Fund. The
Adviser has voluntarily agreed to waive a portion or all of its fee and
reimburse the Fund a portion of its annual operating expenses. The Adviser can
terminate this voluntary waiver and reimbursement at any time at its sole
discretion. For the period ended October 31, 1993, the investment advisory fee
amounted to $165,261, all of which was voluntarily waived. In addition, the
Adviser voluntarily reimbursed $446,749 of the Fund's other operating expenses.
Organization expenses ($13,190) and start-up administrative service expenses
($92,451) were borne initially by the Adviser. The Fund has agreed to pay the
Adviser, at an annual rate of .005 of 1% of average daily net assets and .01 of
1% of average daily net assets for organization expenses and start-up
administrative service expenses, respectively, until expenses borne by the
Adviser are reimbursed. This commitment will expire five years from the date the
Corporation's portfolio became effective. For the period ended October 31, 1993,
the Fund paid the Adviser $736 for organization expenses and $1,471 for start-up
administrative services pursuant to this agreement.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Certain of the Officers and Directors of
the Fund are Officers and Directors of the above corporations.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund will reimburse Federated Securities
Corp., the principal distributor, from the assets of the Class A and Class C
Shares of the Fund, for fees it paid which relate to the distribution and
administration of the Fund's Class A and Classs C Shares. The Plan provides that
the Fund may incur distribution expenses of up to 0.25 of 1% for Class A Shares
and 0.75 of 1% of Class C Shares of the average daily net assets, annually, to
pay commissions, maintenance fees, and to compensate FSC. For the period ended
October 31, 1993, FSC earned $25,677 and $532 for Class A and Class C Shares,
respectively.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities for the
fiscal year ended October 31, 1993, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C>
PURCHASES $ 18,804,799
- -------------------------------------------------------------------------------------------------- --------------
SALES AND MATURITIES $ 20,808,325
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
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 the Investment Series Funds, Inc.), as of October 31, 1993, and the
related statement of operations for the year then ended, the statement of
changes in net assets for the year ended October 31, 1993 and for the ten months
ended October 31, 1992 and the financial highlights (see pages 2, 20 and 21 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 gain
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, 1993, by correspondence with the custodian. 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 of Investment Series Funds, Inc. at October 31, 1993, the
results of its operations for the year then ended, the changes in its net assets
for the year ended October 31, 1993 and for the ten months ended October 31,
1992, and the financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
December 10, 1993
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment Series Funds, Inc.
Capital Growth Fund Federated Investors Tower
Investment 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 8606
Trust Company Boston, Massachusetts 02266-8606
- ---------------------------------------------------------------------------------------------------------------------
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 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL GROWTH FUND
INVESTMENT SHARES
PROSPECTUS
A Diversified Portfolio of
Investment Series Funds, Inc.,
an Open-End,
Management Investment Company
December 31, 1993
FEDERATED SECURITIES CORP.
[LOGO]
DISTRIBUTOR
A Subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
1102503A-R (12/93)
CAPITAL GROWTH FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
INVESTMENT SHARES
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 Investment Shares, Class A Shares
(formerly, Liberty Shares), and Class C Shares of Capital Growth Fund
(the "Fund") dated December 31, 1993. This Statement is not a
prospectus itself. To receive a copy of any of the prospectuses, write
or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated December 31, 1993
[LOGO] FEDERATED SECURITIES CORP.
-------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
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
MANAGEMENT OF THE CORPORATION 6
- ---------------------------------------------------------------
Officers and Directors 6
The Funds 8
Fund Ownership 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 9
Administrative Services Arrangements 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plan (Class A Shares and
Class C Shares) 10
Purchases by Sales Representatives,
Directors, and Employees 10
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
REDEEMING SHARES 11
- ---------------------------------------------------------------
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
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 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 three classes, Investment Shares, Class A
Shares (formerly, Liberty 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 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
investment 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 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:
instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is insured in full by the Federal
Deposit Insurance Corporation; and
prime commercial paper (rated A-1 by Standard and Poor's Corporation,
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:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
securities of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the securities.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Directors ("Directors") to determine the liquidity
of certain restricted securities is permitted under a Securities and Exchange
Commission staff position set forth in the adopting release for Rule 144A under
the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all restricted
securities (eligible for resale under Rule 144A) to the Directors. The Directors
consider the following criteria in determining the liquidity of certain
restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases or sells
securities with payment and delivery scheduled for a future time. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objective
and policies, and not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These assets are marked to
market daily and are maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the total value of 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 year ended October 31, 1993, the
period ended October 31, 1992, and the fiscal year ended December 31, 1991
(prior to reorganization of the Fund as a portfolio of the Corporation), the
portfolio turnover rates were 74%, 29%, and 57%, 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:
during the time the short position is open, it owns an equal amount of
the securities sold or securities convertible into or exchangeable,
without payment of additional consideration, for securities of the same
issuer as, and equal in amount to, the securities sold short; and
not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that 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 (for purposes of this limitation 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), 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 1.00% 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 investment
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.
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.
MANAGEMENT OF THE CORPORATION
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OFFICERS AND DIRECTORS
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Advisers,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Inc., and the Funds as described below.
<TABLE>
<CAPTION>
POSITIONS WITH
NAME AND ADDRESS THE CORPORATION PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Director Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, AEtna Life and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, President and Director
of the Corporation.
John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior Vice-President,
Wood/IPC John R. Wood and Associates, Inc., Realtors; President, Northgate
Commercial Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in Southwest Florida; Director, Trustee, or
Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
William J. Copeland Director Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-23rd Floor Director, Trustee, or Managing General Partner of the Funds; formerly,
Pittsburgh, PA Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
J. Christopher Donahue* President and President and Trustee, Federated Investors; Trustee,
Federated Investors Tower Director Federated Advisers, Federated Management, and Federated
Pittsburgh, PA Research; Director, Federated Administrative Services, Inc.; 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 Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds.
Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Director Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank and Trust Company, State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare,
5916 Penn Mall Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice Chairman,
Horizon Financial, F.A.
Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Endowment for International Peace, RAND Corporation, Online Computer
Learning Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho
University of Pittsburgh Slovak Management Center; Director, Trustee, or Managing General
Pittsburgh, PA Partner of the Funds; President Emeritus, University of Pittsburgh;
formerly Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman
Federated Investors Tower and Director, Federated Securities Corp.; President or Vice President
Pittsburgh, PA of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales Vice President Vice President, Treasurer, and Trustee, Federated Investors; Vice
Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Director,
Federated Administrative Services, Inc.; Trustee or Director of some
of the Funds; Vice President and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice
President, Secretary, and Director, Federated Administrative Services,
Inc.; Director and Executive Vice President, Federated Securities
Corp.; Vice President and Secretary of the Funds.
John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower President, Federated Securities Corp.; President and Trustee,
Pittsburgh, PA Federated Advisers, Federated Management, and Federated Research; Vice
President of the Funds; Director, Trustee, or Managing General Partner
of the Funds; formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
</TABLE>
*This Director is deemed to be an "interested person" of the Corporation
as defined in the Investment Company Act of 1940.
\Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Directors between
meetings of the Directors.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust
Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
FT Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated
GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Intermediate Government Trust; Federated Master
Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Intermediate Municipal Trust; 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; Mark Twain Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New
York Municipal Cash Trust; 111Corcoran Funds; The Planters Funds; Portage Funds;
RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet
Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and
Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; Trademark Funds; Trust for Financial Institutions; Trust for Government
Cash Reserves; Trust for Short-Term U.S. Government Securities; and Trust for
U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of each Fund's outstanding shares.
As of November 30, 1993, the following shareholders of record owned 5% or more
of the outstanding shares of each class of shares of the Fund:
Liberty Bank and Trust, as custodian for IRM retirement plans, Gibbsboro, New
Jersey, owned approximately 982,074.321 shares (94.09%) of Investment Shares of
the Fund.
Merrill, Lynch, Pierce, Fenner & Smith, Jacksonville, Florida, owned
approximately 133,855 shares (15.46%), for the benefit of its customers, of
Class A Shares of the Fund.
Merrill, Lynch, Pierce, Fenner & Smith, (as record owner holding Fund shares for
its clients) Jacksonville, Florida, owned approximately 7,608 shares (28.38%);
Mary E. Sullivan, Pittsburgh, Pennsylvania, owned approximately 2,202 shares
(8.21%); Raymond James & Assoc., Inc., custodian for the IRA of Johan A. DeJong,
Greenville, South Carolina, owned approximately 1,925.059 shares (7.28%); Mead
J. Mulvihill, Jr. and Margaret O. Mulvihill, JTWROS, Pittsburgh, Pennsylvania,
owned approximately 1,601.281 shares (5.97%); and Paine Webber, for the benefit
of Melinda Russi Gerard, Dallas, Texas, owned approximately 1,584.786 shares
(5.91%), of Class C Shares of the Fund.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee
of Federated Advisers, is Chairman and Trustee of Federated Investors and
Chairman and Director of the Corporation. John A. Staley, IV, President and
Trustee of Federated Advisers, is Vice President and Trustee of Federated
Investors; Executive Vice President of Federated Securities Corp.; and Vice
President of the Corporation. J. Christopher Donahue, Trustee of Federated
Advisers, is President and Trustee of Federated Investors; Director of Federated
Administrative Services, Inc.; and President and Director of the Corporation.
John W. McGonigle, Vice President, Secretary, and Trustee of Federated Advisers,
is Trustee, Vice President, Secretary, and General Counsel of Federated
Investors; Director, Executive Vice President and Secretary of Federated
Administrative Services, Inc.; Director, Federated Securities Corp.; and Vice
President, and Secretary of the Corporation.
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 year ended
October 31, 1993, the period ended October 31, 1992, and the fiscal years ended
December 31, 1991, and 1990, the Fund's Adviser earned, with respect to this
Fund, $165,261, $105,850, and $76,409, and $46,905 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 ARRANGEMENTS
For the fiscal year ended October 31, 1993, the period ended October 31, 1992
(prior to the reorganization of the Fund as a portfolio of the Corporation) the
distributor paid $18,638 and $829 to brokers and dealers for distribution and
administrative services and to administrators for administrative services.
The administrative services include, but are not limited to, providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as is necessary or beneficial to establish
and maintain shareholders' accounts and records; processing purchase and
redemption transactions; processing automatic investments of client account cash
balances; answering routine client inquiries regarding the Fund; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as the Fund may reasonably request.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, Inc., a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund at approximate cost.
For the fiscal year ended October 31, 1993, the period ended October 31, 1992,
and the fiscal years ended December 31, 1991 and 1990, prior to the
reorganization of the Fund as a portfolio of the Corporation, the Fund incurred
$240,157, $166,758, $177,435, and $84,818 respectively, for administrative
services, all of which were waived by the Adviser in an effort to limit Fund
expenses. John A. Staley, IV, an officer of the Corporation, and Dr. Henry J.
Gailliot, an officer of Federated Advisers, the Adviser to the Fund, each hold
approximately 15% and 20%, respectively, of the outstanding common stock and
serve as directors of Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative Services, Inc. For the
fiscal year ended October 31, 1993, the period ended October 31, 1992, and the
fiscal years ended December 31, 1991, and 1990, a portion of which occurred
prior to the reorganization of the Fund as a portfolio of the Corporation,
Federated Administrative Services, Inc. paid approximately $165,431, $189,741,
$196,783, and $169,379, respectively, for services provided by Commercial Data
Services, Inc.
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:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in 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 Federated 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 year ended October 31, 1993, the period ended October 31,
1992 and the fiscal years ended December 31, 1991, and 1990, a portion of which
occurred prior to the reorganization of the Fund as a portfolio of the
Corporation, the Fund paid $44,421, $39,310, $18,320, and $10,530, respectively,
in brokerage commissions on brokerage transactions.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value (plus a sales load on Investment Shares
and 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 Investment Shares," "Investing in Class A
Shares," or "Investing in Class C Shares".
DISTRIBUTION PLAN
With respect to Class A Shares and Class C Shares of the Fund, the Corporation
has adopted a Plan pursuant to Rule 12b-1 which was promulgated by the
Securities and Exchange Commission under the Investment Company Act of 1940. The
Plan provides for payment of fees to Federated Securities Corp. to finance any
activity which is principally intended to result in the sale of the Shares
subject to the Plan. Such activities may include the advertising and marketing
of Shares; preparing, printing and distributing prospectuses and sales
literature to prospective shareholders, brokers or administrators; and
implementing and operating the Plan. Pursuant to the Plan, the distributor may
pay fees to brokers for distribution and administrative services and to
administrators for administrative services as to Shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to:
communicating account openings; communicating account closings; entering
purchase transactions; entering redemption transactions; providing or arranging
to provide accounting support for all transactions, wiring funds and receiving
funds for Share purchases and redemptions, confirming and reconciling all
transactions; reviewing the activity in Fund accounts, and providing training
and supervision of broker personnel; posting and reinvesting dividends to Fund
accounts or arranging for this service to be performed by the Fund's transfer
agent; and maintaining and distributing current copies of prospectuses and
shareholder reports to the beneficial owners of Shares and prospective
shareholders. Financial institutions and brokers providing sales and/or
administrative services may receive a different compensation from one class of
Shares of the Fund than from another class of Shares.
The Directors expect that the adoption of the Plan will result in the sale of a
sufficient number of Shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
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 charge or
redemption fees. Shares may also be sold without a sales charge 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 ("State Street Bank") 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:
according to the last sale price on a national securities exchange, if
available;
in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities, as determined by an independent pricing service;
for unlisted equity securities, the latest bid prices;
for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, or for short-term obligations
with maturities of 60 days or less, at amortized cost; or
at fair value as determined in good faith by the Directors.
Options are valued at the market values established by the exchanges at the
close of option trading unless the Directors determine in good faith that
another method of valuing option positions is necessary.
For the fiscal year ended October 31, 1993, for the period ended October 31,
1992, and the fiscal years ended December 31, 1991, and 1990, a portion of which
occurred prior to the reorganization of the Fund as a portfolio of the
Corporation, the Fund paid $112,187, $5,229, $0 and $0, respectively.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after State Street
Bank receives the redemption request. Shareholder redemptions may be subject to
a redemption fee. Redemption procedures are explained in the respective
prospectuses under "Redeeming Investment Shares," "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:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends 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
- --------------------------------------------------------------------------------
Cumulative total return reflects the Fund's total performance of all classes of
Shares over a specific period of time.
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load (Investment Shares and Class A Shares only), adjusted over the period by
any additional Shares, assuming the quarterly reinvestment of all dividends and
distributions. Any applicable redemption fee 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. Occasionally, total return which does not
reflect the effect of the sales load may be quoted in advertising.
The Fund's average annual total returns for the one year period ended October
31, 1993 were 9.07%, and 10.13%, for Investment Shares and Class A Shares,
respectively. The average annual total return for the period from November 30,
1989 (effective date of Fund's registration statement) to October 31, 1993, from
the period from January 16, 1992 (effective date of Fund's registration
statement) to October 31, 1993 and from the period April 13, 1993 (effective
date of Fund's registration statement) to October 31, 1993 were 8.80%, 2.40%,
and 6.86% for Investment Shares, 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 Securities and
Exchange Commission) 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 Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in 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, 1993, was 0.53%,
0.29% and (0.43)% for Investment Shares, Class A Shares, and Class C Shares,
respectively.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance of each class of Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or a class of Shares' expenses; and
various other factors.
Any class of Shares' performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
From time to time, any class of Shares may advertise its performance compared to
similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following:
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value 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.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected blue
chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of industries.
Because it represents the top corporations of America, the DJIA's index movement
are leading economic indicators for the stock market as a whole.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, compares total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the Standard & Poor's index assumes
reinvestment of all dividends paid by stocks listed on its index. Taxes due on
any of these distributions are not included, nor are brokerage or other fees
calculated in the Standard & Poor's figures.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-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.
Investors may use such indices or reporting services in addition to each
respective class of Shares' prospectus to obtain a more complete view of the
respective Shares' performance before investing. Of course, when comparing the
performance of any class of Shares to any index, factors such as composition of
index and prevailing market conditions should be considered in assessing the
significance of such comparisons.
When comparing funds using reporting services, or total return and yield,
investors should take into consideration any relevant differences in funds such
as permitted portfolio compositions and methods used to value portfolio
securities and compute offering price.
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 CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 weakend 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.
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
edge." 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., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) SIGN
DESIGNATION.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as 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:
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; 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.
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.
1102503B (12/93) 1
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Capital Growth Fund (the "Fund") was established in 1989 to provide the
opportunity for investment in a diversified portfolio of stocks which have
prospects for substantial capital appreciation. The stock selection process for
the Fund utilizes investment disciplines which the Federated organization has
used successfully for several years. The investment emphasis is placed on stocks
that have favorable price and earnings momentum characteristics. The Fund may
also invest in companies that are candidates for corporate restructuring or
acquisition. Managed to participate fully in up markets, the Fund offers the
potential for significant capital appreciation over time.
Over the 12 months ended October 31, 1993, U.S. stocks have registered
excellent results. Driven by the recovery in corporate profits, falling interest
rates, and large flows of money into mutual funds, the S&P 500 Index recorded a
total return of 14.92% for the year ended October 31, 1993. Small capitalization
stocks were the standout, however, as the Russell 2000 Index had a total return
of 32.41% for the same period. Perhaps the most important factor was the decline
in interest rates. The yield on the 30-year U.S. Treasury bond dropped from 6.7%
to 5.7% between May and September.
In addition to the relative value growth that stocks currently possess, the
current macroeconomic conditions also favor investment in growth equities. As
the workforce grows and domestic businesses continue to increase productivity,
the circumstances exist which should provide for continued moderate economic
growth and low relative interest rates through the end of the decade. The recent
changes in the federal tax laws also increase the relative attractiveness of
growth stocks, which produce more of their total returns in the form of capital
gains than do other stocks. These circumstances should produce the appropriate
environment to provide continued reasonable returns to growth equities in the
1990s.
The Fund's value overlay results in a concentration on medium to high
capitalization companies using the best available investment vehicles. These may
include convertible and/or putable bonds, Liquid Yield Option Notes, and
Preferred Equity Redemption Certificates, which tend to reduce the inherent
volatility of the Fund.
The Fund's disciplined stock selection approach, with its concentration on
reasonably priced stocks exhibiting positive relative earnings and price
momentum, is designed to allow the Fund to take advantage of market
opportunities. We believe the Fund is well-suited in the current environment to
pursue a goal of strong performance in up markets and over market cycles.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE IN
CAPITAL GROWTH FUND (CLASS A SHARES--FORMERLY, LIBERTY SHARES), STANDARD AND
POOR'S 500
INDEX, AND LIPPER GROWTH FUND INDEX.
[INSERT GRAPH HERE]
Past Performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated December 31, 1993.
*Reflects operations of Capital Growth Fund (Class A
Shares--formerly, Liberty Shares) from the start of business on
2/4/92 through 10/31/93.
**Represents a hypothetical investment of $10,000 in Capital Growth
Fund (Class A Shares), after deducting the maximum sales charge of
4.50% ($10,000 investment minus $450 sales charge = $9,550). The
Fund's performance assumes the reinvestment of all dividends and
distributions. The Standard and Poor's Index and the Lipper Growth
Fund Index are adjusted to reflect reinvestment of dividends on
securities in the indices.
The Standard and Poor's Index and the Lipper Growth Fund Index are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Fund's performance.
Returns reflect maximum applicable fees.
[LOGO] FEDERATED SECURITIES CORP.
-----------------------------------------------------------------------
Distributor
1102503A-A (12/93)
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE IN
CAPITAL GROWTH FUND (CLASS C SHARES), STANDARD AND POOR'S 500 INDEX,
AND LIPPER GROWTH FUND INDEX.
[INSERT GRAPH HERE}
Past Performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated December 31, 1993.
*Reflects operations of Capital Growth Fund (Class C Shares) from
the start of business on 4/13/93 through 10/31/93 on a cumulative
basis.
**Represents a hypothetical investment of $10,000 in Capital Growth
Fund (Class C Shares). The ending value of the Fund reflects a
contingent deferred sales charge of 1.00% on any redemption less
than one year from the purchase date.
The Standard and Poor's 500 Index and the Lipper Growth Fund Index are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Fund's performance.
Returns reflect maximum applicable fees.
[LOGO FEDERATED SECURITIES CORP.
--------------------------------------------------------------------------
Distributor
1102503A-C (12/93)
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE IN
CAPITAL GROWTH FUND (INVESTMENT SHARES), STANDARD AND POOR'S 500 INDEX,
AND LIPPER GROWTH FUND INDEX.
Past Performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated December 31, 1993.
*Reflects operations of Capital Growth Fund (Investment Shares) from
the start of business on 11/30/89 through
10/31/93.
**Represents a hypothetical investment of $10,000 in Capital Growth
Fund (Investment Shares), after deducting the maximum sales charge
of 5.75% ($10,000 investment minus $575 sales charge = $9,425). The
Fund's performance assumes the reinvestment of all dividends and
distributions. The Standard and Poor's 500 Index and the Lipper
Growth Fund Index are adjusted to reflect reinvestment of dividends
on securities in the indices.
The Standard and Poor's 500 Index and the Lipper Growth Fund Index are not
adjusted to reflect sales loads, expenses, or other fees that the SEC
requires to be reflected in the Fund's performance.
Returns reflect maximum applicable fees.
[LOGO] FEDERATED SECURITIES CORP.
-----------------------------------------------------------------------
Distributor
1102503A-I (12/93)
FORTRESS BOND FUND
PROSPECTUS
DECEMBER 31, 1993
ESTABLISHED 1987
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, 1993, with the
Securities and Exchange Commission. The
information contained in the Statement of
Additional Information is incorporated by
reference in this prospectus. You may request a
copy of the Statement of Additional Information
free of charge, obtain other information, or make
inquiries about the Fund by writing or calling the
Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus dated December 31, 1993
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Acceptable Investments 4
Corporate Debt Obligations 5
U.S. Government Obligations 5
Asset-Backed Securities 6
Non-Mortgage Related Asset-Backed Securities 7
Mortgage-Related Asset-Backed Securities 7
Adjustable Rate Mortgage Securities
("ARMS") 7
Collateralized Mortgage Obligations
("CMOs") 7
Real Estate Mortgage Investment
Conduits ("REMICs") 7
Resets of Interest 8
Caps and Floors 8
Bank Instruments 8
Zero Coupon Convertible Securities 9
Restricted and Illiquid Securities 9
Foreign Securities 9
Investing in Securities of Other
Investment Companies 10
Temporary Investments 10
Repurchase Agreements 10
When-Issued and Delayed
Delivery Transactions 10
Lending of Portfolio Securities 10
Put and Call Options 10
Risks 11
Investment Limitations 12
NET ASSET VALUE 12
- ------------------------------------------------------
INVESTING IN THE FUND 12
- ------------------------------------------------------
Share Purchases 12
Through a Financial Institution 12
Directly By Mail 13
Directly By Wire 13
Minimum Investment Required 13
What Shares Cost 13
Dealer Concession 14
Eliminating the Sales Charge 14
Quantity Discounts and
Accumulated Purchases 14
Letter of Intent 14
Reinvestment Privilege 15
Concurrent Purchases 15
Systematic Investment Program 15
Exchange Privilege 15
Certificates and Confirmations 16
Dividends and Distributions 16
Retirement Plans 16
REDEEMING SHARES 16
- ------------------------------------------------------
Through a Financial Institution 16
Directly By Mail 17
Signatures 17
Receiving Payment 17
Redemption Fee 17
Systematic Withdrawal Program 18
Redemption Before Purchase
Instruments Clear 19
Accounts with Low Balances 19
Exchanges for Shares of Other Funds 19
INVESTMENT SERIES FUNDS, INC., INFORMATION 19
- ------------------------------------------------------
Management of the Corporation 19
Board of Directors 19
Investment Adviser 19
Advisory Fees 19
Adviser's Background 20
Distribution of Fund Shares 20
Administration of the Fund 20
Administrative Services 20
Shareholder Services Plan 20
Custodian 21
Transfer Agent and Dividend Disbursing Agent 21
Legal Counsel 21
Independent Auditors 21
Expenses of the Fund 21
SHAREHOLDER INFORMATION 22
- ------------------------------------------------------
Voting Rights 22
TAX INFORMATION 22
- ------------------------------------------------------
Federal Income Tax 22
Pennsylvania Corporate and
Personal Property Taxes 22
PERFORMANCE INFORMATION 23
- ------------------------------------------------------
FINANCIAL STATEMENTS 24
- ------------------------------------------------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 37
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as applicable)............................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)(1)................. 1.00%
Exchange Fee.......................................................................... None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)...................................................... 0.15%
12b-1 Fee............................................................................. None
Total Other Expenses.................................................................. 0.90%
Shareholder Servicing Fee........................................................ 0.25%
Total Fund Operating Expenses(3)...................................................... 1.05%
</TABLE>
(1) The redemption fee charged 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.
(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 Total Fund Operating Expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1994. The Total Fund
Operating Expenses were 1.04% for the fiscal year ended October 31, 1993 and
were 1.65% absent the voluntary waiver of a portion of the management fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "INVESTMENT SERIES FUNDS, INC., INFORMATION." Wire transferred
redemptions of less than $1,000 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 $ 137
You would pay the following expenses on the same
investment, assuming no redemption...................... $ 21 $ 43 $ 67 $ 137
</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.
FORTRESS BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors on page
37.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31, YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------
1993 1992** 1991 1990 1989 1988***
-------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $9.23 $8.81 $6.89 $8.79 $9.86 $10.06
- -----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------
Net investment income 0.77 0.59 1.01 1.08 1.23 0.61
- -----------------------------------
Net realized and unrealized gain
(loss) on investments 1.07 0.43 1.92 (1.84) (1.07) (0.16 )
- ----------------------------------- ------ ------ ------ ------ ------ ------
Total from investment operations 1.84 1.02 2.93 (0.76) 0.16 0.45
- -----------------------------------
LESS
DISTRIBUTIONS
- -----------------------------------
Dividends to shareholders from
net investment income (0.77) (0.60) (1.01) (1.14) (1.23) (0.65 )
- -----------------------------------
NET ASSET VALUE, END OF PERIOD $10.30 $9.23 $8.81 $6.89 $8.79 $9.86
- ----------------------------------- ------ ------ ------ ------ ------ ------
TOTAL RETURN* 20.61% 11.79% 44.62% -9.59% 1.32% 4.62 %(a)
- -----------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------
Expenses 1.04% 0.49%(b) 1.00% 1.01% 1.14% 1.00 %(b)
- -----------------------------------
Net investment income 7.69% 8.05%(b) 12.17% 13.43% 12.81% 12.58 %(b)
- -----------------------------------
Expense waiver/reimbursement(c) 0.61% 2.01%(b) 1.50% 1.49% 1.36% 1.00 %(b)
- -----------------------------------
SUPPLEMENTAL DATA
- -----------------------------------
Net assets, end of period
(000 omitted) $125,762 $54,886 $6,068 $7,484 $4,734 $4,968
- -----------------------------------
Portfolio turnover rate 51% 49% 33% 28% 38% 31 %
- -----------------------------------
</TABLE>
<TABLE>
<S> <C>
* Based on net asset value which does not reflect the sales load or redemption fee, if applicable.
** For the ten months ended October 31, 1992.
*** Reflects operations for the period from July 8, 1988 (date of initial public investment) to December 31,
1988. For the period from the start of business, May 5, 1987, to July 8, 1988, income aggregating $1.270
per share ($92,475) was distributed to the Fund's investment adviser.
(a) Cumulative total return.
(b) Computed on an annualized basis.
(c) This expense decrease is reflected in both the expense and net investment income ratios shown above
(Note 5).
</TABLE>
Further information about the Fund's performance is contained in the Fund's
annual report dated December 31, 1993, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
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 an IRA account,
which requires a $50 minimum initial investment. The minimum subsequent
investment is $100, except for an IRA account, which requires a minimum
subsequent investment of $50.
Fund shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. However, a redemption fee 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)--a fund providing growth
of capital and income by concentrating the area of investment decision in
the securities of high quality companies;
California Municipal Income Fund (Fortress Shares only)--a fund providing
current income exempt from federal regular income tax and California
personal income taxes;
Fortress Adjustable Rate U.S. Government Fund, Inc.--a fund 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.--a fund providing high current income
generally exempt from federal regular income tax by investing primarily in
a diversified portfolio of municipal bonds;
Fortress Utility Fund, Inc.--a fund providing high current income and
moderate capital appreciation primarily through equity and debt securities
of utility companies;
Government Income Securities, Inc.--a fund providing current income through
long-term U.S. government securities;
Liberty Equity Income Fund, Inc. (Fortress Shares only)--a fund providing
above average income and capital appreciation;
Limited Term Fund (Fortress Shares only)--a fund providing a high level of
current income consistent with minimum fluctuation in principal value;
Limited Term Municipal Fund (Fortress Shares only)--a fund 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.--a fund providing current income consistent
with stability of principal through high-quality money market instruments;
New York Municipal Income Fund (Fortress Shares only)--a fund providing
current income exempt from federal regular income tax, New York personal
income taxes, and New York City income taxes; and
Ohio Municipal Income Fund (Fortress Shares only)--a fund providing current
income exempt from federal regular income tax and Ohio personal income
taxes.
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 nine investment vehicles, and by providing the
investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
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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. As a matter of investment policy, which can be changed without
shareholder approval, 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., Standard &
Poor's Corporation, or Fitch Investors Service, Inc. A description of the
ratings categories is contained in the Appendix to the Statement of Additional
Information.
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 adviser);
- obligations of the United States;
- notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: 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 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.
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 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 Standard & Poor's 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. A full description of the rating
categories is contained in the Appendix to the Statement of Additional
Information.
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 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, 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.
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 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 to be illiquid, 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 Board of 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 Fund's investment 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 Fund's investment 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 investment 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. 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."
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. 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. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis 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
investment adviser has determined are creditworthy under guidelines established
by the Fund's Board of Directors and will receive collateral in the form of cash
or U.S. government securities equal to at least 100% of the value of the
securities loaned.
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 Fund's 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 (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 Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as
interest rate movements. In such an event, the Fund may lose the purchase
price of the put option. Finally, it is not certain that a secondary market
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into 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
- 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. (For purposes of this limitation, 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 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
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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
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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. (Boston time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Boston 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. (Boston 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 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, State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604.
Purchases by mail are considered received after payment by check is converted by
State Street Bank into federal funds. This is generally the next business day
after State Street 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
State Street Bank receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,500, except for an IRA account,
which requires a minimum initial investment of $50. Subsequent investments must
be in amounts of at least $100, except for an IRA account, 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 charge of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales charge for purchases of $1 million or
more. In addition, no sales charge is imposed for Fund shares purchased through
bank trust departments or investment advisers registered under the Investment
Advisers Act of 1940 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. (Boston time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Shares," shareholders may
be charged a redemption fee by the distributor at the time shares are redeemed.
DEALER CONCESSION. For sales of shares of the Fund, broker/dealers will normally
receive 100% of the applicable sales charge. Any portion of the sales charge
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 charge 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 charge 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 CHARGE
The sales charge 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 charge 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 charge.
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 charge on the additional purchase.
The Fund will also combine purchases for the purpose of reducing the redemption
fee 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 redemption fee would be reduced to .50% of those
additional shares. For more information on the levels of redemption fees and
holding periods, see the section entitled "Redemption Fee."
To receive the sales charge elimination and/or the redemption fee 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 charge and/or reduce the redemption fee 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 charge may be eliminated by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge elimination depending on the amount actually
purchased within the 13-month period and a provision for the Fund's custodian to
hold 1% of the total amount intended to be purchased in escrow (in shares of the
Fund) until such purchase is completed.
The 1% 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%
sales charge.
This letter of intent also includes a provision for reductions in the redemption
fee and holding period depending on the amount actually purchased within the
13-month period. For more information on the various levels of redemption fees
and holding periods, see the section entitled "Redemption Fee."
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 charge.
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 charge. If the shareholder redeems his shares in the
Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge 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 charge. For example, if a shareholder concurrently invested $400,000 in
one of the other Fortress Funds and $600,000 in the Fund, the sales charge would
be eliminated.
To receive this sales charge 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 charge
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% sales
charge 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 charge (if previously paid) or a redemption fee.
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
charge, 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 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 charge 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,
including prototype retirement plans, contact Federated Securities Corp. and
consult a tax adviser.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value 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 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. (Boston
time) and must be transmitted by the broker to the Fund before 5:00 p.m. (Boston
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. (Boston 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.
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 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.
REDEMPTION FEE
Shareholders redeeming shares from their Fund accounts within certain time
periods of the purchase date of those shares will be charged a redemption fee by
the Fund's distributor of the lesser of the original price or the net asset
value of the shares redeemed as follows:
<TABLE>
<CAPTION>
AMOUNT OF PURCHASE SHARES HELD REDEMPTION FEE
----------------------------- ----------------------------- ---------------
<S> <C> <C>
Up to $1,999,999 less than 4 years 1%
$2,000,000 to $4,999,999 less than 2 years .50%
$5,000,000 or more less than 1 year .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 redemption fee 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 redemption fee 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 redemption fee 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
redemption fee 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. Redemption fees are 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).
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that shares are sold with a sales charge, it is
not advisable for shareholders to be purchasing shares while participating in
this program.
Redemption fees are charged for shares redeemed through this program within four
years of their purchase dates.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check, the proceeds from the redemption of those
shares are not available, and the shares may not be exchanged, until the Fund or
its agents are reasonably certain that the purchase check has cleared, which
could take up to ten calendar days.
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 redemption fee or a sales charge.
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 redemption fee and possibly a sales
charge. 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
of at least $1,500. 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 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.
Mark E. Durbiano has been the Fund's 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.
Joseph M. Balestrino has been the Fund's co-portfolio manager since
September, 1993. 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.
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, Inc., which is a
subsidiary of Federated Investors, provides the Fund with the administrative
personnel and services necessary to operate the Fund. Such services include
shareholder servicing and certain legal and accounting services. Federated
Administrative Services, Inc., provides these at approximate cost.
SHAREHOLDER SERVICES PLAN. Effective April 1, 1993, the Fund has adopted a
Shareholder Services Plan (the "Services Plan") with respect to Fund shares.
Under the Services Plan, financial institutions
will enter into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time to time may be
owners of record or beneficial owners of shares. In return for providing these
support services, a financial institution may receive payments from the Fund at
a rate not exceeding 0.25% of the average daily net assets of the shares
beneficially owned by the financial institution's customers for whom it is
holder of record or with whom it has a servicing relationship. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer, 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 regarding the
Fund; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Fund reasonably requests.
In addition to receiving payments under the Services Plan, financial
institutions may be compensated by the distributor, or affiliates thereof, for
providing administrative support services to holders of Fund shares. These
payment will be made directly by the distributor and will not be made from the
assets of the Fund.
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 the shares of the Fund, and
dividend disbursing agent for the Fund.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young,
Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of Corporation
expenses. These expenses include, but are not limited to, the cost of:
Directors' fees; investment advisory and administrative services; printing
prospectuses and other Fund documents for shareholders; registering the
Corporation, the Fund, and shares of the Fund with federal and state securities
commissions; taxes and commissions; issuing, purchasing, repurchasing, and
redeeming shares; fees for custodians, transfer agents, dividend disbursing
agents, shareholder servicing agents, and registrars; printing, mailing,
auditing, accounting, and legal expenses; reports to shareholders and
governmental agencies; meetings of Directors and shareholders and proxy
solicitations therefor; insurance premiums; association membership dues; and
such nonrecurring and extraordinary items as may arise. However, the adviser may
voluntarily reimburse some expenses and has, in addition, undertaken to
reimburse the Fund, up to the amount of the advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
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 a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. The Directors shall call a special meeting of shareholders upon the
written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
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 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 Internal Revenue Code, as amended.
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 redemption fee, 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.
FORTRESS BOND FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--85.3%
- ----------------------------------------------------------------------------------
AIR TRANSPORTATION--1.7%
-------------------------------------------------------------------
$1,000,000 AMR Corp., Deb., 9.75%, 8/15/2021 $ 1,159,110
-------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <C> <S> <C>
1,000,000 USAir, Inc., Sr. Note, 10.375%, 3/1/2013 1,015,000
------------------------------------------------------------------- ------------
Total 2,174,110
------------------------------------------------------------------- ------------
AUTOMOTIVE--3.7%
-------------------------------------------------------------------
1,000,000 Auburn Hills, 12.375%, 5/1/2020 1,545,000
-------------------------------------------------------------------
1,000,000 Chrysler Corp., Note, 10.40%, 8/1/99 1,155,000
-------------------------------------------------------------------
1,000,000 Ford Motor Co., 9.90%, 11/6/97 1,166,990
-------------------------------------------------------------------
750,000 Motor Wheel Corp., Sr. Note, 11.50%, 3/1/2000 821,250
------------------------------------------------------------------- ------------
Total 4,688,240
------------------------------------------------------------------- ------------
BROADCAST RADIO & TV--3.2%
-------------------------------------------------------------------
500,000 Allbritton Communication Co., Sr. Sub. Note, 11.50%, 8/15/2004 532,500
-------------------------------------------------------------------
2,000,000 CBS Inc., Sr. Deb., 8.875%, 6/1/2022 2,372,900
-------------------------------------------------------------------
1,000,000 SCI Television, Inc., Sr. Sec. Note, 11.00%, 6/30/2005 1,045,000
------------------------------------------------------------------- ------------
Total 3,950,400
------------------------------------------------------------------- ------------
BUSINESS EQUIPMENT & SERVICES--0.5%
-------------------------------------------------------------------
500,000 Anacomp, Inc., Sr. Sub. Note, 15.00%, 11/1/2000 578,125
------------------------------------------------------------------- ------------
CABLE TV--4.5%
-------------------------------------------------------------------
500,000 Cablevision Systems, Sr. Sub. Deb., 9.875%, 2/15/2013 590,000
-------------------------------------------------------------------
1,000,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 1,120,000
-------------------------------------------------------------------
750,000 Rogers Communications, Inc., Sr. Note, 10.875%, 4/15/2004 836,250
-------------------------------------------------------------------
2,000,000 TKR Cable, Inc., Sr. Note, 10.50%, 10/30/2007 2,505,000
-------------------------------------------------------------------
500,000 Videotron Inc., Sr. Sub. Note, 10.25%, 10/15/2002 552,500
------------------------------------------------------------------- ------------
Total 5,603,750
------------------------------------------------------------------- ------------
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- ----------------------------------------------------------------------------------
CHEMICALS & PLASTICS--4.0%
-------------------------------------------------------------------
$ 750,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 $ 785,625
-------------------------------------------------------------------
500,000 Foamex Capital Corp., Sr. Sub. Deb., 11.875%, 10/1/2004 542,500
-------------------------------------------------------------------
2,500,000 G-I Holdings, Inc., Sub. PIK Notes, 12.875%, 3/15/2005 1,528,125
-------------------------------------------------------------------
1,000,000 UCC Investors Holdings, Inc., Sr. Sub. Note, 11.00%, 5/1/2003 1,090,000
-------------------------------------------------------------------
1,250,000 Harris Chemical North American, Inc., 0/10.25%, 7/15/2001 1,028,125
------------------------------------------------------------------- ------------
Total 4,974,375
------------------------------------------------------------------- ------------
CLOTHING/TEXTILES--3.6%
-------------------------------------------------------------------
1,000,000 Fruit Of The Loom, Inc., Deb., 7.00%, 3/15/2011 972,500
-------------------------------------------------------------------
1,000,000 Fruit of the Loom, Inc., Sr. Note, 7.875%, 10/15/99 1,094,090
-------------------------------------------------------------------
500,000 Londontown Corp., Sr. Sub. Note., 13.625%, 6/15/99 538,750
-------------------------------------------------------------------
1,800,000 Reebok International Ltd., Deb., 9.75%, 9/15/98 1,958,688
------------------------------------------------------------------- ------------
Total 4,564,028
------------------------------------------------------------------- ------------
CONGLOMERATE--4.5%
-------------------------------------------------------------------
504,000 Figgie International, Sub. Deb., 10.375%, 4/1/98 513,989
-------------------------------------------------------------------
1,000,000 Noranda, Inc., Deb., 8.625%, 7/15/2002 1,102,610
-------------------------------------------------------------------
500,000 Sherritt Gordon Ltd., Sr. Note, 9.75%, 4/1/2003 502,500
-------------------------------------------------------------------
2,000,000 Textron, Inc., Deb., 8.75%, 7/1/2022 2,310,860
-------------------------------------------------------------------
1,000,000 TRW, Inc., Deb., 9.375%, 4/15/2021 1,237,790
------------------------------------------------------------------- ------------
Total 5,667,749
------------------------------------------------------------------- ------------
CONTAINER & GLASS PRODUCTS--3.3%
-------------------------------------------------------------------
750,000 Owens Corning Fiberglass, Deb., 9.375%, 6/1/2012 886,125
-------------------------------------------------------------------
500,000 Owens Illinois, Inc., Sr. Sub. Note, 10.50%, 6/15/2002 545,625
-------------------------------------------------------------------
1,000,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 975,000
-------------------------------------------------------------------
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 1,150,000
------------------------------------------------------------------- ------------
Total 4,130,500
------------------------------------------------------------------- ------------
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- ----------------------------------------------------------------------------------
COSMETICS & TOILETRIES--0.8%
-------------------------------------------------------------------
$2,000,000 Revlon Worldwide Corp., Sr. Secured Note, Series B, 0/12.0%,
3/15/98 $ 1,030,000
------------------------------------------------------------------- ------------
ECOLOGICAL SERVICES & EQUIPMENT--1.0%
-------------------------------------------------------------------
1,000,000 Browning Ferris Industries, Inc., 9.25%, 5/1/2021 1,249,230
------------------------------------------------------------------- ------------
ELECTRONICS/ELECTRIC--0.4%
-------------------------------------------------------------------
500,000 Harmon International Industries, Sr. Sub. Note, 12.00%, 8/1/2002 557,500
------------------------------------------------------------------- ------------
FINANCIAL INTERMEDIARIES--4.5%
-------------------------------------------------------------------
500,000 Coldwell Banker Corp., Sr. Sub. Note, 10.25%, 6/30/2003 530,000
-------------------------------------------------------------------
1,000,000 Ford Capital-B.V., Guaranteed Global Note, 9.50%, 6/1/2010 1,275,740
-------------------------------------------------------------------
1,500,000 Goldman Sachs Group LP, Note, 8.00%, 3/1/2013 1,607,475
-------------------------------------------------------------------
2,000,000 Huntington Bancshares, Sub. Note, 7.875%, 11/15/2002 2,244,140
------------------------------------------------------------------- ------------
Total 5,657,355
------------------------------------------------------------------- ------------
FOOD PRODUCTS--3.9%
-------------------------------------------------------------------
500,000 Doskocil Cos., Inc., 9.75%, 7/15/2000 497,500
-------------------------------------------------------------------
1,000,000 Grand Met Investment Corp., Guaranteed Deb., 8.00%, 9/15/2022 1,134,590
-------------------------------------------------------------------
500,000 PMI Acquisition Corp., Sr. Sub. Note, 10.25%, 9/1/2003 527,500
-------------------------------------------------------------------
2,000,000 Specialty Foods Acquisition Corp., Sr. Secured Disc. Deb.,
0/13.00%, 8/15/2005 955,000
-------------------------------------------------------------------
1,500,000 Super Value, Inc., Deb., 8.875%, 11/15/2022 1,756,050
------------------------------------------------------------------- ------------
Total 4,870,640
------------------------------------------------------------------- ------------
FOOD SERVICE--2.1%
-------------------------------------------------------------------
500,000 Americold Corp., 11.50%, FMB Series B, 3/1/2005 512,500
-------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.75%, 9/15/2001 512,500
-------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.875%, 12/01/2002 512,500
-------------------------------------------------------------------
1,000,000 McDonalds Corp., Deb., 7.375%, 7/15/2033 1,064,390
------------------------------------------------------------------- ------------
Total 2,601,890
------------------------------------------------------------------- ------------
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- ----------------------------------------------------------------------------------
FOOD/DRUG RETAILER--1.6%
-------------------------------------------------------------------
$1,000,000 Grand Union Co., Sr. Note, 12.25%, 7/15/2002 $ 1,057,500
-------------------------------------------------------------------
1,000,000 Pathmark Stores, Inc., 9.625%, 5/1/2003 997,500
------------------------------------------------------------------- ------------
Total 2,055,000
------------------------------------------------------------------- ------------
FOREST PRODUCTS--3.6%
-------------------------------------------------------------------
1,000,000 Georgia-Pacific Corp. Note, 10.125%, 5/15/2000 1,075,480
-------------------------------------------------------------------
1,500,000 Georgia-Pacific Corp., Deb., 9.50%, 5/15/2022 1,739,430
-------------------------------------------------------------------
500,000 Riverwood International Corp., Sr. Sub. Note, 11.25%, 6/15/2002 545,000
-------------------------------------------------------------------
1,000,000 Scott Paper Co., Deb., 8.80%, 5/15/2022 1,181,020
------------------------------------------------------------------- ------------
Total 4,540,930
------------------------------------------------------------------- ------------
HEALTHCARE--3.0%
-------------------------------------------------------------------
1,000,000 Alco Health Distribution Corp., Sr. PIK Deb., 11.25%, 7/15/2005 1,035,000
-------------------------------------------------------------------
500,000 American Medical International, Inc., Sr. Sub. Note, 13.50%,
8/15/2001 588,750
-------------------------------------------------------------------
1,000,000 Baxter International Inc., 7.50%, 5/1/97 1,079,840
-------------------------------------------------------------------
1,000,000 Hillhaven Corp., Sr. Sub. Note, 10.125%, 9/1/2001 1,052,500
------------------------------------------------------------------- ------------
Total 3,756,090
------------------------------------------------------------------- ------------
HOME PRODUCTS--0.7%
-------------------------------------------------------------------
1,500,000 American Standard, Inc., Sr. Sub. Disc. Deb., 14.25%, 6/1/2005 920,625
------------------------------------------------------------------- ------------
INDUSTRIAL EQUIPMENT--5.2%
-------------------------------------------------------------------
1,000,000 Amerace Corp., Sr. Sub. Note, 13.75%, 3/15/98 1,072,500
-------------------------------------------------------------------
1,000,000 Caterpillar, Inc., Sr. Sinking Fund Deb., 9.75%, 6/1/2019 1,226,130
-------------------------------------------------------------------
2,000,000 Deere & Co., Note, 8.45%, 3/1/2000 2,020,960
-------------------------------------------------------------------
500,000 Essex Group, Inc., Sr. Note, 10.00%, 5/1/2003 508,750
-------------------------------------------------------------------
1,000,000 Praxair, Inc., Deb., 8.70%, 7/15/2022 1,148,510
-------------------------------------------------------------------
500,000 Wolverine Tube, Inc., Sr. Sub. Note, 10.125%, 9/1/2002 540,000
------------------------------------------------------------------- ------------
Total 6,516,850
------------------------------------------------------------------- ------------
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- ----------------------------------------------------------------------------------
INSURANCE--3.3%
-------------------------------------------------------------------
$ 500,000 Americo Life, Inc., Sr. Sub. Note, 9.25%, 6/1/2005 $ 503,750
-------------------------------------------------------------------
1,000,000 Delphi Financial Group, Inc., 8.00%, 10/1/2003 987,820
-------------------------------------------------------------------
1,000,000 Leucadia National Corp., Sr. Sub. Note, 10.375%, 6/15/2002 1,110,000
-------------------------------------------------------------------
1,500,000 Sunamerica, Inc., Deb., 8.125%, 4/28/2023 1,585,800
------------------------------------------------------------------- ------------
Total 4,187,370
------------------------------------------------------------------- ------------
LEISURE--3.3%
-------------------------------------------------------------------
500,000 Cinemark USA, Inc., Sr. Note, 12.00%, 6/1/2002 557,500
-------------------------------------------------------------------
2,000,000 Eastman Kodak Co., Sr. Deb., 9.50%, 6/15/2008 2,572,240
-------------------------------------------------------------------
1,000,000 Paramount Communications, Inc., Deb., 8.25%, 8/1/2022 1,006,710
------------------------------------------------------------------- ------------
Total 4,136,450
------------------------------------------------------------------- ------------
NON-FERROUS METALS/MINERALS--0.4%
-------------------------------------------------------------------
500,000 Kaiser Aluminum & Chemical Corp., Sr. Sub. Note, 12.75%, 2/1/2003 495,000
------------------------------------------------------------------- ------------
OIL & GAS--5.6%
-------------------------------------------------------------------
2,000,000 Ashland Oil Co., Deb., 11.125%, 10/15/2017 2,456,920
-------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Deb., 11.125%, 6/1/2019 1,278,360
-------------------------------------------------------------------
1,000,000 Seagull Energy Corp., Sr. Note, 7.875%, 8/1/2003 1,008,750
-------------------------------------------------------------------
1,000,000 Triton Energy Corp., Sr. Sub. Disc Note, 0/12.90%, 11/1/97 702,500
-------------------------------------------------------------------
1,000,000 USX Corp., Deb., 9.125%, 1/15/2013 1,041,460
-------------------------------------------------------------------
500,000 USX Corp., Note, 9.625%, 8/15/2003 561,385
------------------------------------------------------------------- ------------
Total 7,049,375
------------------------------------------------------------------- ------------
PUBLISHING--2.7%
-------------------------------------------------------------------
2,000,000 News America Holdings, Sr. Note, 8.50%, 2/15/2005 2,213,940
-------------------------------------------------------------------
1,000,000 News Corp., Sr. Note, 12.00%, 12/15/2001 1,227,500
------------------------------------------------------------------- ------------
Total 3,441,440
------------------------------------------------------------------- ------------
RAIL INDUSTRY--0.4%
-------------------------------------------------------------------
500,000 Southern Pacific Rail Corp., Sr. Note, 9.375%, 8/15/2005 513,750
------------------------------------------------------------------- ------------
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS--CONTINUED
- ----------------------------------------------------------------------------------
RETAILERS--3.6%
-------------------------------------------------------------------
$1,000,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 $ 1,020,000
-------------------------------------------------------------------
1,000,000 JC Penney & Co. Inc., Sinking Fund Deb., 9.75%, 6/15/2021 1,261,450
-------------------------------------------------------------------
2,000,000 May Dept. Stores Co., 8.375%, 10/1/2022 2,281,140
------------------------------------------------------------------- ------------
Total 4,562,590
------------------------------------------------------------------- ------------
STEEL--1.7%
-------------------------------------------------------------------
500,000 Armco, Inc., Sr. Note, 11.375%, 10/15/99 538,750
-------------------------------------------------------------------
1,000,000 Carbide/Graphite Group Inc., Sr. Note, 11.50%, 9/1/2003 1,035,000
-------------------------------------------------------------------
500,000 Geneva Steel Co., Sr. Note, 11.125%, 3/15/2001 523,750
------------------------------------------------------------------- ------------
Total 2,097,500
------------------------------------------------------------------- ------------
SURFACE TRANSPORTATION--0.4%
-------------------------------------------------------------------
500,000 Greyhound Lines, Inc., Sr. Note, 10.00%, 7/31/2001 522,500
------------------------------------------------------------------- ------------
TELECOMMUNICATIONS/CELLULAR--1.4%
-------------------------------------------------------------------
1,000,000 GTE South Corp., Deb., 9.375%, 6/15/2030 1,117,840
-------------------------------------------------------------------
1,000,000 PanAmSat, L.P., Sr. Sub. Disc. Note, 0/11.375%, 8/1/2003 647,500
------------------------------------------------------------------- ------------
Total 1,765,340
------------------------------------------------------------------- ------------
UTILITIES--6.7%
-------------------------------------------------------------------
500,000 Long Island Lighting Co., Deb., 9.00%, 11/1/2022 552,860
-------------------------------------------------------------------
500,000 Long Island Lighting Co., Deb., 9.625%, 7/1/2024 577,515
-------------------------------------------------------------------
1,000,000 Niagara Mohawk Power Corp., First Mortgage, 9.50%, 3/1/2021 1,156,550
-------------------------------------------------------------------
2,000,000 Ontario Hydro, Government Guaranteed Note, 9.250%, 5/1/95 2,136,300
-------------------------------------------------------------------
1,000,000 Southern California Edison, Mortgage Bonds, 8.875%, 6/1/2024 1,120,890
-------------------------------------------------------------------
2,600,000 Tennessee Valley Authority, Deb., Series C, 6.875%, 1/15/2002 2,860,130
------------------------------------------------------------------- ------------
Total 8,404,245
------------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $102,095,718) 107,262,947
------------------------------------------------------------------- ------------
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
PREFERRED STOCKS--0.4%
- ----------------------------------------------------------------------------------
UTILITIES--0.4%
-------------------------------------------------------------------
$ 18,000 Long Island Lighting Co., Series AA Pfd., 7.95% $ 495,000
------------------------------------------------------------------- ------------
GOVERNMENT AGENCIES--3.8%
- ----------------------------------------------------------------------------------
SOVEREIGNTY--3.8%
-------------------------------------------------------------------
1,400,000 New Zealand Government, Deb., 10.5%, 7/16/2000 1,658,678
-------------------------------------------------------------------
1,500,000 Province of Quebec, 13.25%, 09/15/14 2,095,680
-------------------------------------------------------------------
1,000,000 Province of Quebec, 7.5%, 7/15/23 1,050,440
------------------------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $4,717,856) 4,804,798
------------------------------------------------------------------- ------------
MORTGAGE-BACKED SECURITIES--5.1%
- ----------------------------------------------------------------------------------
STRUCTURED PRODUCTS (ABS)--5.1%
-------------------------------------------------------------------
1,000,000 Discover Card Corp., 8.85%, 7/15/98 1,090,800
-------------------------------------------------------------------
1,000,000 GE Capital Mortgage Services, Inc. 1991-1, Class B, 8.70%,
8/30/2011 1,105,320
-------------------------------------------------------------------
1,000,000 Green Tree Financial Corp. 1992-2 Manufacturing Housing Sub Pass
Thru, 9.15%, 1/15/2018 1,080,650
-------------------------------------------------------------------
2,000,000 MBNA Corp., Series 1992 2-A, 6.20%, 8/15/99 2,077,120
-------------------------------------------------------------------
1,000,000 Merrill Lynch Mortgage Investment, Inc., Series 1988H, 9.70%,
6/15/2008 1,082,500
------------------------------------------------------------------- ------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $6,281,250) 6,436,390
------------------------------------------------------------------- ------------
*REPURCHASE AGREEMENTS--6.5%
- ----------------------------------------------------------------------------------
8,135,000 J.P. Morgan Securities, Inc., 2.99%, dated 10/29/93, due 11/1/93
(Note 2B) 8,135,000
------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $121,715,824) $127,134,135+
------------------------------------------------------------------- ------------
</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 $121,717,474. The
net unrealized appreciation of investments on a federal income tax basis
amounts to $5,416,661, which is comprised of $5,800,543 appreciation and
$383,882 depreciation at October 31, 1993.
ABS -- Asset Backed Securities
PIK -- Payment in kind.
Note: The categories of investments are shown as a percentage of net assets
($125,761,959) at October 31, 1993.
(See Notes which are an integral part of the Financial Statements)
FORTRESS BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments at value (Notes 2A and 2B)
(identified cost, $121,715,824 and tax cost, $121,717,474) $127,134,135
- --------------------------------------------------------------------------------
Cash 5,041
- --------------------------------------------------------------------------------
Receivable for investments sold 2,648,503
- --------------------------------------------------------------------------------
Interest receivable 2,511,856
- --------------------------------------------------------------------------------
Receivable for capital stock sold 1,061,620
- -------------------------------------------------------------------------------- ------------
Total assets 133,361,155
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for investments purchased $6,572,130
- -------------------------------------------------------------------
Dividends payable 461,442
- -------------------------------------------------------------------
Payable for capital stock redeemed 395,012
- -------------------------------------------------------------------
Accrued expenses 170,612
- ------------------------------------------------------------------- ----------
Total liabilities 7,599,196
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 12,211,700 shares of capital stock outstanding $125,761,959
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $118,483,275
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,418,311
- --------------------------------------------------------------------------------
Accumulated net realized gain on investments 1,886,224
- --------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (25,851)
- -------------------------------------------------------------------------------- ------------
Total $125,761,959
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, and Redemption Price Per Share
($125,761,959 / 12,211,700 shares of capital stock outstanding) $10.30
- -------------------------------------------------------------------------------- ------------
COMPUTATION OF OFFERING PRICE:
OFFERING PRICE PER SHARE (100/99 OF $10.30)* $10.40
- -------------------------------------------------------------------------------- ------------
</TABLE>
* On sales of $1,000,000 or more the offering price is reduced as stated under
"What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FORTRESS BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------
Interest $ 7,801,203
- --------------------------------------------------------------------------------
Dividends 17,887
- -------------------------------------------------------------------------------- ------------
Total investment income (Note 2C) 7,819,090
- --------------------------------------------------------------------------------
EXPENSES--
- --------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 671,751
- -------------------------------------------------------------------
Directors' fees 4,763
- -------------------------------------------------------------------
Administrative personnel and services (Note 5) 288,504
- -------------------------------------------------------------------
Custodian, transfer and dividend disbursing agent fees and expenses 154,701
- -------------------------------------------------------------------
Capital stock registration costs 115,524
- -------------------------------------------------------------------
Auditing fees 18,082
- -------------------------------------------------------------------
Legal fees 9,051
- -------------------------------------------------------------------
Printing and postage 43,384
- -------------------------------------------------------------------
Insurance premiums 6,767
- -------------------------------------------------------------------
Taxes 3,855
- -------------------------------------------------------------------
Shareholder servicing fee 162,264
- -------------------------------------------------------------------
Miscellaneous 1,239
- ------------------------------------------------------------------- ----------
Total expenses 1,479,885
- -------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) 548,973
- ------------------------------------------------------------------- ----------
Net expenses 930,912
- -------------------------------------------------------------------------------- ------------
Net investment income 6,888,178
- -------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------
Net realized gain on investments (identified cost basis)-- 2,082,462
- --------------------------------------------------------------------------------
Net change in unrealized appreciation on investments 6,719,114
- -------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments 8,801,576
- -------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 15,689,754
- -------------------------------------------------------------------------------- ------------
</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,
----------------------------
1993 1992*
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------
Net investment income $ 6,888,178 $ 1,219,186
- -----------------------------------------------------------------
Net realized gain from investment transactions ($2,084,112 net
gain and $112,136 net gain, respectively, as computed for
federal tax purposes) 2,082,462 112,136
- -----------------------------------------------------------------
Change in unrealized appreciation (depreciation)
of investments 6,719,114 (1,136,377)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 15,689,754 194,945
- ----------------------------------------------------------------- ------------ ------------
NET EQUALIZATION CREDITS (NOTE 2E) 116,945 167,586
- ----------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 3)
- -----------------------------------------------------------------
Dividends to shareholders from net investment income (7,005,123) (1,395,956)
- -----------------------------------------------------------------
Distributions in excess of net investment income (20,955) (4,896)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets from distributions to shareholders (7,026,078) (1,400,852)
- ----------------------------------------------------------------- ------------ ------------
CAPITAL STOCK (PRINCIPAL) TRANSACTIONS (EXCLUSIVE OF
AMOUNTS ALLOCATED TO NET INVESTMENT INCOME) (NOTE 4)
- -----------------------------------------------------------------
Proceeds from sale of shares 84,195,992 81,128,886
- -----------------------------------------------------------------
Net asset value of shares issued to shareholders electing to
receive payment of dividends in capital stock 2,669,825 679,758
- -----------------------------------------------------------------
Cost of shares redeemed (24,770,792) (31,951,931)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets from capital stock transactions 62,095,025 49,856,713
- ----------------------------------------------------------------- ------------ ------------
Change in net assets 70,875,646 48,818,392
- ----------------------------------------------------------------- ------------ ------------
NET ASSETS:
- -----------------------------------------------------------------
Beginning of period 54,886,313 6,067,921
- ----------------------------------------------------------------- ------------ ------------
End of period $125,761,959 $ 54,886,313
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
* For the ten months ended October 31, 1992.
(See Notes which are an integral part of the Financial Statements)
FORTRESS BOND FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as a diversified, 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.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Listed Corporate Bonds (and other fixed income securities) are
valued at the last sale prices on national securities exchanges on that day, if
applicable. Unlisted Corporate Bonds are valued at the mean between the bid and asked
prices provided by an independent pricing service. Short-term obligations are generally
valued at the mean between bid and asked prices as furnished by an independent pricing
service. Short-term obligations with maturities of sixty days or less are valued at
amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry System, or to
have segregated within the custodian's 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 the value at least
equals to 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 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.
</TABLE>
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
C. INCOME--Interest income is recorded on the accrual basis and includes discount earned,
less any premium on short-term obligations, and original issue discount on all other debt
securities.
D. FEDERAL TAXES--It is the Fund's policy to continue to comply with the provisions of the
Internal Revenue Code, applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal tax is 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 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.
I. OTHER--Investment transactions are accounted for on the date of the transaction.
</TABLE>
(3) DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly.
Distributions of any net realized capital gains will be made at least once every
twelve months. Dividends and capital gain distributions, if any, are recorded on
the ex-dividend date.
The amounts shown in the financial statements for net investment income for the
year ended October 31, 1993 and the period ended October 31, 1992, differs from
the amount determined for tax purposes because of certain timing differences.
This resulted in distributions to shareholders in excess of net investment
income. These distributions do not represent a return of capital for federal
income tax purposes.
FORTRESS BOND FUND
- --------------------------------------------------------------------------------
(4) CAPITAL STOCK
At October 31, 1993, there were 1,000,000,000,000 shares of ($.0001 par value)
capital stock authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------------------------------
1993 1992*
---------- ----------
- --------------------------------------------------------------------
<S> <C> <C>
Shares outstanding, beginning of period 5,943,685 688,656
- --------------------------------------------------------------------
Shares sold 8,508,866 8,529,534
- --------------------------------------------------------------------
Shares issued to shareholders electing to receive payment of
dividends in
Fund shares 269,258 72,792
- --------------------------------------------------------------------
Shares redeemed (2,510,109) (3,347,297)
- -------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 12,211,700 5,943,685
- -------------------------------------------------------------------- ---------- ----------
</TABLE>
* For the ten months ended October 31, 1992.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Advisers, the Fund's investment adviser, ("Adviser") received for its
services an annual investment advisory fee equal to .75 of 1% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive a portion
of its fee. The Adviser can terminate this voluntary waiver at any time at its
sole discretion. For the fiscal year ended October 31, 1993, the Adviser earned
a fee of $671,751 of which $548,973 was voluntarily waived.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. ("FAS") Certain of the Officers and
Directors of the Fund are Officers and Directors of the above corporations.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales of investments, excluding short-term securities for the
fiscal year ended October 31, 1993 were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
PURCHASES-- $109,869,032
- ----------------------------------------------------------------------------- ------------
SALES-- $ 52,320,090
- ----------------------------------------------------------------------------- ------------
</TABLE>
REPORT OF ERNST & YOUNG, 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 the Investment Series Funds, Inc.) and the related statement of
operations as of October 31, 1993, the statement of changes in net assets for
the year ended October 31, 1993 and for the ten months ended October 31, 1992,
and the financial highlights (see page 2 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, 1993, 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 of Investment Series Funds, Inc. at October 31, 1993, the
results of its operations for the year then ended, the changes in its net assets
for the year ended October 31, 1993 and for the ten months ended October 31,
1993 and the financial highlights for the periods presented in conformity with
generally accepted accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
December 10, 1993
(This page intentionally left blank)
(This page intentionally left blank)
(This page intentionally left blank)
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <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 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 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Center
Pittsburgh, Pennsylvania 15219
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</TABLE>
FORTRESS BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS,
INC.)
PROSPECTUS
A Diversified Portfolio of
Investment Series Funds, Inc.,
an Open-End Management
Investment Company
Prospectus Dated December 31, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
2041304 (12/93)
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, 1993. 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, 1993
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Futures and Options Transactions 1
Investing in Foreign Currencies 2
When-Issued and Delayed
Delivery Transactions 3
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
INVESTMENT LIMITATIONS 4
- ---------------------------------------------------------------
MANAGEMENT OF THE CORPORATION 7
- ---------------------------------------------------------------
Officers and Directors 7
The Funds 8
Fund Ownership 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE ARRANGEMENTS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
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 11
- ---------------------------------------------------------------
EXCHANGE PRIVILEGE 11
- ---------------------------------------------------------------
Reduced Sales Charge 12
Requirements for Exchange 12
Tax Consequences 12
Making an Exchange 12
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
Duration 14
APPENDIX 15
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio of Investment Series Funds, Inc. (the "Corporation").
The Fund was established as a portfolio of Investment Series Trust, a
Massachusetts business trust, on March 17, 1987, and on 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:
- - domestically-issued corporate debt obligations;
- - asset-backed securities;
- - obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; and
- - repurchase agreements.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income. The Fund currently does not intend to
invest more than 5% of its total assets in options transactions.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
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
advisor 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 Fund's investment 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 Fund's investment 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 arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objectives and
policies, not for investment leverage. In
- --------------------------------------------------------------------------------
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous.
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payments for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and maintained until the transaction is settled.
As a matter of policy, 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 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 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. 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 year ended October 31, 1993,
the period ended October 31, 1992, and the fiscal year ended December 31, 1991,
the portfolio turnover rates were 51%, 49%, and 33%, 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. (For purposes of this limitation, 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.")
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 in
accordance with that section of the prospectus entitled "Lending of
Portfolio 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:
- during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into
or exchangeable, without payment of additional consideration, for
securities of the same issuer as, and equal in amount to, the
securities sold short; and
- --------------------------------------------------------------------------------
- not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in those limitations becomes effective.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS
AND DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Corporation or its investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. The Fund will not purchase put options
on securities unless the securities are held in the Fund's portfolio.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will limit its investments in the
securities of other investment companies to those of money market funds
having investment objectives and policies similar to its own. The Fund
will purchase securities of closed-end investment companies only in open
market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization or acquisition of
assets. While it is the Fund's policy to waive its investment advisory
fee on assets invested in securities of open-end investment companies, it
should be noted that investment companies incur certain expenses such as
custodian and transfer agent fees, and therefore any investment by a Fund
in shares of another investment company would be subject to such
duplicate expenses.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
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.
MANAGEMENT OF THE CORPORATION
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Officers and Directors are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Advisers,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Inc., and the Funds (as defined below).
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
John F. Donahue+* Chairman and Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Director Trustee, Federated Advisers, Federated Management, and
Tower Federated Research; Director, AEtna Life and Casualty
Pittsburgh, PA Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, President and Trustee of
the Corporation.
- -----------------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. Director Senior Vice-President, John R. Wood and Associates, Inc.,
Wood/IPC Realtors; President, Investment Properties Corporation;
Commercial Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., Realtors in Southwest Florida; Director, Trustee, or Managing
3255 Tamiami Trail North General Partner of the Funds; formerly, President, Naples
Naples, FL Property Management, Inc.
- -----------------------------------------------------------------------------------------------------------------
William J. Copeland Director Director and Member of the Executive Committee, Michael
One PNC Plaza Baker, Inc.; Director, Trustee, or Managing General Partner
23rd Floor of the Funds; formerly, Vice Chairman and Director, PNC
Pittsburgh, PA Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.
- -----------------------------------------------------------------------------------------------------------------
J. Christopher Donahue* President and President and Trustee, Federated Investors; Trustee,
Federated Investors Director Federated Advisers, Federated Management, and Federated
Tower Research; President and Director, Federated Administrative
Pittsburgh, PA Services, Inc.; Trustee, Federated Services Company;
President or Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds.
Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Corporation.
- -----------------------------------------------------------------------------------------------------------------
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the
Concord, MA Funds; formerly, Director, Blue Cross of Massachusetts,
Inc.
- -----------------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.
- -----------------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+ Director Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Counsel, Horizon Financial,
F.A., Western Region.
- -----------------------------------------------------------------------------------------------------------------
Peter E. Madden Director Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee or Managing General
Boston, MA Partner of the Funds; formerly, President, State Street
Bank and Trust Company and State Street Boston Corporation
and Trustee, Lahey Clinic Foundation, Inc.
- -----------------------------------------------------------------------------------------------------------------
Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Trustee, or Managing General
Pittsburgh, PA Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C> <C>
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Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace and
Learning RAND Corporation, Online Computer Library Center, Inc., and
University of Pittsburgh U.S. Space Foundation; Chairman, Czecho Slovak Management
Pittsburgh, PA Center; Director, Trustee, or Managing General Partner of
the Funds; President Emeritus, University of Pittsburgh;
formerly Chairman, National Advisory Council for
Environmental Policy and Technology.
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Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee,
4905 Bayard Street or Managing General Partner of the Funds.
Pittsburgh, PA
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Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors;
Federated Investors Chairman and Director, Federated Securities Corp.;
Tower President or Vice President of the Funds; Director or
Pittsburgh, PA Trustee of some of the Funds.
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Edward C. Gonzales Vice President Vice President, Treasurer, and Trustee, Federated
Federated Investors and Treasurer Investors; Vice President and Treasurer, Federated
Tower Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services
Company; Chairman, Treasurer, and Director, Federated
Administrative Services, Inc.; Trustee of some of the
Funds; Vice President and Treasurer of the Funds.
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John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee,
Federated Investors and Secretary Federated Investors; Vice President, Secretary and Trustee,
Tower Federated Advisers, Federated Management, and Federated
Pittsburgh, PA Research; Trustee, Federated Services Company; Trustee,
Federated Services Company Executive Vice President,
Secretary, and Director, Federated Administrative Services,
Inc.; Director Federated Securities Corp.; Vice President
and Secretary of the Funds.
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John A. Staley, IV Vice President Vice President and Trustee, Federated Investors; Executive
Federated Investors Vice President, Federated Securities Corp.; President and
Tower Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Vice President of the Funds; Director,
Trustee, or Managing General Partner of some of the Funds;
formerly, Vice President, The Standard Fire Insurance
Company and President of its Federated Research Division.
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</TABLE>
* This Director is deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
+ Members of the Corporation's Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the Board of Directors
between meetings of the Directors.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: A.T. Ohio
Tax-Free Money Fund; American Leaders Fund, Inc.; Annuity Management Series;
Automated Cash Management Trust; Automated Government Money Trust; The Boulevard
Funds; California Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust
Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
FT Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated
GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Intermediate Government Trust; Federated Master
Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated
Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
- --------------------------------------------------------------------------------
for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Intermediate Municipal Trust; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust,
Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
New York Municipal Cash Trust; 111 Corcoran Funds; The Planters Funds; Portage
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust;
Signet Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II;
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; and Trust for U.S. Treasury Obligations.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
Merrill Lynch, Pierce, Fenner & Smith (as record owner holding Fund shares for
its clients), Jacksonville, Florida, owned approximately 4,306,722 shares
(33.40%) of the Fund as of December 31, 1993.
INVESTMENT ADVISORY SERVICES
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ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee
of Federated Advisers, is Chairman and Trustee of Federated Investors and
Chairman and Director of the Corporation. John A. Staley, IV, President and
Trustee of Federated Advisers, is Vice President and Trustee of Federated
Investors, Executive Vice President of Federated Securities Corp., and Vice
President of the Corporation. J. Christopher Donahue, Trustee of Federated
Advisers, is President and Trustee of Federated Investors, President and
Director of Federated Administrative Services, Inc., and President and Director
of the Corporation. John W. McGonigle, Vice President, Secretary and Trustee of
Federated Advisers, is Trustee, Vice President, Secretary and General Counsel of
Federated Investors, Executive Vice President, Secretary and Director of
Federated Administrative Services, Inc., Executive Vice President and Director
of Federated Securities Corp., and Vice President and Secretary of the
Corporation.
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 year
ended October 31, 1993, for the period ended October 31, 1992, and for the
fiscal years ended December 31, 1991 and 1990, the Adviser earned, with respect
to this Fund, $671,751, $113,009, $52,851, and $47,436, respectively, of which
$548,973, $113,009, $52,851 and $47,436 was voluntarily waived because of
undertakings to limit the Fund's expenses. In addition, for the fiscal year
ended October 31, 1993, the period ended October 31, 1992 and the fiscal years
ended December 31, 1991 and 1990, the Adviser voluntarily reimbursed, with
respect to this Fund, $0, $200,470, $221,961 and $230,000, respectively, of
other operating expenses because of the same 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 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 ARRANGEMENTS
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For the fiscal year ended October 31, 1993, the period ended October 31, 1992
and for the fiscal years ended December 31, 1991 and 1990, the distributor paid
$0, $0, $125, and $343 respectively, to brokers and dealers for distribution and
administrative services and to administrators for administrative services. These
payments were made prior to the reorganization of the Fund into a portfolio of
the Corporation. The administrative services include, but are not limited to,
providing office space, equipment, telephone facilities, and various personnel,
including clerical, supervisory, and computer, 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, and addresses, and providing
such other services as the Fund may reasonably request.
ADMINISTRATIVE SERVICES
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Federated Administrative Services, Inc., a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund at approximate cost.
For the fiscal year ended October 31, 1993, the period ended October 31, 1992,
and for the fiscal years ended December 31, 1991 and 1990, the Fund incurred
costs for administrative services of $288,504, $131,503, $164,561, and $117,913
respectively. These payments were made prior to the reorganization of the Fund
into a portfolio of the Corporation. John A. Staley, IV, an officer of the
Corporation, and Dr. Henry J. Gailliot, an officer of Federated Advisers, the
Adviser to the Corporation, each hold approximately 15% and 20%, respectively,
of the outstanding common stock and serve as directors of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services, Inc. For the period ended October 31, 1993,
the period ended October 31, 1992, and for the fiscal years ended December 31,
1991 and 1990, Federated Administrative Services, Inc., paid approximately,
$165,431, $189,741, $196,783, and $169,379 respectively, for services provided
by Commercial Data Services, Inc.
BROKERAGE TRANSACTIONS
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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:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated 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
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Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge 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."
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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
charge. Shares may also be sold without a sales charge 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.
DETERMINING NET ASSET VALUE
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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:
- - according to the last sale price on a national securities exchange, if
available;
- - in the absence of recorded sales for equity securities, according to the mean
between the current closing bid and asked prices and for bonds and other fixed
income securities as determined by an independent pricing service;
- - for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or for short-term obligations
with maturities of less than 60 days, at amortized cost unless the Board
determines this is not fair value; or
- - at fair value as determined in good faith by the Fund's Board of Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
- - yield;
- - quality;
- - coupon rate;
- - maturity;
- - type of issue;
- - trading characteristics; and
- - other market data.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices.
REDEEMING SHARES
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Shares of the Fund are redeemed at the next computed net asset value after State
Street Bank receives the redemption request. Redemption procedures are explained
in the prospectus under "Redeeming Shares." Although State Street Bank does not
charge for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $1,000.
EXCHANGE PRIVILEGE
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The Securities and Exchange Commission has issued an order exempting the
Corporation from certain provisions of the Investment Company Act of 1940. 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 charge different from that of the Fund's or with no sales charge
and which 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 charge already paid and any sales charge 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 charge, to exchange their shares
for Fund shares on a basis other than their current offering price. These
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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
charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or State Street Bank in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net asset value
of at least $1,500. 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
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THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
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
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The Fund's average annual total returns for the one-year and five-year periods
ended October 31, 1993 and for the period from July 8, 1988 (effective date of
the Fund's registration statement) to October 31, 1993 were 18.40%, 12.35% and
11.41%, 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 redemption fee 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
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The Fund's yield for the thirty-day period ended October 31, 1993, was 6.65%.
The yield for the Fund is determined each day by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders. To the
extent that financial institutions and broker/dealers charge fees in connection
with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
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The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return. From
time to time, the Fund may advertise its performance compared to similar funds
or portfolios using certain indices, reporting services, and financial
publications. These may include the following:
- - SHEARSON LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; and publicly issued, fixed
rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds approximates nine
years. Tracked by Shearson Lehman Hutton, Inc., the index calculates total
returns for one-month, three-month, twelve-month, and ten-year periods and
year-to-date.
- - SALOMON BROTHERS AAA-AA CORPORATES INDEX calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or more
and companies in industry, public utilities, and finance.
- - MERRILL LYNCH CORPORATE & GOVERNMENT MASTER INDEX is an unmanaged index
comprised of approximately 4,821 issues which include corporate debt
obligations rated BBB or better and publicly issued, non-convertible domestic
debt of the U.S. government or any agency thereof. These quality parameters
are based on composites of ratings assigned by Standard and Poor's Corporation
and Moody's Investors Service, Inc. Only notes and bonds with a minimum
maturity of one year are included.
- - MERRILL LYNCH CORPORATE MASTER is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better. These
quality parameters are based on composites of ratings assigned by Standard and
Poor's Corporation and Moody's Investors Service, Inc. Only bonds with a
minimum maturity of one year are included.
- - LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in advertising and
sales literature.
- - THE LEHMAN BROTHERS CORPORATE BOND INDEX is comprised of a large universe of
bonds issued by industrial, utility and financial companies which have a
minimum rating of Baa by Moody's Investors Service, Inc., BBB by Standard and
Poor's Corporation or, in the case of bank bonds not rated by either of the
previously mentioned services, BBB by Fitch Investors Service, Inc.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed Mutual Funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Investors may use such indices in addition to the Fund's prospectus to obtain a
more complete view of the Fund's performance before investing. Of course, when
comparing Fund performance to any index, conditions such as
- --------------------------------------------------------------------------------
composition of the index and prevailing market conditions should be considered
in assessing the significance of such comparisons.
When comparing funds using reporting services, or total return and yield,
investors should take into consideration any relevant differences in funds such
as permitted portfolio compositions and methods used to value portfolio
securities and compute offering price.
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
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STANDARD AND POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
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.
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
edge." 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., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
STANDARD AND POOR'S CORPORATION COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
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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:
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; 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.
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.
2041304B (12/93)
FORTRESS BOND FUND
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MANAGEMENT DISCUSSION & ANALYSIS:
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The twelve month period ending October 1993 was very good for
investors in corporate fixed income securities. During the period, interest
rates fell dramatically to the lowest level in 20 years. For example,
30-year. U.S. Treasuries declined in yield from 7.66% to 6.03%. This
decline in interest rates was the result of continued slow growth in the
U.S. economy coupled with very low inflation. Corporate securities
outperformed government securities during the period as investors' demand
for yield caused spreads between governments and corporates to tighten.
Fortress Bond Fund (the "Fund") performed well during the period. The
Fund had a total return of 20.61% (based on net asset value) for the 12
months ending 10/31/93 versus 15.10% for the average Lipper BBB-rated fund.
This placed the Fund 4th out of the 54 funds in this category. The Fund
also outperformed the Lehman Corporate Bond Index which returned 15.16%
during the period. The Fund benefited from its position in call-protected
securities which performed well in the falling interest rate environment.
The Fund also benefited as issuers like Fruit-of-the-Loom, Chrysler, and
News Corp. were upgraded by the major rating agencies.
Going forward, Fund management turned slightly cautious in September,
reducing the Fund's target duration from 6 years to 5.25 years. The speed
and magnitude of the summer decline in interest rates appears to leave the
market vulnerable to anything but a continuation of outstanding news. In
addition, while Fund management believed long governments in the 7% area
represented good value at the beginning of the period, the value argument
became less compelling with long governments at 6%. While a large increase
in rates does not seem likely, further gains from 6% may also be difficult.
Therefore, a reduction in the Fund's risk profile was appropriate.
Fund management has also modestly shifted the Fund's investment-grade
holdings. Spreads on mid BBB to mid A securities have tightened and are not
particularly compelling. Increased emphasis has been placed on A+ and AA
securities on the high end and BBB-securities on the low end. We believe
that the higher rated securities will not suffer a great degree if spreads
widen while the BBB-securities will benefit as these issuers (News America,
Fruit-of-the-Loom, and Chrysler, for example) improve their credit quality.
PERFORMANCE COMPARISON
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COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 PURCHASE
IN FORTRESS BOND FUND***, LEHMAN CORPORATE BOND INDEX+, AND LIPPER CORPORATE
DEBT FUNDS BBB RATED AVERAGE+.
Past Performance is not indicative of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.
This annual report incorporates by reference and accompanies the prospectus
dated December 31, 1993.
* Reflects operations of Fortress Bond Fund from the start of business on
5/20/87, through 10/31/93.
** Represents a hypothetical investment of $10,000 in Fortress Bond Fund,
after deducting the maximum sales charge of 1% ($10,000 investment minus
$100 sales charge = $9,900). The Fund's performance assumes the
reinvestment of all dividends and distributions. The Lehman Corporate Bond
Index and the Lipper Corporate Debt Funds BBB Rated Average are adjusted to
reflect reinvestment of dividends on securities in the indices.
*** The Fund changed its investment policy from investing primarily in
lower-rated bonds to investing primarily in investment-grade bonds
effective July 1, 1992.
+ The Lehman Corporate Bond Index and the Lipper Corporate Debt Funds BBB
Rated Average are not adjusted to reflect sales loads, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance.
++ Reflects maximum applicable fees.
FEDERATED SECURITIES CORP.
(LOGO)
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Distributor
3110812-ARS (12/93)
APPENDIX
A. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. The line graph is a visual
representation of a comparison of change in value of a
hypothetical $10,000 purchase in Capital Growth Fund (Class
A Shares) (the "Fund"); Standard and Poor's 500 Index and
Lipper Growth Fund Index. The "x" axis reflects the cost of
the investment. The "y" axis reflects computation periods
from the Fund's start of business, 02/04/92, through
10/31/93. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to Standard
and Poor's 500 Index and Lipper Growth Fund Index ; the
ending values are $12,286, $12,037 and $10,418 respectively.
There is also a legend in the upper left quadrant of the
graphic presentation which indicates the Average Annual
Total Return for the period ended October 31, 1993,
beginning with the inception date of the Fund (02/04/92),
and the one-year period; the Average Annual Total Returns
are 2.40% and 10.13%, respectively.
B. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. The line graph is a visual
representation of a comparison of change in value of a
hypothetical $10,000 purchase in Capital Growth Fund (Class
C Shares) (the "Fund"); Standard and Poor's 500 Index and
Lipper Growth Fund Index . The "x" axis reflects the cost
of the investment. The "y" axis reflects the computation
period since the Fund's start of business, 4/13/93, through
10/31/93. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to Standard
and Poor's 500 Index and Lipper Growth Fund Index; the
ending values are $10,949, $10,686 and $10,506 respectively.
There is also a legend in the upper left quadrant of the
graphic presentation which indicates the Average Annual
Total Return for the period ended October 31, 1993,
beginning with the inception date of the Fund, (4/13/93);
the Average Annual Total Return is 6.86%.
C. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. The line graph is a visual
representation of a comparison of change in value of a
hypothetical $10,000 purchase in Capital Growth Fund
(Investment Shares) (the "Fund") , Standard and Poor's 500
Index and Lipper Growth Fund Index. The "x" axis reflects
the cost of the investment. The "y" axis reflects
computation periods from the Fund's start of business,
11/30/89, through 10/31/93. The right margin reflects the
ending value of the hypothetical investment in the Fund as
compared to Standard and Poor's 500 Index and Lipper Growth
Fund Index; the ending values are $15,819, $15,340 and
$13,916, respectively. There is also a legend in the upper
left quadrant of the graphic presentation which indicates
the Average Annual Total Return for the period ended October
31, 1993, beginning with the inception date of the Fund
(11/30/89), and the one-year period; the Average Annual
Total Returns are 8.80% and 9.07%, respectively.
D. The graphic presentation here displayed consists of a
boxed legend in the bottom center indicating the components
of the corresponding line graph. The line graph is a visual
representation of a comparison of change in value of a
hypothetical $10,000 purchase in Fortress Bond Fund (the
"Fund"); Lehman Corporate Bond Index and Lipper Corporate
Debt Funds BBB Rated Average. The "x" axis reflects the
cost of the investment. The "y" axis reflects the
computation period since the Fund's start of business,
5/20/87, through 10/31/93. The right margin reflects the
ending value of the hypothetical investment in the Fund as
compared to Lehman Corporate Bond Index and Lipper
Corporate Debt Funds BBB Rated Average; the ending values
are $20,166 $20,061 and $18,848 respectively. There is
also a legend in the upper left quadrant of the graphic
presentation which indicates the Fund's Average Annual Total
Return for the period ended October 31, 1993, beginning with
the inception date of the Fund (5/20/87), the one-year
period, and the five-year period; the Average Annual Total
Returns are 11.41%, 12.35%, and 18.40%, respectively.
