FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS
The shares of Federated Bond 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 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 RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares, Class B Shares, or Class C Shares of the Fund. Keep
this prospectus for future reference.
The Fund has also filed with the Securities and Exchange Commission a Combined
Statement of Additional Information dated June 27, 1995 for Class A Shares,
Class B Shares, Class C Shares, and Fortress Shares. 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 to 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 June 27, 1995
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Class A Shares...............................................................1
Class B Shares...............................................................2
Class C Shares...............................................................3
Synopsis.......................................................................4
Liberty Family of Funds........................................................5
Federated LifeTrackTM Program (Class
A Shares and Class C Shares)..............................................6
Investment Information.........................................................7
Investment Objective.........................................................7
Investment Policies..........................................................7
Investment Limitations......................................................15
Net Asset Value...............................................................16
Investing in the Fund.........................................................17
How To Purchase Shares........................................................18
Investing In Class A Shares.................................................18
Investing In Class B Shares.................................................20
Investing In Class C Shares.................................................21
Special Purchase Features...................................................21
Exchange Privilege............................................................22
How To Redeem Shares..........................................................24
Special Redemption Features.................................................25
Contingent Deferred Sales Charge............................................26
Elimination of Contingent Deferred
Sales Charge.............................................................27
Account and Share Information.................................................28
Investment Series Funds, Inc., Information....................................29
Management of the Corporation...............................................29
Distribution of Shares......................................................30
Administration of the Fund..................................................32
Shareholder Information.......................................................33
Voting Rights...............................................................33
Tax Information...............................................................34
Federal Income Tax..........................................................34
Pennsylvania Personal Property Taxes........................................34
Performance Information.......................................................34
Other Classes of Shares.......................................................35
Financial Highlights..........................................................36
Financial Statements..........................................................37
Report of Ernst & Young LLP,
Independent Auditors........................................................53
Appendix......................................................................54
Addresses.....................................................................56
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SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
<TABLE>
<CAPTION>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
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
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)..........................................0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)..................................None
Exchange Fee....................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES*
(As a percentage of average net assets)
Management Fee (after waiver) (2)...................................................................0.48%
12b-1 Fee (3).......................................................................................None
Total Other Expenses............................................................................... 0.52%
Shareholder Services Fee (after waiver) (4).....................................................0.20%
Total Class A Shares Operating Expenses (5)................................................1.00%
</TABLE>
(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and sold with a sales
load and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 of 1% for redemptions made within
one year of purchase.
(2) The estimated management fee has been reduced to reflect the anticipated
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) Class A Shares has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending October 31, 1995. If Class A Shares were
paying or accruing the 12b-1 fee, Class A Shares would be able to pay up to
0.25% of its average daily net assets for the 12b-1 fee. See "Investment
Series Funds, Inc. Information".
(4) The maximum shareholder services fee is 0.25%.
(5) The total Class A Shares operating expenses are estimated to be 1.38% absent
the anticipated voluntary waiver of the management fee and a portion of the
shareholder services fee.
* Total Class A Shares operating expenses in the table above are estimated
based on average expenses expected to be incurred during the period ending
October 31, 1995. During the course of this period, expenses may be more or
less than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES 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.
<TABLE>
<CAPTION>
<S> <C> <C>
EXAMPLE 1 year 3 years
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...........$60 $75
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES FISCAL YEAR ENDING OCTOBER
31, 1995.
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SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
<TABLE>
<CAPTION>
<S> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....................None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).........None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................None
Exchange Fee...................................................................................None
ANNUAL CLASS B SHARES OPERATING EXPENSES*
(As a percentage of average net assets)
Management Fee (after waiver) (2)..............................................................0.48%
12b-1 Fee......................................................................................0.75%
Total Other Expenses...........................................................................0.57%
Shareholder Services Fee (after waiver)....................................................0.25%
Total Class B Shares Operating Expenses (3)(4)........................................1.80%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").
(2) The estimated management fee has been reduced to reflect the anticipated
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) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The total Class B Shares operating expenses are estimated to be 2.13% absent
the anticipated voluntary waiver of the management fee.
* Total Class B Shares operating expenses in the table above are estimated
based on average expenses expected to be incurred during the period ending
October 31, 1995. During the course of this period, expenses may be more or
less than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS B SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS B SHARES" AND "INVESTMENT SERIES
FUNDS, INC. INFORMATION." Wire-transferred redemptions of less than $5,000 may
be subject to additional fees.
<TABLE>
<CAPTION>
<S> <C> <C>
EXAMPLE 1 year 3 years
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......... $75 $101
You would pay the following expenses on the same investment, assuming no redemption....$18 $57
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS B SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1995.
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SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
<TABLE>
<CAPTION>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).....None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)................................1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).........................None
Exchange Fee...............................................................................None
ANNUAL CLASS C SHARES OPERATING EXPENSES*
(As a percentage of average net assets)
Management Fee (after waiver) (2)..........................................................0.48%
12b-1 Fee................................................................................. 0.75%
Total Other Expenses.......................................................................0.57%
Shareholder Services Fee (after waiver)............................................... 0.25%
Total Class C Shares Operating Expenses (3).......................................1.80%
</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. (See "Contingent Deferred Sales Charge").
(2) The estimated management fee has been reduced to reflect the anticipated
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 Class C Shares operating expenses are estimated to be 2.13% absent
the anticipated voluntary waiver of the management fee.
* Total Class C Shares operating expenses in the table above are estimated
based on average expenses expected to be incurred during the period ending
October 31, 1995. During the course of this period, expenses may be more or
less than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS C SHARES 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.
<TABLE>
<CAPTION>
<S> <C> <C>
EXAMPLE 1 year 3 years
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....................$29 $57
You would pay the following expenses on the same investment, assuming no redemption.......$18 $57
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1995.
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SYNOPSIS
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
change of the Fund to Fortress Bond Fund. On June 27, 1995, the name of the Fund
was changed to Federated Bond Fund. The Articles of Incorporation permit the
Fund 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. With respect to this Fund, as of the date of
this prospectus, the Board of Directors (the "Directors") has established four
classes of shares, known as Class A Shares, Class B Shares, Class C Shares
(individually and collectively referred to, as the context requires, as
"Shares"), and Fortress Shares. This prospectus relates only to the Class A
Shares, Class B Shares, and Class C Shares of the Fund.
Shares of the Fund are designed primarily for individuals and institutions
seeking as high a level of current income as is consistent with the preservation
of capital by investing in a portfolio of investment grade bonds.
For information on how to purchase the Shares offered by this prospectus, please
refer to "Investing in the Fund." The minimum initial investment for Class A
Shares is $500. The minimum initial investment for Class B Shares and Class C
Shares is $1,500. However, the minimum initial investment for a retirement
account in any class is $50. Subsequent investments in any class must be in
amounts of at least $100, except for retirement plans which must be in amounts
of at least $50.
Class A Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed under certain circumstances. For a more complete description, see
"Redeeming Shares."
Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "Redeeming Shares."
Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "Redeeming Shares."
Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as principal underwriter ("Federated Funds") can be found under "Exchange
Privilege."
Federated Advisers is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services.
Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including entering into repurchase agreements, investing in when-issued
securities, and lending portfolio securities. These risks are described under
"Investment Policies."
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Federated Liberty."
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LIBERTY FAMILY OF FUNDS
Class A, Class B, and Class C shares of the Fund are members 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;
Capital Growth Fund, providing appreciation of capital primarily through equity
securities;
Fund for U.S. Government Securities, Inc., providing current income through
long-term U.S. government securities;
International Equity Fund, providing long-term capital growth and income
through international securities;
International Income Fund, providing a high level of current income consistent
with prudent investment risk through high-quality debt securities denominated
primarily in foreign currencies;
Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;
Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated, corporate bonds;
Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
Liberty U.S. Government Money Market Trust, providing current income consistent
with stability of principal through high-quality U.S. government securities;
Liberty Utility Fund, Inc., providing current income and long-term growth of
income, primarily through electric, gas, and communications utilities;
Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal through investment grade securities;
Limited Term Municipal Fund, providing a high level of current income exempt
from federal regular income tax consistent with the preservation of principal,
primarily limited to municipal securities;
Michigan Intermediate Municipal Trust, providing current income exempt from
federal regular income tax and personal income taxes imposed by the State of
Michigan and Michigan municipalities, primarily through Michigan municipal
securities;
Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
Strategic Income Fund, (Fortress Shares only), providing high current income
through investing in domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt obligations;
Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
World Utility Fund, providing total return primarily through securities issued
by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads on future purchases in, and exchanges between, the
Class A Shares of any Liberty Fund so long as they maintain a $500 balance in
one of the Liberty Funds.
FEDERATED LIFETRACKTM PROGRAM (CLASS A SHARES AND CLASS C SHARES)
The Fund is also a member of the Federated LifeTrackTM Program (the "Program")
sold through financial representatives. The Program is 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 a plan trustee. For further
information about participating in the Federated LifeTrackTM Program please
contact an investment professional or the Fund at the address referenced on the
inside back cover of this prospectus.
Other funds available through the Federated LifeTrackTM Program are: American
Leaders Fund, Inc.; Capital Growth Fund; Capital Preservation Fund; Fund for
U.S. Government Securities, Inc.; International Equity Fund; International
Income Fund; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Utility Fund, Inc.; Prime Cash Series; Stock and Bond Fund, Inc.;
and Strategic Income Fund.
With respect to Class A Shares, no sales load is imposed on purchases made by
qualified retirement plans with over $1 million invested in funds participating
in the Federated LifeTrackTM Program.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective stated above cannot be changed without the approval of
shareholders. Unless stated otherwise, the investment policies of the Fund
described below may be changed without shareholder approval. As a matter of
investment policy, the Fund will invest, under normal circumstances, at least
65% of the value of its total net assets in investment grade bonds. Investment
grade bonds are generally described as bonds that are rated in one of the top
four rating categories by a nationally recognized statistical rating
organization ("NRSRO"), such as Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc.
("Fitch"). A description of the ratings categories is contained in the Appendix
to the Prospectus.
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, including zero coupon convertible securities, in
which the Fund will invest will be rated B or better by an NRSRO, or which are
of comparable quality in the judgment of the Fund's investment adviser);
obligations of the United States;
notes, bonds, and discount notes of the
following U.S. government agencies or instrumentalities, such as Federal Home
Loan Banks, Federal National Mortgage Association, Government National Mortgage
Association, Farm Credit System (including the National Bank for Cooperatives
and Banks for Cooperatives), 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;
taxable municipal debt obligations (as a matter of operating policy, the lowest
rated municipal debt obligations in which the Fund will invest will be rated
BBB or better by an NRSRO, or which are of comparable quality in the judgment
of the Fund's investment adviser);
asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
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 may be withdrawn upon notice not exceeding ninety days;
bankers' acceptances issued by a BIF-insured bank, or issued by the bank's Edge
Act subsidiary and guaranteed by the bank, with remaining maturities of nine
months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits
according to the bank's last published statement of condition preceding the
date of acceptance;
preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
other securities which are deemed by the Fund's investment adviser, Federated
Advisers (the "Adviser"), to be consistent with the Fund's investment
objective; and
repurchase agreements collateralized by acceptable investments.
CORPORATE DEBT OBLIGATIONS
Although the Fund will invest primarily in corporate debt obligations that are
rated as investment grade by a NRSRO, or are determined to be comparable quality
in the judgment of the Adviser, the Fund may invest up to 35% of the value of
its total assets in corporate debt obligations that are not investment grade
bonds, but are rated B or better by an NRSRO (i.e., "junk bonds"). Corporate
debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment grade bonds, lower rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower rated bonds may be more
difficult to dispose of or to value than higher rated, lower-yielding bonds.
Bonds rated "BBB" by S&P or Fitch, or "Baa" by Moody's, have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated bonds.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
AS A PERCENTAGE OF TOTAL
MARKET VALUE OF BOND
CREDIT RATING HOLDINGS AS OF DECEMBER 31, 1994
BB................... 6.8%
B.................... 26.5
CC & CCC............. .8
------
34.1%
------
------
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.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets
including vehicle installment purchase obligations and credit card receivables
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. 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, as amended (the "Code"). Issuers of REMICs may take several forms,
such as trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not subject
to federal income taxation. Instead, income is passed through the entity and
is taxed to the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests," some of
which may offer adjustable rates of interest, and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the entity
must be in assets directly or indirectly secured principally by real property.
RESETS OF INTEREST
The interest rates paid on the ARMs, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, adjustable rate mortgage securities
which use indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that closely mirror
the market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market rates, even
after the interest rate is reset, and are subject to correspondingly increased
price volatility. In the event the Fund purchases such 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 REMICs 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"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, record keeping, and the public availability of
information, these investments may present additional risks to investors.
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 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 laws, and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper,
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors, are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial paper,
as determined by the Adviser, as liquid and not subject to the investment
limitations applicable to illiquid securities.
FOREIGN SECURITIES
The Fund reserves the right to invest up to 25% of its total assets in fixed
income securities of foreign governmental units located within an individual
foreign nation and to purchase or sell various currencies on either a spot or
forward basis in connection with these investments.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic issuers. These considerations include the possibility of
expropriation, the unavailability of financial information or the difficulty of
interpreting financial information prepared under foreign accounting standards,
less liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in general.
The Fund will only invest in other investment companies that are money market
funds having an investment objective and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The Adviser to the Fund will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes and to maintain liquidity.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. 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 OR DELAYED
DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, the Fund may pay more/less than the
market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy under
guidelines established by the Directors and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the value of the
securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PUT AND CALL OPTIONS
The Fund may purchase put options on financial futures contracts and put options
on portfolio securities. Financial futures may include index futures. These
options will be used as a hedge to attempt to protect securities which the Fund
holds against decreases in value. For the immediate future, the Fund will enter
into futures contracts directly only when it desires to exercise a financial
futures put option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only purchase puts on financial futures
contracts which are traded on a nationally recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (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 in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
RISKS
When the Fund writes a call option, the Fund risks not participating in any rise
in the value of the underlying security. In addition, when the Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio securities to market
changes. In addition, the Adviser could be incorrect in its expectations about
the direction or extent of market factors such as interest rate movements. In
such an event, the Fund may lose the purchase price of the put option. Finally,
it is not certain that a secondary market for options will exist at all times.
Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Fund's ability to establish and close out option positions depends on this
secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purpose disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including ARMs, CMOs, and REMICs, it will only do so
in a manner consistent with its investment objectives, policies and limitations.
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.
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.
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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 each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value of each class of Shares of the Fund is determined at 4:00
p.m. (Eastern time), Monday through Friday, except on: (i) days on which there
are not sufficient changes in the value of the Fund's portfolio securities that
its net asset value might be materially affected; (ii) days during which no
Shares are tendered for redemption and no orders to purchase Shares are
received; or (iii) the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
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INVESTING IN THE FUND
This prospectus offers investors three classes of Shares that carry sales loads
and charges in different forms and amounts and which bear different levels of
expenses:
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales load of 4.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies"). Class A
Shares are distributed pursuant to a Rule 12b-1 plan whereby the distributor is
paid a fee of up to .25 of 1.00%. Certain purchases of Class A Shares qualify
for reduced sales loads. See "Reducing the Sales Load--Class A Shares."
CLASS B SHARES
Class B Shares are sold without an initial sales load, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, at the end of the month eight full years after the
purchase date. Class B Shares provide an investor the benefit of putting all of
the investor's dollars to work from the time the investment is made, but (until
conversion) will have a higher expense ratio and pay lower dividends than Class
A Shares due to Class B Shares' higher possible 12b-1 fee of up to .75 of 1%.
CLASS C SHARES
Class C Shares are sold without an initial sales load, but are subject to a 1%
contingent deferred sales charge on assets redeemed within the first 12 months
following purchase. Class C Shares provide an investor the benefit of putting
all of the investor's dollars to work from the time the investment is made, but
will have a higher expense ratio and pay lower dividends than Class A Shares due
to Class C Shares' higher possible 12b-1 fee of up to .75 of 1%. Class C Shares
have no conversion feature.
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HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Shares of Classes B and C. Additional investments can be made for as little as
$100. The minimum initial and subsequent investment for retirement plans is only
$50. (Financial institutions may impose different minimum investment
requirements on their customers.)
In connection with any sale, 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. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales load as follows:
DEALER
SALES LOAD SALES LOAD CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1,000,000 or greater 0.00% 0.00% 0.25%*
*See sub-section entitled "DEALER CONCESSION."
No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, to "wrap accounts" or similar programs for the benefit of clients of
financial institutions under which clients pay fees to such financial
institutions, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser,
wrap account, or retirement plan may be charged an additional service fee by the
institution.
No sales load is imposed on purchases made by retirement plans with over $1
million invested in funds available through the Federated LifeTrackTM Program.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales load. Any portion of the sales load which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales load retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of Shares outstanding at each month end.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING
THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment company
shares.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales load. In addition, the sales load, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.
To receive the sales load 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 Class A Shares are already owned or that purchases are
being combined. The Fund will reduce the sales load after it confirms the
purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $20,000 in this Fund, the sales
load would be reduced.
To receive this sales load 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 load
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of Shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 5.50% of the total amount intended to
be purchased in escrow (in shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon the
fulfillment of
the letter of intent or the end of the 13-month period, whichever comes first.
If the amount specified in the letter of intent is not purchased, an appropriate
number of escrowed Shares may be redeemed in order to realize the difference in
the sales load.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any fund in
the Liberty Family of Funds, excluding money market accounts, will be aggregated
to provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES
Investors may purchase Class A Shares at net asset value, without a sales load,
with the proceeds from the redemption of shares of an unaffiliated investment
company that were purchased or sold with a sales load or commission and were not
distributed by Federated Securities Corp. The purchase must be made within 60
days of the redemption, and Federated Securities Corp. must be notified by the
investor in writing, or by his financial institution, at the time the purchase
is made. From time to time, the Fund may offer dealers a payment of .50 of 1%
for Shares purchased under this program. If Shares are purchased in this manner,
Fund purchases will be subject to a contingent deferred sales charge for one
year from the date of purchase.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales load, under
certain circumstances described under "Contingent Deferred Sales Charge--Class B
Shares," a contingent deferred sales charge may be applied by the distributor at
the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares at the end of the
month eight full years after the purchase date, except as noted below, and will
no longer be subject to a distribution services fee (see "Distribution of
Shares"). Such conversion will be on the basis of the relative net asset values
per share, without the imposition of any sales load, fee or other charge. Class
B Shares acquired by exchange from Class B Shares of another fund in the Liberty
Family of Funds will convert into Class A Shares based on the time of the
initial purchase. For purposes of conversion to Class A Shares, Shares purchased
through the reinvestment of dividends and distributions paid on Class B Shares
will be considered to be held in a separate sub-account. Each time any Class B
Shares in the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account will also convert to Class A Shares. The conversion of Class B
Shares to Class A Shares is subject to the continuing availability of a ruling
from the Internal Revenue Service or an opinion of counsel that such conversions
will not constitute taxable events for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B Shares to Class A Shares will not
occur if such ruling or opinion is not available. In such event, Class B Shares
would continue to be subject to higher expenses than Class A Shares for an
indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES 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 or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods (see "Other Payments to Financial Institution").
PURCHASING SHARES BY WIRE
To purchase Shares directly from Federated Securities Corp. by Federal Reserve
wire, call the Fund. All information needed will be taken over the telephone,
and the order is considered received when the transfer agent's bank receives
payment by wire.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, c/o State Street Bank and Trust Company,
P.O. Box 8604, Boston, Massachusetts 02266-8604. Orders by mail are considered
received when payment by check is converted into federal funds (normally the
business day after the check is received).
SPECIAL PURCHASE FEATURES
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 or savings
account at an Automated Clearing House ("ACH") member and invested
in the Fund at the net asset value next determined after an order is received by
the Fund, plus the sales load, if applicable. Shareholders should contact their
financial institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
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EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Neither the
Fund nor any of the funds in the Liberty Family of Funds imposes any additional
fees on exchanges. Participants in a retirement plan under the Federated
LifeTrackTM Program may exchange all or some of their Shares for Class A Shares
of other funds offered under the plan at net asset value.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Liberty Family of Funds. (Not all funds in the Liberty
Family of Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Liberty
Family of Funds). Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other
Class C Shares in the Liberty Family of Funds.) Participants in a retirement
plan under the Program may exchange some or all of their Shares for Class C
Shares of other funds offered under their plan at net asset value without a
contingent deferred sales charge. To the extent that a shareholder exchanges
Shares for Class C Shares in other funds in the Liberty Family of Funds, the
time for which the exchanged-for Shares are to be held will be added to the time
for which exchanged-from Shares were held for purposes of satisfying the
applicable holding period. For more information, see "Contingent Deferred Sales
Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of 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 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 capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds may be given in
writing or by telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to Federated Services Company, 500
Victory Road--Second Floor, Quincy, Massachusetts 02171.
Instructions for exchanges for retirement plans participating in the Federated
LifeTrackTM 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 Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604 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 Fund before
that time for Shares to be
exchanged the same day. Shareholders exchanging into a 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.
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HOW TO REDEEM SHARES
Shares are redeemed 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. Redemption requests must be received in proper form and can be made
as described below. Redemptions of Shares held through retirement plans
participating in the Federated LifeTrack ProgramTM will be governed by the
requirements of the respective plans.
REDEEMING SHARES THROUGH YOUR FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution 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
(such as banks) 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. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared.
Telephone instructions will 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
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, c/o State Street Bank and Trust Company, Fund Name, Fund
Class, P.O. Box 8604, Boston, Massachusetts 02266-8604.
The written request should state: Fund Name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. It is recommended
that any share certificates be sent by registered or certified mail with the
written request.
If you are requesting a redemption of any amount to be sent to an address other
than that on record with the Fund, or a redemption payable to a third party,
then all signatures appearing on the written request must be guaranteed by a
bank which is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, or any other "eligible
guarantor institution," as defined by the Securities and 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.
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.
SPECIAL REDEMPTION FEATURES
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 Fund. For this reason, payments under this
program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales load, it is not advisable for shareholders to continue to purchase Class A
Shares while participating in this program. A contingent deferred sales charge
may be imposed on Class B and C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of shares of an unaffiliated investment company purchased and
redeemed with a sales load and not distributed by Federated Securities Corp. may
be charged a contingent deferred sales charge of .50 of 1.00% for redemptions
made within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Class A Shares at the time of purchase or the net asset value of the redeemed
Class A Shares at the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
CONTINGENT
YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption. No contingent deferred sales charge
will be charged for redemptions of Class C Shares from the Federated LifeTrackTM
Program.
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount
of the applicable contingent deferred sales charge, redemptions are deemed to
have occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains; (2) Shares held for more
than six full years from the date of purchase with respect to Class B Shares and
one full year from the date of purchase with respect to Class C Shares and
applicable Class A Shares; (3) Shares held for fewer than six years with respect
to Class B Shares and one full year from the date of purchase with respect to
Class C Shares and applicable Class A Shares on a first-in, first-out basis. A
contingent deferred sales charge is not assessed in connection with an exchange
of Fund Shares for Shares of other funds in the Liberty Family of Funds in the
same class (see "Exchange Privilege"). Any contingent deferred sales charge
imposed at the time the exchanged for Shares are redeemed is calculated as if
the shareholder had held the Shares from the date on which he became a
shareholder of the exchanged-from Shares. Moreover, the contingent deferred
sales charge will be eliminated with respect to certain redemptions (see
"Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds or
Federated LifeTrackTM Program funds or redemptions from the Federated
LifeTrackTM Program.
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor; employees of any
financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment Advisers Act
of 1940, as amended, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Directors reserve
the right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.
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ACCOUNT AND SHARE
INFORMATION
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
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Dividends and distributions are automatically reinvested in
additional Shares of the Fund on payment dates at the ex-dividend date net asset
value without a sales load, unless shareholders request cash payments on the new
account form or by contacting the transfer 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 month's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
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 Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. 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.
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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 Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
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 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 other mutual funds with similar objectives and policies. 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
investment philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have access
to this same level of investment expertise.
Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992. Mr.
Balestrino joined Federated Investors in 1986 and has been an Assistant Vice
President of the Fund's investment adviser since 1991. Mr. Balestrino served as
an Investment Analyst of the investment adviser from 1989 until 1991, and from
1986 until 1989 he acted as Project Manager in the Product Development
Department. Mr. Balestrino is a Chartered Financial Analyst and received his
M.U.R.P. in Urban and Regional Planning from the University of Pittsburgh.
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.
DISTRIBUTION OF 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.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase (except for participants in the Federated LifeTrackTM
Program). These payments will be made directly by the distributor from its
assets, and will not be made from assets of the Fund. Financial institutions may
elect to waive the initial payment described above; such waiver will result in
the waiver by the Fund of the otherwise applicable contingent deferred sales
charge.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to .25% for Class A Shares and up to .75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor may
not exceed an annual rate of .75% of each class of Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related support services
pursuant to the Plan.
The Distribution Plan is a compensation type Plan. As such, the Fund makes no
payments
to the distributor except as described above. Therefore, the Fund does not pay
for un-
reimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to .25 of 1% of the average daily net asset value
of Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
In addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of sales services, distribution-related support
services, or shareholder services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings 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.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50 of 1% of the net asset value
of Class A Shares purchased by their clients or customers under the Federated
LifeTrackTM 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.)
Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
the distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for providing substantial marketing and
sales support. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Corporation. Federated
Administrative Services provides these at an annual rate
which relates to the average aggregate daily net assets of all Federated Funds
as specified below:
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, 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, P.O. Box 8604, Boston, Massachusetts 02266-8604, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE CORPORATION AND CLASS A, B, AND C SHARES
Holders of Class A, B and C Shares pay their allocable portion of Corporation
and portfolio expenses.
The Corporation expenses for which holders of Class A, B and C 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 portfolio expenses for which holders of Class A, B and C Shares pay their
allocable portion include, but are not limited to: registering the portfolio and
shares of the portfolio; 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 Class A, B and
C Shares as classes are expenses under the Corporation's Distribution Plan and
fees for Shareholder Services. However, the Directors reserve the right to
allocate certain other expenses to holders of Class A, B and C Shares as they
deem 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 Class A, B and C Shares; fees for
Shareholder Services; 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 Class A,
B and C Shares; legal fees relating solely to Class A, B or C Shares; and
Directors' fees incurred as a result of issues relating solely to Class A, B or
C Shares.
- ------------------------------------------------------------------------------
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 Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only Shares of that portfolio or class are
entitled to vote. As of June 22, 1995, Merrill Lynch Pierce Fenner & Smith,
acting in various capacities for numerous accounts, was the owner of record of
approximately 4,625,053 shares (25.60%) of the Fund, and therefore, may, for
certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding Shares of all series 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 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 PERSONAL PROPERTY TAXES
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 for each class
of Shares including Fortress Shares (described under "Other Classes of Shares").
Total return represents the change, over a specific period of time, in the value
of an investment in each class of 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 each class of Shares is calculated 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 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 each class of 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 maximum sales load or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, Class C Shares and Fortress Shares.
From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares, and Fortress Shares of the Fund may refer to ratings, rankings, and
other information in certain financial publications and/or compare the
performance of Class A Shares, Class B Shares, Class C Shares and Fortress
Shares to certain indices.
- -------------------------------------------------------------------------------
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Fortress Shares. Fortress
Shares are sold primarily to customers of financial institutions subject to a
front-end sales load, a contingent deferred sales charge and a minimum initial
investment of $1,500, unless the investment is in a retirement account in which
the minimum investment is $50.
Shares and Fortress Shares are subject to certain of the same expenses. Expense
differences, however, between Shares and Fortress Shares may affect the
performance of each class.
To obtain more information and a prospectus for Fortress Shares, investors may
call 1-800-235-4669.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 53.
Class A Shares, Class B Shares, and Class C Shares were not being offered as of
June 23, 1995. Accordingly, there are no Financial Highlights for such shares.
The Financial Highlights presented below are historical information for shares
of Fortress Bond Fund, which were the predecessor to Fortress Shares.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
1994 1993 1992** 1991 1990 1989
NET ASSET VALUE, BEGINNING OF PERIOD $10.30 $ 9.23 $8.81 $6.89 $8.79 $9.86
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.76 0.77 0.59 1.01 1.08 1.23
- ----------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.09) 1.07 0.43 1.92 (1.84) (1.07)
- ---------------------------------------------------------- --------- --------- ----------- --------- ---------
Total from investment operations (0.33) 1.84 1.02 2.93 (0.76) 0.16
- ----------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.75) (0.77) (0.60) (1.01) (1.14) (1.23)
- ----------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.14) -- -- -- -- --
- ---------------------------------------------------------- --------- --------- ------- ------- ------- -------
Total distributions (0.89) (0.77) (0.60) (1.01) (1.14) (1.23)
- ---------------------------------------------------------- --------- --------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $9.08 $10.30 $9.23 $8.81 $6.89 $8.79
- ---------------------------------------------------------- --------- --------- ------- ------ ------- -------
TOTAL RETURN*** (3.41%) 20.61% 11.79% 44.62% (9.59%) 1.32%
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 1.05% 1.04% 0.49%(a) 1.00% 1.01% 14%
- ----------------------------------------------------------
Net investment income 7.92% 7.69% 8.05%(a) 12.17% 13.43% 12.81%
- ----------------------------------------------------------
Expense waiver/reimbursement (b) 0.33% 0.61% 2.01%(a) 1.50% 1.49% 1.36%
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $146,270 $125,762 $54,886 $6,068 $7,484 $4,734
- ----------------------------------------------------------
Portfolio Turnover 74% 51% 49% 33% 28% 38%
- ----------------------------------------------------------
</TABLE>
1988*
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.06
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.61
- ----------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.16)
- ---------------------------------------------------------- ---------
Total from investment operations 0.45
- ----------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.65)
- ----------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions --
- ---------------------------------------------------------- ---------
Total distributions (0.65)
- ---------------------------------------------------------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.86
- ---------------------------------------------------------- ---------
TOTAL RETURN*** 4.62%
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 1.00%(a)
- ----------------------------------------------------------
Net investment income 12.58%(a)
- ----------------------------------------------------------
Expense waiver/reimbursement (b) 1.00%(a)
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $4,968
- ----------------------------------------------------------
Portfolio Turnover 31%
- ----------------------------------------------------------
* Reflects operations for the period from July 8, 1988 (date of initial public
investment) to December 31, 1988.
** During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a)Computed on an annualized basis.
(b)This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
Federated Bond Fund
(formerly, Fortress Bond Fund)
Portfolio of Investments
- --------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------- --------------
CORPORATE BONDS--88.3%
- -----------------------------------------------------------------
AEROSPACE & DEFENSE--2.5%
---------------------------------------------------
$ 3,450,000 Grumman Corp., Deb., 10.375%, 1/1/99 $ 3,586,827
---------------------------------------------------------------- --------------
AIR TRANSPORTATION--3.5%
---------------------------------------------------
2,000,000 AMR Corp., Deb., 10.00%, 2/1/2001 2,061,540
---------------------------------------------------
2,100,000 Southwest Airlines, Inc., Deb., 9.40%, 7/1/2001 2,213,169
---------------------------------------------------
1,000,000 US Air, Inc., Pass Thru Cert., Series 1993-A2, 9.625%, 9/1/2003 840,000
------------------------------------------------------------------- --------------
Total 5,114,709
------------------------------------------------------------------ --------------
AUTOMOTIVE--3.9%
------------------------------------------------------------------
500,000 Aftermarket Technology Corp., Sr. Sub. Note, 12.00%, 8/1/2004 508,750
-----------------------------------------------------------------
2,000,000 Arvin Industries, Inc., Note, 6.875%, 2/15/2001 1,809,780
-----------------------------------------------------------------
2,200,000 Chrysler Corp., Deb., 12.375%, 5/1/2020 2,892,846
----------------------------------------------------------------
500,000 Motor Wheel Corp., Sr. Note, Series B, 11.50%, 3/1/2000 491,250
----------------------------------------------------------------- --------------
Total 5,702,626
----------------------------------------------------------------- --------------
BANKING--0.4%
----------------------------------------------------------------
500,000 First Nationwide Holdings, Inc., Sr. Note, 12.25%, 5/15/2001 521,250
---------------------------------------------------------------- --------------
BROADCAST RADIO & TV--1.7%
----------------------------------------------------------------
500,000 Allbritton Communications Co., Sr. Sub. Note, 11.50%, 8/15/2004 510,000
-----------------------------------------------------------------
500,000 Chancellor Broadcasting Co., Sr. Sub. Note, 12.50%, 10/1/2004 500,000
-----------------------------------------------------------------
1,000,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 1,015,000
-----------------------------------------------------------------
500,000 Sinclair Broadcast Group Inc., Sr. Sub. Note, 10.00%, 12/15/2003 482,500
------------------------------------------------------------------ --------------
Total 2,507,500
------------------------------------------------------------------ --------------
BUSINESS EQUIPMENT & SERVICES--0.7%
-----------------------------------------------------------------
500,000 Anacomp, Inc., Sr. Sub. Note, 15.00%, 11/1/2000 552,500
-----------------------------------------------------------------
500,000 Bell & Howell Co., Sr. Sub. Note, Series B, 10.75%, 10/1/2002 482,500
----------------------------------------------------------------- --------------
Total 1,035,000
--------------------------------------------------------------- --------------
CABLE TELEVISION--2.2%
-----------------------------------------------------------------
$ 500,000 Cablevision Systems Corp., Sr. Sub. Deb., 9.875%, 2/15/2013 $ 462,500
-----------------------------------------------------------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
CABLE TELEVISION--CONTINUED
-----------------------------------------------------------------------------------
1,000,000 Continental Cablevision Inc., Sr. Deb., 9.50%, 8/1/2013 905,000
-----------------------------------------------------------------------------------
1,500,000 International Cabletel, Inc., Sr. Dfd. Coupon Note, 0/10.875%,
10/15/2003 836,250
-----------------------------------------------------------------------------------
500,000 Marcus Cable Operating Co. L.P., Sr. Deb., 11.875%, 10/1/2005 466,250
-----------------------------------------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Sr. Secd. Note, 9.65%, 1/15/2014 620,659
----------------------------------------------------------------------------------- --------------
Total 3,290,659
----------------------------------------------------------------------------------- --------------
CHEMICALS & PLASTICS--4.2%
-----------------------------------------------------------------------------------
1,500,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 1,473,750
-----------------------------------------------------------------------------------
500,000 Foamex Capital Corp., Sr. Sub. Deb., 11.875%, 10/1/2004 502,500
-----------------------------------------------------------------------------------
2,500,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 11.375%, 10/1/98 1,525,000
-----------------------------------------------------------------------------------
875,000 Harris Chemical North America, Inc., Sr. Secd. Disc. Note, 0/10.25%,
7/15/2001 710,938
-----------------------------------------------------------------------------------
500,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 478,750
-----------------------------------------------------------------------------------
500,000 Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 500,000
-----------------------------------------------------------------------------------
1,000,000 UCC Investors Holdings, Inc., Sr. Sub. Note, 11.00%, 5/1/2003 1,010,000
----------------------------------------------------------------------------------- --------------
Total 6,200,938
----------------------------------------------------------------------------------- --------------
CLOTHING & TEXTILES--1.9%
-----------------------------------------------------------------------------------
1,800,000 Reebok International Ltd., Deb., 9.75%, 9/15/98 1,846,548
-----------------------------------------------------------------------------------
1,000,000 Westpoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 902,500
----------------------------------------------------------------------------------- --------------
Total 2,749,048
----------------------------------------------------------------------------------- --------------
CONGLOMERATES--4.5%
-----------------------------------------------------------------------------------
2,500,000 Leucadia National Corp., Sr. Sub., 10.375%, 6/15/2002 2,637,500
-----------------------------------------------------------------------------------
2,000,000 Noranda, Inc., Deb., 8.125%, 6/15/2004 1,921,520
-----------------------------------------------------------------------------------
1,000,000 Noranda, Inc., Deb., 8.625%, 7/15/2002 1,001,100
-----------------------------------------------------------------------------------
1,000,000 Sherritt Gordon Ltd., Sr. Note, 9.75%, 4/1/2003 965,000
----------------------------------------------------------------------------------- --------------
Total 6,525,120
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
CONTAINER & GLASS PRODUCTS--1.9%
-----------------------------------------------------------------------------------
$ 1,000,000 Owens-Corning Fiberglass Corp., Deb., 9.375%, 6/1/2012 $ 1,010,760
-----------------------------------------------------------------------------------
750,000 Silgan Holdings, Inc., Sr. Disc. Deb., 0/13.25%, 12/15/2002 605,625
-----------------------------------------------------------------------------------
1,000,000 U.S. Can Co., Sr. Sub. Note, 13.50%, 1/15/2002 1,115,000
----------------------------------------------------------------------------------- --------------
Total 2,731,385
----------------------------------------------------------------------------------- --------------
COSMETICS & TOILETRIES--0.8%
-----------------------------------------------------------------------------------
2,000,000 Revlon World Wide Corp., Sr. Secd. Discount Note, Series B, 12.00% accrual, 3/15/98 1,110,000
----------------------------------------------------------------------------------- --------------
ECOLOGICAL SERVICES & EQUIPMENT--1.3%
-----------------------------------------------------------------------------------
500,000 Allied Waste Industries, Inc., Sr. Sub. Note, 10.75%, 2/1/2004 465,000
-----------------------------------------------------------------------------------
1,000,000 ICF Kaiser International, Inc., Sr. Sub. Note, 12.00% 12/31/2003 880,000
-----------------------------------------------------------------------------------
500,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 492,500
----------------------------------------------------------------------------------- --------------
Total 1,837,500
----------------------------------------------------------------------------------- --------------
FINANCE/AUTOMOTIVE--2.1%
-----------------------------------------------------------------------------------
1,000,000 Ford Capital, Deb., 9.00%, 8/15/98 1,032,440
-----------------------------------------------------------------------------------
2,000,000 General Motors Acceptance Corp., Medium Term Note, 7.50%, 5/18/98 1,980,740
----------------------------------------------------------------------------------- --------------
Total 3,013,180
----------------------------------------------------------------------------------- --------------
FINANCIAL INTERMEDIARIES--1.7%
-----------------------------------------------------------------------------------
500,000 Coldwell Banker Corp., Sr. Sub. Note, Series B, 10.25%, 6/30/2003 513,125
-----------------------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., Inc., Medium Term Note, 7.25%, 6/14/2004 1,966,820
----------------------------------------------------------------------------------- --------------
Total 2,479,945
----------------------------------------------------------------------------------- --------------
FOOD & DRUG RETAILERS--4.0%
-----------------------------------------------------------------------------------
1,000,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 700,000
-----------------------------------------------------------------------------------
4,075,000 Hook-Superx, Inc., Sr. Note, 10.125%, 6/1/2002 4,217,625
-----------------------------------------------------------------------------------
1,000,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 888,750
----------------------------------------------------------------------------------- --------------
Total 5,806,375
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
FOOD PRODUCTS--3.5%
-----------------------------------------------------------------------------------
$ 500,000 Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005 $ 505,000
-----------------------------------------------------------------------------------
500,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 437,500
-----------------------------------------------------------------------------------
2,000,000 Grand Metropolitan Investment Corp., Company Guarantee, 7.00%,
6/15/99 1,930,540
-----------------------------------------------------------------------------------
1,000,000 PMI Acquisition Corp., Sr. Sub. Note, 10.25%, 9/1/2003 972,500
-----------------------------------------------------------------------------------
3,000,000 Specialty Foods Acquisition Corp., Sr. Secd. Disc. Deb., Series B,
0/13.00%, 8/15/2005 1,305,000
----------------------------------------------------------------------------------- --------------
Total 5,150,540
----------------------------------------------------------------------------------- --------------
FOOD SERVICES--1.6%
-----------------------------------------------------------------------------------
1,000,000 Americold Corp., First Mortgage Bond, Series B, 11.50%, 3/1/2005 900,000
-----------------------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.75%, 9/15/2001 472,500
-----------------------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 471,250
-----------------------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Sub. Deb., 11.25%, 11/1/2004 427,500
----------------------------------------------------------------------------------- --------------
Total 2,271,250
----------------------------------------------------------------------------------- --------------
FOREST PRODUCTS--4.5%
-----------------------------------------------------------------------------------
500,000 Domtar, Inc., Deb., 11.25%, 9/15/2017 508,750
-----------------------------------------------------------------------------------
500,000 Domtar, Inc., Note, 12.00%, 4/15/2001 537,500
-----------------------------------------------------------------------------------
1,000,000 Georgia-Pacific Corp., Deb., 10.125%, 5/15/2000 1,019,740
-----------------------------------------------------------------------------------
2,500,000 Georgia-Pacific Corp., Deb., 9.50%, 5/15/2022 2,516,125
-----------------------------------------------------------------------------------
500,000 Riverwood International Corp., Sr. Sub. Note, 11.25%, 6/15/2002 518,750
-----------------------------------------------------------------------------------
500,000 Stone Container Corp., Sr. Note, 11.50%, 10/1/2004 505,625
-----------------------------------------------------------------------------------
1,000,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 943,750
----------------------------------------------------------------------------------- --------------
Total 6,550,240
----------------------------------------------------------------------------------- --------------
GOVERNMENT AGENCY--1.2%
-----------------------------------------------------------------------------------
2,000,000 Tennessee Valley Authority, Deb., 7.85%, 6/15/2044 1,769,420
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
HEALTH SERVICES--1.3%
-----------------------------------------------------------------------------------
$ 2,000,000 Columbia HCA Healthcare Corp., Medium Term Note, 8.05%,
8/25/2006 $ 1,904,000
----------------------------------------------------------------------------------- --------------
HEALTHCARE--0.8%
-----------------------------------------------------------------------------------
1,111,175 Amerisource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 1,122,287
----------------------------------------------------------------------------------- --------------
HOME PRODUCTS & FURNISHINGS--0.8%
-----------------------------------------------------------------------------------
1,750,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 1,181,250
----------------------------------------------------------------------------------- --------------
HOTELS, MOTELS, INNS & CASINOS--0.4%
-----------------------------------------------------------------------------------
500,000 Motels of America, Inc., Sr. Sub. Note, 12.00%, 4/15/2004 567,500
----------------------------------------------------------------------------------- --------------
INDUSTRIAL PRODUCTS & EQUIPMENT--3.6%
-----------------------------------------------------------------------------------
500,000 Truck Components, Inc., Sr. Note, Series B, 12.25%, 6/30/2001 526,250
-----------------------------------------------------------------------------------
4,435,000 Varity Corp., Sr. Note, 11.375%, 11/15/98 4,734,362
----------------------------------------------------------------------------------- --------------
Total 5,260,612
----------------------------------------------------------------------------------- --------------
INSURANCE--3.0%
-----------------------------------------------------------------------------------
2,000,000 Delphi Financial Group Inc., Note, 8.00%, 10/1/2003 1,684,000
-----------------------------------------------------------------------------------
3,000,000 Sunamerica, Inc., Deb., 8.125%, 4/28/2023 2,664,390
----------------------------------------------------------------------------------- --------------
Total 4,348,390
----------------------------------------------------------------------------------- --------------
LEISURE & ENTERTAINMENT--0.6%
-----------------------------------------------------------------------------------
1,000,000 Paramount Communications, Inc., Sr. Deb., 8.25%, 8/1/2022 831,640
----------------------------------------------------------------------------------- --------------
OIL & GAS--9.9%
-----------------------------------------------------------------------------------
2,710,000 Ashland Oil, Inc., Deb., 11.125%, 10/15/2017 3,057,720
-----------------------------------------------------------------------------------
1,000,000 Burlington Resources, Note, 7.15%, 5/1/99 973,200
-----------------------------------------------------------------------------------
1,000,000 Falcon Drilling Co., Inc., Sr. Note, Series B, 9.75%, 1/15/2001 972,500
-----------------------------------------------------------------------------------
1,000,000 Giant Industries, Sr. Sub. Note, 9.75%, 11/15/2003 930,000
-----------------------------------------------------------------------------------
1,000,000 H.S. Resources, Inc., Sr. Sub. Note, 9.875%, 12/1/2003 942,500
-----------------------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Deb., 11.125%, 6/1/2019 1,130,940
-----------------------------------------------------------------------------------
1,000,000 Triton Energy Corp., Sr. Sub. Disc. Note, 0/9.75%, 12/15/2000 755,000
-----------------------------------------------------------------------------------
$ 2,000,000 USX Corp., Deb., 9.125%, 1/15/2013 $ 1,919,120
-----------------------------------------------------------------------------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
OIL & GAS--CONTINUED
-----------------------------------------------------------------------------------
1,000,000 USX Corp., Note, 6.375%, 7/15/98 940,520
-----------------------------------------------------------------------------------
3,000,000 Western Atlas, Inc., Deb., 8.55%, 6/15/2024 2,827,440
----------------------------------------------------------------------------------- --------------
Total 14,448,940
----------------------------------------------------------------------------------- --------------
PRINTING & PUBLISHING--3.1%
-----------------------------------------------------------------------------------
500,000 Affiliated Newspaper, Sr. Disc. Note, Class B, 0/13.25%, 7/1/2006 260,000
-----------------------------------------------------------------------------------
250,000 Garden State Newspapers, Inc., Sr. Sub. Note, 12.00%, 7/1/2004 248,750
-----------------------------------------------------------------------------------
1,000,000 News America Holdings, Inc., Sr. Note, 12.00%, 12/15/2001 1,132,220
-----------------------------------------------------------------------------------
3,000,000 News America Holdings, Inc., Sr. Note, 8.50%, 2/15/2005 2,881,590
----------------------------------------------------------------------------------- --------------
Total 4,522,560
----------------------------------------------------------------------------------- --------------
RETAILERS--1.4%
-----------------------------------------------------------------------------------
1,000,000 Brylane Capital Corp., Sr. Sub. Note, Series B, 10.00%, 9/1/2003 947,500
-----------------------------------------------------------------------------------
1,000,000 J.C. Penney Co., S.F. Deb., 9.75%, 6/15/2021 1,058,850
----------------------------------------------------------------------------------- --------------
Total 2,006,350
----------------------------------------------------------------------------------- --------------
SOVEREIGN GOVERNMENT--8.8%
-----------------------------------------------------------------------------------
2,500,000 Freeport Terminal (Malta) Ltd., Gtd. Global Note, 7.50%, 3/29/2009 2,281,475
-----------------------------------------------------------------------------------
1,400,000 New Zealand Government, Deb., 10.50%, 7/16/2000 1,498,000
-----------------------------------------------------------------------------------
1,000,000 Province of New Brunswick, Local Government Guarantee, 9.75%,
5/15/2020 1,091,100
-----------------------------------------------------------------------------------
1,500,000 Province of Quebec, Deb., 13.25%, 9/15/2014 1,854,525
-----------------------------------------------------------------------------------
2,000,000 Province of Quebec, Deb., 7.50%, 7/15/2023 1,687,020
-----------------------------------------------------------------------------------
2,000,000 Republic of Columbia, Note, 8.75%, 10/6/99 1,977,420
-----------------------------------------------------------------------------------
2,500,000 Victoria Public Authority, Local Government Guarantee, 8.25%,
1/15/2002 2,484,375
----------------------------------------------------------------------------------- --------------
Total 12,873,915
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
STEEL--2.8%
-----------------------------------------------------------------------------------
$ 500,000 Armco, Inc., Sr. Note, 11.375%, 10/15/99 $ 511,250
-----------------------------------------------------------------------------------
500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 464,375
-----------------------------------------------------------------------------------
1,000,000 Carbide/Graphite Group Inc., Sr. Note, 11.50%, 9/1/2003 1,010,000
-----------------------------------------------------------------------------------
1,250,000 Envirosource, Inc., Sr. Note, 9.75%, 6/15/2003 1,109,375
-----------------------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 11.125%, 3/15/2001 497,500
-----------------------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 9.50%, 1/15/2004 445,625
----------------------------------------------------------------------------------- --------------
Total 4,038,125
----------------------------------------------------------------------------------- --------------
SURFACE TRANSPORTATION--2.8%
-----------------------------------------------------------------------------------
2,000,000 American President Co. Ltd., Sr. Note, 7.125%, 11/15/2003 1,764,060
-----------------------------------------------------------------------------------
1,000,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 928,750
-----------------------------------------------------------------------------------
500,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 492,500
-----------------------------------------------------------------------------------
1,000,000 Trism, Inc., Sr. Sub. Note, 10.75%, 12/15/2000 985,000
----------------------------------------------------------------------------------- --------------
Total 4,170,310
----------------------------------------------------------------------------------- --------------
TELECOMMUNICATIONS & CELLULAR--0.5%
-----------------------------------------------------------------------------------
1,000,000 Panamsat, L.P., Sr. Sub. Disc. Note, 0/11.375%, 8/1/2003 677,500
----------------------------------------------------------------------------------- --------------
TOBACCO--0.5%
-----------------------------------------------------------------------------------
750,000 Philip Morris, Deb., 8.625%, 3/1/99 769,462
----------------------------------------------------------------------------------- --------------
UTILITIES--0.4%
-----------------------------------------------------------------------------------
750,000 California Energy Co., Inc., Sr. Disc. Note, 0/10.25%, 1/15/2004 533,438
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $136,358,135) 129,209,791
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
CONVERTIBLE PREFERRED STOCKS--2.0%
- -------------------------------------------------------------------------------------------------
BANKING--2.0%
-----------------------------------------------------------------------------------
150,000 Citicorp., PERCS, Series 15, 8.25% $ 2,943,750
----------------------------------------------------------------------------------- --------------
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $2,975,000) 2,943,750
----------------------------------------------------------------------------------- --------------
COMMON STOCKS--0.0%
- -------------------------------------------------------------------------------------------------
ECOLOGICAL SERVICES & EQUIPMENT--0.0%
-----------------------------------------------------------------------------------
4,800 (a)ICF Kaiser International, Inc., Warrants 2,400
----------------------------------------------------------------------------------- --------------
PRINTING & PUBLISHING--0.0%
-----------------------------------------------------------------------------------
500 (a)Affiliated Newspaper 12,562
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $16,831) 14,962
----------------------------------------------------------------------------------- --------------
ASSET-BACKED SECURITIES--4.7%
- -------------------------------------------------------------------------------------------------
STRUCTURED PRODUCTS--4.7%
-----------------------------------------------------------------------------------
$ 1,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 1,023,810
-----------------------------------------------------------------------------------
1,000,000 GE Capital Home Equity Loan 1991-1, Class B, 8.70%, 8/30/2011 988,330
-----------------------------------------------------------------------------------
1,000,000 Greentree Financial Corp., 1992-2, Class B, 9.15%, 1/15/2018 1,003,750
-----------------------------------------------------------------------------------
2,000,000 MBNA Master Credit Card Trust, 1992-2, Class A, 6.20%, 8/15/99 1,928,720
-----------------------------------------------------------------------------------
1,000,000 Merrill Lynch Mortgage Investment, Inc., 1988-H, Class B, 9.70%,
6/15/2008 1,021,880
-----------------------------------------------------------------------------------
1,000,000 Residential Funding Corp., 1993-S26, Class A10, 7.50%, 7/25/2023 843,120
----------------------------------------------------------------------------------- --------------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $7,290,312) 6,809,610
----------------------------------------------------------------------------------- --------------
MORTGAGE-BACKED SECURITIES--1.5%
- -------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--1.5%
-----------------------------------------------------------------------------------
2,420,238 Government National Mortgage Association, Pool 379983, 7.50%,
2/15/2024 2,246,998
----------------------------------------------------------------------------------- --------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,443,684) 2,246,998
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--1.1%
- -------------------------------------------------------------------------------------------------
$ 1,605,000 J.P. Morgan Securities, Inc., 4.82%, dated 10/31/94, due 11/1/94 (at amortized
cost) $ 1,605,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $150,688,962) $ 142,830,111+
----------------------------------------------------------------------------------- --------------
</TABLE>
The cost of investments for federal tax purposes amounts to $150,688,962. The
net unrealized depreciation on a federal tax cost basis amounts to $7,858,851,
and is comprised of $329,907 appreciation and $8,188,758 depreciation at
October 31, 1994.
* The repurchase agreement is fully collateralized by U.S. government
obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(a) Non-income producing.
Note: The categories of investments are shown as a percentage of net assets
($146,270,055) at October 31, 1994.
The following abbreviations are used in this portfolio:
PERCS--Preferred Equity Redeemable Preferred Stock
PIK --Payment in Kind
SF --Sinking Fund
(See Notes which are an integral part of the Financial Statements.)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost: $150,688,962) $ 142,830,111
- -------------------------------------------------------------------------------------------------
Cash 19,855
- -------------------------------------------------------------------------------------------------
Receivable for investments sold 3,706,172
- -------------------------------------------------------------------------------------------------
Interest receivable 3,546,494
- -------------------------------------------------------------------------------------------------
Receivable for capital stock sold 699,579
- ------------------------------------------------------------------------------------------------- --------------
Total assets 150,802,211
- ------------------------------------------------------------------------------------------------- --------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for investments purchased $ 2,487,041
- -----------------------------------------------------------------------------------
Payable for capital stock redeemed 1,299,169
- -----------------------------------------------------------------------------------
Dividends payable 623,242
- -----------------------------------------------------------------------------------
Accrued expenses and other liabilities 122,704
- ----------------------------------------------------------------------------------- ------------
Total liabilities 4,532,156
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 16,110,377 shares of capital stock outstanding $ 146,270,055
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 157,260,387
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (7,858,851)
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (3,335,869)
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 204,388
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 146,270,055
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, and Redemption Proceeds Per Share:
(net assets of $146,270,055 / 16,110,377 shares of capital stock outstanding) $9.08
- ------------------------------------------------------------------------------------------------- --------------
COMPUTATION OF OFFERING PRICE:
- -------------------------------------------------------------------------------------------------
Offering Price Per Share (100/99 of $9.08)* $9.17
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
*See "How to Purchase Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended October 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest $ 12,799,966
- ---------------------------------------------------------------------------------------------------
Dividends 118,106
- --------------------------------------------------------------------------------------------------- ------------
Total investment income 12,918,072
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee $ 1,081,066
- --------------------------------------------------------------------------------------
Directors' fees 5,008
- --------------------------------------------------------------------------------------
Administrative personnel and services 192,379
- --------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 66,297
- --------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 134,126
- --------------------------------------------------------------------------------------
Shareholder services fee 350,007
- --------------------------------------------------------------------------------------
Fund share registration costs 41,758
- --------------------------------------------------------------------------------------
Auditing fees 13,508
- --------------------------------------------------------------------------------------
Legal fees 9,189
- --------------------------------------------------------------------------------------
Printing and postage 41,014
- --------------------------------------------------------------------------------------
Insurance premiums 6,784
- --------------------------------------------------------------------------------------
Taxes 40,247
- --------------------------------------------------------------------------------------
Miscellaneous 6,621
- -------------------------------------------------------------------------------------- -----------
Total expenses 1,988,004
- --------------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 481,690
- -------------------------------------------------------------------------------------- -----------
Net expenses 1,506,314
- --------------------------------------------------------------------------------------------------- ------------
Net investment income 11,411,758
- --------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (3,358,420)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (13,277,162)
- --------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (16,635,582)
- --------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ (5,223,824)
- --------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED OCTOBER 31,
1994 1993
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------------
Net investment income $ 11,411,758 $ 6,888,178
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($3,359,826 net loss and
$2,084,112 net gain, respectively, as computed for federal tax purposes) (3,358,420) 2,082,462
- ---------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (13,277,162) 6,719,114
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations (5,223,824) 15,689,754
- --------------------------------------------------------------------------------- -------------- --------------
NET EQUALIZATION CREDITS 81,055 116,945
- --------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------------
Dividends to shareholders from net investment income (11,262,574) (7,005,123)
- ---------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (1,863,673) --
- ---------------------------------------------------------------------------------
Distributions in excess of net investment income -- (20,955)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (13,126,247) (7,026,078)
- --------------------------------------------------------------------------------- -------------- --------------
CAPITAL STOCK TRANSACTIONS--(EXCLUSIVE OF AMOUNTS
ALLOCATED TO NET INVESTMENT INCOME)
- ---------------------------------------------------------------------------------
Proceeds from sale of shares 84,985,424 84,195,992
- ---------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of dividends declared 4,135,607 2,669,825
- ---------------------------------------------------------------------------------
Cost of shares redeemed (50,343,919) (24,770,792)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets from capital stock transactions 38,777,112 62,095,025
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets 20,508,096 70,875,646
- ---------------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------------
Beginning of period 125,761,959 54,886,313
- --------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income of $204,388 and $0,
respectively) $ 146,270,055 $ 125,761,959
- --------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Notes to Financial Statements
- --------------------------------------------------------------------------------
October 31, 1994
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of two diversified
portfolios. The financial statements included herein present only those of
Federated Bond Fund (the "Fund"). The financial statements of the other
portfolio are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. Effective February 3, 1993, the Fund was registered into a portfolio of
Investment Series Funds, Inc. Prior to that date, the Fund was operated as a
portfolio of Investment Series Trust.
Effective June 30, 1995 the Board of Directors of the Corporation (the
"Directors") changed the name of the Fund from Fortress Bond Fund to Federated
Bond Fund.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed corporate bonds and other fixed income and
asset backed securities are valued at the last sale price reported on
national securities exchanges. Unlisted bonds and securities and short-term
obligations are valued at the prices provided by an independent pricing
service. Listed equity securities are valued at the last sale price
reported on national securities exchanges. Unlisted securities and
short-term obligations (and private placement securities) are generally
valued at the prices provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less may be stated at
amortized cost, which approximates value.
During the year ended October 31, 1994, the Fund changed its method of
accounting for costing securities and calculating gains and losses for
financial reporting purposes from the average cost method to the specific
identification method. This accounting change resulted only in
reclassification between unrealized and realized gains and losses, and
therefore had no effect on the net results from operations, net assets or
net asset value per share. The specific identification method is the
preferred method used in the industry and it more closely agrees with the
costing method for federal tax purposes.
B. REPURCHASE AND REVERSE REPURCHASE AGREEMENTS--It is the policy of the Fund
to require the custodian bank to take possession, to have legally
segregated in the Federal Reserve Book Entry System, or to have segregated
within the custodian bank's vault, all securities held as collateral in
support of repurchase and reverse repurchase agreement investments.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's underlying
collateral to ensure that the value
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
of collateral at least equals the principal amount of the repurchase
agreement, including accrued interest.
The Fund is also permitted to enter into reverse repurchase agreements, in
which the Fund sells U.S. government securities to financial institutions
and agrees to repurchase the securities at an agreed upon price and date.
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.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At October 31,
1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $3,359,826, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 2002 ($3,359,826).
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemptions of capital stock equivalent, on a per share basis, to the
amount of undistributed net investment income on the date of the
transaction is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1994, there were 1,000,000,000,000 shares ($0.0001 par value per
share) of capital stock of the Fund authorized. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED
OCTOBER 31,
1994 1993
Shares sold 8,746,756 8,508,866
- ---------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 436,461 269,258
- ---------------------------------------------------------------------------------------
Shares redeemed (5,284,540) (2,510,109)
- --------------------------------------------------------------------------------------- ----------- -----------
Net change resulting from Fund share transactions 3,898,677 6,268,015
- --------------------------------------------------------------------------------------- ----------- -----------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.75 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee and to reimburse certain operating expenses
of the Fund. The Adviser can modify or terminate this voluntary waiver or
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is incurred to
obtain certain personal services for shareholders and to maintain the
shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended
October 31, 1994, were as follows:
- ----------------------------------------------------
PURCHASES $ 140,759,517
- ---------------------------------------------------- --------------
SALES $ 103,126,151
- ---------------------------------------------------- --------------
Report of Ernst & Young LLP,
Independent Auditors
- -----------------------------------------------------------------------------
To the Directors and Shareholders of
INVESTMENT SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Bond Fund (formerly, Fortress Bond
Fund), (one of the portfolios comprising Investment Series Funds, Inc.) as of
October 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights (see page 36 of this prospectus)
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Bond Fund (formerly, Fortress Bond Fund) at October 31, 1994, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 9, 1994
THIS PAGE INTENTIONALLY LEFT BLANK
- -------------------------------------------------------------------------------
APPENDIX
(UNAUDITED)
STANDARD AND POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB
rating.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
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.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligator's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
<TABLE>
<CAPTION>
<S> <C> <C>
ADDRESSES
- --------------------------------------------------------------------------------
Investment Series Funds, Inc.
Federated Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8602
Boston, Massachusetts 02266-8602
- ---------------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
(A PORTFOLIO OF INVESTMENT
SERIES FUNDS, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS
An Open-End, Diversified
Management Investment Company
June 27, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 461444507
Cusip 461444606
Cusip 461444705
G01271-01 (6/95)
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
FORTRESS SHARES
PROSPECTUS
The shares of Federated Bond 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 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 RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Fortress Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed with the Securities and Exchange Commission a Combined
Statement of Additional Information dated June 27, 1995 for Class A Shares,
Class B Shares, Class C Shares, and Fortress Shares. 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 June 27, 1995
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights...........................................................2
General Information............................................................3
Fortress Investment Program....................................................4
Investment Information.........................................................5
Investment Objective.........................................................5
Investment Policies..........................................................5
Derivative Contracts and Securities.........................................13
Investment Limitations......................................................14
Net Asset Value...............................................................15
Investing in Fortress Shares..................................................15
Share Purchases.............................................................15
Minimum Investment Required.................................................16
What Shares Cost............................................................16
Eliminating the Sales Load..................................................17
Systematic Investment Program...............................................18
Exchange Privilege..........................................................18
Certificates and Confirmations..............................................19
Dividends and Distributions.................................................19
Retirement Plans............................................................19
Redeeming Fortress Shares.....................................................19
Through a Financial Institution.............................................19
Directly By Mail............................................................20
Contingent Deferred Sales Charge............................................20
Systematic Withdrawal Program...............................................21
Accounts with Low Balances..................................................22
Exchanges for Shares of Other Funds.........................................22
Investment Series Funds, Inc.,
Information.................................................................23
Management of the Corporation...............................................23
Distribution of Fortress Shares.............................................24
Administration of the Fund..................................................25
Shareholder Information.......................................................26
Voting Rights...............................................................26
Tax Information...............................................................26
Federal Income Tax..........................................................26
Pennsylvania Personal Property Taxes........................................26
Performance Information.......................................................27
Other Classes of Shares.......................................................27
Financial Statements..........................................................28
Report of Ernst & Young LLP,
Independent Auditors........................................................44
Appendix......................................................................45
Addresses.....................................................................47
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SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
<TABLE>
<S> <C> <C>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... 1.00%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................................ None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.48%
12b-1 Fee........................................................................................................ None
Total Other Expenses............................................................................................. 0.56%
Shareholder Services Fee (after waiver) (3)....................................................... 0.24%
Total Fortress Shares Operating Expenses (4)............................................................ 1.04%
</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
four years of their purchase date. For a more complete description see
"Contingent Deferred Sales Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.
(3) The maximum Shareholder Services Fee is 0.25%.
(4) The Total Fortress Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending October 31, 1995. The Total
Fortress Shares Operating Expenses were 1.05% for the fiscal year ended
October 31, 1994, and were 1.38% absent the voluntary waiver of a portion of
the management fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Fortress Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Fortress 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.......................................................... $31 $54 $67 $136
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $21 $43 $67 $136
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors'
report on page 44.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C>
1994 1993 1992** 1991 1990 1989
NET ASSET VALUE, BEGINNING OF PERIOD $10.30 $ 9.23 $ 8.81 $ 6.89 $ 8.79 $ 9.86
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.76 0.77 0.59 1.01 1.08 1.23
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Net realized and unrealized gain (loss) on investments (1.09) 1.07 0.43 1.92 (1.84) (1.07)
- ---------------------------------------------------------- --------- --------- ----------- --------- --------- ---------
Total from investment operations (0.33) 1.84 1.02 2.93 (0.76) 0.16
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.75) (0.77) (0.60) (1.01) (1.14) (1.23)
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Distributions to shareholders from net realized gain on
investment transactions (0.14) -- -- -- -- --
- ---------------------------------------------------------- --------- --------- ----------- --------- --------- ---------
Total distributions (0.89) (0.77) (0.60) (1.01) (1.14) (1.23)
- ---------------------------------------------------------- --------- --------- ----------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.08 $10.30 $ 9.23 $ 8.81 $ 6.89 $ 8.79
- ---------------------------------------------------------- --------- --------- ----------- --------- --------- ---------
TOTAL RETURN*** (3.41%) 20.61% 11.79% 44.62% (9.59%) 1.32%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.05% 1.04% 0.49%(a) 1.00% 1.01% 1.14%
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Net investment income 7.92% 7.69% 8.05%(a) 12.17% 13.43% 12.81%
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Expense waiver/reimbursement (b) 0.33% 0.61% 2.01%(a) 1.50% 1.49% 1.36%
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $146,270 $125,762 $54,886 $6,068 $7,484 $4,734
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Portfolio Turnover 74% 51% 49% 33% 28% 38%
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</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1988*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.06
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.61
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Net realized and unrealized gain (loss) on investments (0.16)
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Total from investment operations 0.45
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.65)
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Distributions to shareholders from net realized gain on
investment transactions --
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Total distributions (0.65)
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NET ASSET VALUE, END OF PERIOD $ 9.86
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TOTAL RETURN*** 4.62%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.00%(a)
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Net investment income 12.58%(a)
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Expense waiver/reimbursement (b) 1.00%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $4,968
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Portfolio Turnover 31%
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</TABLE>
* Reflects operations for the period from July 8, 1988 (date of initial public
investment) to December 31, 1988.
** During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a)Computed on an annualized basis.
(b)This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended October 31, 1994, which can be obtained
free of charge.
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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
change of the Fund to Fortress Bond Fund. On June 27, 1995, the name of the Fund
was changed to Federated Bond Fund. The Fund's address is Liberty Center,
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. The Articles of
Incorporation permit the Fund 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. With respect to this
Fund, as of the date of this prospectus, the Board of Directors (the
"Directors") has established four classes of shares, known as Class A Shares,
Class B Shares, Class C Shares, and Fortress Shares. This prospectus relates
only to Fortress Shares ("Shares," or "Fortress Shares," as the context
requires) of the Fund.
Shares of the Fund are designed primarily for individuals and institutions
seeking as high a level of current income as is consistent with the preservation
of capital by investing in a portfolio of investment grade bonds. A minimum
initial investment of $1,500 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 an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on Shares, other than shares purchased through reinvestment of
dividends, which are redeemed within one to four years of their purchase date.
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FORTRESS INVESTMENT PROGRAM
The Fortress Shares class is a member of a family of funds ("Fortress Funds"),
collectively known as the Fortress Investment Program. The other funds in the
Program are:
American Leaders Fund, Inc. (Fortress Shares only), providing growth of capital
and income through high-quality stocks;
California Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and California personal income
taxes;
Fortress Adjustable Rate U.S. Government Fund, Inc., providing current income
consistent with lower volatility of principal through a diversified portfolio
of adjustable and floating rate mortgage securities which are issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
Fortress Municipal Income Fund, Inc., providing a high level of current income
generally exempt from the federal regular income tax by investing primarily in
a diversified portfolio of municipal bonds;
Fortress Utility Fund, Inc., providing high current income and moderate capital
appreciation primarily through equity and debt securities of utility companies;
Government Income Securities, Inc., providing current income through long-term
U.S. government securities;
Liberty Equity Income Fund, Inc. (Fortress Shares only), providing
above-average income and capital appreciation through income producing equity
securities;
Limited Term Fund (Fortress Shares only), providing a high level of current
income consistent with minimum fluctuation in principal value;
Limited Term Municipal Fund (Fortress Shares only), providing a high level of
current income which is exempt from federal regular income tax consistent with
the preservation of capital;
Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
New York Municipal Income Fund (Fortress Shares only), providing current income
exempt from federal regular income tax, New York personal income taxes, and New
York City income taxes;
Ohio Municipal Income Fund (Fortress Shares only), providing current income
exempt from federal regular income tax and Ohio personal income taxes;
Strategic Income Fund (Fortress Shares only), providing high current income
through investing in domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt obligations; and
World Utility Fund (Fortress Shares only), providing total return by investing
primarily in securities issued by domestic and foreign companies in the
utilities industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment
vehicles, and by providing the investment services of proven, professional
investment advisers.
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Federated Fortress."
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective stated above cannot be changed without the approval of
shareholders. Unless stated otherwise, the investment policies of the Fund
described below may be changed without shareholder approval. As a matter of
investment policy, the Fund will invest, under normal circumstances, at least
65% of the value of its total net assets in investment grade bonds. Investment
grade bonds are generally described as bonds that are rated in one of the top
four rating categories by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc.
("Fitch"). A description of the ratings categories is contained in the Appendix
to the Prospectus.
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, including zero coupon convertible securities, in
which the Fund will invest will be rated B or better by an NRSRO, or which are
of comparable quality in the judgment of the Fund's investment adviser);
obligations of the United States;
notes, bonds, and discount notes of the following U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Farm Credit System
(including the National Bank for Cooperatives and Banks for Cooperatives),
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;
taxable municipal debt obligations (as a matter of operating policy, the lowest
rated municipal debt obligations in which the Fund will invest will be rated
BBB or better by an NRSRO, or which are of comparable quality in the judgment
of the Fund's investment adviser);
asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
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 may be withdrawn upon notice not exceeding ninety days;
bankers' acceptances issued by a BIF-insured bank, or issued by the bank's Edge
Act subsidiary and guaranteed by the bank, with remaining maturities of nine
months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits according to the bank's last
published statement of condition preceding the date of acceptance;
preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
other securities which are deemed by the Fund's investment adviser, Federated
Advisers (the "Adviser"), to be consistent with the Fund's investment
objective; and
repurchase agreements collateralized by acceptable investments.
CORPORATE DEBT OBLIGATIONS
Although the Fund will invest primarily in corporate debt obligations that are
rated as investment grade by a NRSRO, or are determined to be comparable quality
in the judgment of the Adviser, the Fund may invest up to 35% of the value of
its total assets in corporate debt obligations that are not investment grade
bonds, but are rated B or better by a NRSRO (i.e., "junk bonds"). Corporate debt
obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment grade bonds, lower rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower rated bonds may be more
difficult to dispose of or to value than higher rated, lower-yielding bonds.
Bonds rated "BBB" by S&P or Fitch, or "Baa" by Moody's, have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated bonds.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL
CREDIT MARKET VALUE OF BOND HOLDINGS
RATING AS OF DECEMBER 31, 1994
<S> <C>
BB..................... 6.8%
B...................... 26.5
CC & CCC............... .8
-----
34.1%
-----
-----
</TABLE>
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.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets
including vehicle installment purchase obligations and credit card receivables
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. 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, as amended (the "Code"). Issuers of REMICs may take several forms,
such as trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not subject
to federal income taxation. Instead, income is passed through the entity and is
taxed to the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest, and a single class of "residual interests."
To qualify as a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.
RESETS OF INTEREST
The interest rates paid on the ARMs, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, adjustable rate mortgage securities
which use indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that closely mirror
the market. Certain residual interest tranches of
CMOs may have adjustable interest rates that deviate significantly from
prevailing market rates, even after the interest rate is reset, and are subject
to correspondingly increased price volatility. In the event the Fund purchases
such 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 REMICs 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"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, recordkeeping, and the public availability of information,
these investments may present additional risks to investors.
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 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 laws, and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper,
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors, are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial paper,
as determined by the Adviser, as liquid and not subject to the investment
limitations applicable to illiquid securities.
FOREIGN SECURITIES
The Fund reserves the right to invest up to 25% of its total assets in fixed
income securities of foreign governmental units located within an individual
foreign nation and to purchase or sell various currencies on either a spot or
forward basis in connection with these investments. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in general.
The Fund will only invest in other investment companies that are money market
funds having an investment objective and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The Adviser to the Fund will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes and to maintain liquidity.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. 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 OR DELAYED
DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, the Fund may pay more/less than the
market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy under
guidelines established by the Directors and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the value of the
securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
PUT AND CALL OPTIONS
The Fund may purchase put options on financial futures contracts and put options
on portfolio securities. Financial futures may include index futures. These
options will be used as a hedge to attempt to protect securities which the Fund
holds against decreases in value. For the immediate future, the Fund will enter
into futures contracts directly only when it desires to exercise a financial
futures put option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only purchase puts on financial futures
contracts which are traded on a nationally recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only
from investment dealers and other financial associations (such as commercial
banks or savings and loan institutions) deemed creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (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 in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
RISKS
When the Fund writes a call option, the Fund risks not participating in any rise
in the value of the underlying security. In addition, when the Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio securities to market
changes. In addition, the Adviser could be incorrect in its expectations about
the direction or extent of market factors such as interest rate movements. In
such an event, the Fund may lose the purchase price of the put option. Finally,
it is not certain that a secondary market for options will exist at all times.
Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Fund's ability to establish and close out option positions depends on this
secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the
response of certain dervative contracts and securities to market changes may
differ from traditional investments, such as stock and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including ARMs, CMOs, and REMICs, it will only do so
in a manner consistent with its investment objectives, policies and limitations.
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.
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.
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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 Fortress Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Fortress Shares in the liabilities of the Fund and those attributable to
Fortress Shares, and dividing the remainder by the total number of Fortress
Shares outstanding. The net asset value for Fortress Shares may differ from that
of Class A Shares, Class B Shares, and Class C Shares due to the variance in
daily net income realized by each class. Such variance will reflect only accrued
net income to which the shareholders of a particular class are entitled.
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INVESTING IN FORTRESS SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution who has a sales agreement with the
distributor, or directly from the distributor, Federated Securities Corp.,
either by mail or by 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. Orders through a financial
institution are considered received when the Fund is notified of the purchase
order. Purchase orders through a registered broker/dealer must be received by
the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker
to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be purchased
at that day's price. Purchase orders through other financial institutions must
be received by the financial institution and transmitted to the Fund before 4:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership
periods (see "Other Payments to Financial Institutions").
DIRECTLY BY MAIL
To purchase Shares by mail directly from Federated Securities Corp.:
complete and sign the new account form available from the Fund;
enclose a check made payable to Federated Bond Fund--Fortress Shares; and
mail both to the Fund's transfer agent, Federated Services Company, c/o State
Street Bank and Trust Company, P.O. Box 8604, Boston, Massachusetts 02266-8604.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("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 directly from Federated Securities Corp. by Federal Reserve
wire, call the Fund. All information needed will be taken over the telephone,
and the order is considered received when the transfer agent's bank receives
payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares 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
Shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1.00% of the offering price (which is 1.00% of
the net amount invested). There is no sales load for purchases of $1 million or
more. In addition, no sales load is imposed for Shares purchased through bank
trust departments or investment advisers registered under the Investment
Advisers Act of 1940, as amended, purchasing on behalf of their clients, or by
sales representatives, Directors, and employees of the Fund, the Adviser, 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 or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp., or its
affiliates, to the extent that no payment was advanced for purchases made by
such entities. Unaffiliated institutions through whom Shares are purchased may
charge fees for services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any agreement
between the customer and the institution with regard to services provided, the
fees charged for these services, and any restrictions and limitations imposed.
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances, described under "Redeeming Fortress Shares,"
shareholders may be charged a contingent deferred sales
charge by the distributor at the time Shares are redeemed.
DEALER CONCESSION
For sales of Shares, broker/dealers will normally receive 100% of the applicable
sales load. Any portion of the sales load which is not paid to a broker/dealer
will be retained by the distributor. However, from time to time, and at the sole
discretion of the distributor, all or a part of that portion may be paid to a
dealer. The sales load for Shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp. Federated
Securities Corp. may pay fees to banks out of the sales load in exchange for
sales and/or administrative services performed on behalf of the bank's customers
in connection with the initiation of customer accounts and purchases of Shares.
ELIMINATING THE SALES LOAD
The sales load can be eliminated on the purchase of 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 PURCHASE
There is no sales load for purchases of $1 million or more. The Fund will
combine purchases made on the same day by the investor, his spouse, and his
children under age 21 when it calculates the sales load.
If an additional purchase of 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 more at the current public offering price, there will be no
sales load on the additional purchase. The Fund will also combine purchases for
the purpose of reducing the contingent deferred sales charge imposed on some
Share redemptions. For example, if a shareholder already owns Shares having
current value at a public offering price of $1 million and purchases an
additional $1 million at the current public offering price, the applicable
contingent deferred sales charge would be reduced to .50% of those additional
Shares. For more information on the levels of contingent deferred sales charges
and holding periods, see the section entitled "Contingent Deferred Sales
Charge."
To receive the sales load elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by his financial institution at the time the purchase is made that
Shares are already owned or that purchases are being combined. The Fund will
eliminate the sales load and/or reduce the contingent deferred sales charge
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least
$1 million of Shares over the next 13 months, the sales load may be reduced by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales load elimination depending on the amount actually
purchased within the 13-month period and a provision for the Fund's custodian to
hold 1.00% of the total amount intended to be purchased in escrow (in Shares)
until such purchase is completed.
The 1.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent,
which must be $1 million or more of Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales load.
This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase Shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days (purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load on such purchases
will not be adjusted to reflect a lower sales load).
REINVESTMENT PRIVILEGE
If Shares have been redeemed, the shareholder has a one-time right, within 120
days, to reinvest the redemption proceeds at the next-determined net asset value
without any sales load. Federated Securities Corp. must be notified by the
shareholder in writing or by his financial institution of the reinvestment in
order to receive this elimination of the sales load. If the shareholder redeems
his Shares, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales load elimination, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Fortress
Investment Program, the purchase price of which includes a sales load. For
example, if a shareholder concurrently invested $400,000 in one of the other
Fortress Funds, and $600,000 in Shares, the sales load would be eliminated.
To receive this sales load elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales load
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in amounts of not less than $100 per transaction. Under this
program, funds may be automatically withdrawn 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 Fund plus the 1.00% sales load
for purchases under $1 million. A shareholder may apply for participation in
this program through Federated Securities Corp. or his financial institution.
EXCHANGE PRIVILEGES
Shares in other Fortress Funds may be exchanged for Shares at net asset value
without a sales load (if previously paid) or a contingent deferred sales charge.
The exchange privilege is available to shareholders residing in any state in
which the shares being acquired may be sold.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value (plus a sales load, if applicable). Shareholders using this privilege must
exchange Shares having a net asset value equal to the minimum investment
requirements of the fund into which the exchange is being made. Shareholders who
desire to automatically exchange Shares of a predetermined amount on a monthly,
quarterly, or annual basis may take advantage of a systematic exchange
privilege. Further information on these exchange privileges is available by
calling Federated Securities Corp. or the shareholder's financial institution.
Before making an exchange, a shareholder must receive a prospectus of the fund
for which the exchange is being made.
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 on payment dates at the
ex-dividend date net asset value without a sales load, unless shareholders
request cash payments on the new account form or by writing to the transfer
agent.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for retirement plans
(including 401(k) and 403(b) plans) or for individual retirement accounts
(IRAs). For further details, contact Federated Securities Corp. and consult with
a tax adviser.
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REDEEMING FORTRESS 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. 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 by calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value, less any applicable contingent deferred sales charge,
next determined after the Fund receives the redemption request from the
financial institution. Redemption requests through a registered broker/dealer
must be received by the broker before 4:00 p.m. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. Redemption requests
through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
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 Federated
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8604,
Boston, Massachusetts 02266-8604. This written request must include the
shareholder's name, the Fund name and class of shares, the account number, and
the share or dollar amount to be redeemed. Shares will be redeemed at their net
asset value, less any applicable contingent deferred sales charge, next
determined after the Fund 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
of all registered owners on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock Exchange;
a savings bank or savings and loan association whose deposits are insured by
the Savings Association Insurance Fund, which is administered by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and 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 request, provided State Street Bank has collected payment for
Shares from the shareholder instructions from a broker or from the shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a contingent
deferred sales charge 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>
CONTINGENT
AMOUNT OF DEFERRED
PURCHASE SHARES HELD SALES CHARGE
<S> <C> <C>
Up to $1,999,999 less than 4 years 1.00%
$2,000,000 to $4,999,000 less than 2 years .50%
$5,000,000 or more less than 1 year .25%
</TABLE>
To the extent that a shareholder exchanges between or among Fortress Shares in
other funds in the Fortress Investment Program, 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.
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through the reinvestment of
dividends or distributions of long-term capital gains. In computing the amount
of contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred in the following
order: 1) first of shares acquired through the reinvestment of dividends and
long-term capital gains, 2) second of purchases of shares occurring prior to the
number of years necessary to satisfy the applicable holding period, and 3)
finally of purchases of shares occurring within the current holding period. For
accounts with shares subject to multiple share holding periods, the redemption
sequence will be determined first, with reinvested dividends and long-term
capital gains, and second, on a first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a 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 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.
Contingent deferred sales charges 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. Shares of the Fund originally
purchased through a bank trust department or investment adviser registered under
the Investment Advisers Act of 1940, as amended, and third-party administrators
acting on behalf of deferred contribution plans, are not subject to the
contingent deferred sales charge, to the extent that no payment was advanced for
purchases made by such entities.
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, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder; the minimum withdrawal amount
is $100. 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 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 load and
contingent deferred sales charge, it is not advisable for shareholders to be
purchasing Shares while participating in this program.
A contingent deferred sales charge is charged for Shares redeemed through this
program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the minimum required value of
$1,000. 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
Shares may be exchanged for shares in other Fortress Funds at net asset value
without a contingent deferred sales charge or a sales load.
Shares may also be exchanged for shares in other Federated Funds which are
advised by subsidiaries or affiliates of Federated Investors. With the exception
of exchanges into other Fortress Funds, such exchanges will be subject to a
contingent deferred sales charge and possibly a sales load.
Shareholders using this privilege must exchange shares having a net asset value
equal to the minimum investment required for the fund into which the exchange is
being made. A shareholder may obtain information on the exchange privilege, and
may obtain prospectuses for other Fortress Funds and Federated Funds by calling
Federated Securities Corp. or his financial institution.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.
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 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 other mutual funds with similar objectives and policies. 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
investment philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have access
to this same level of investment expertise.
Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992. Mr.
Balestrino joined Federated Investors in 1986 and has been an Assistant Vice
President of the Fund's investment adviser since 1991. Mr. Balestrino served as
an Investment Analyst of the investment adviser from 1989 until 1991, and from
1986 until 1989 he acted as Project Manager in the Product Development
Department. Mr. Balestrino is a Chartered Financial Analyst and received his
M.U.R.P. in Urban and Regional Planning from the University of Pittsburgh.
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.
DISTRIBUTION OF FORTRESS 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.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to .25 of 1% of the average daily net asset value of
Fortress Shares, computed at an annual rate, to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
sales services, distribution-related support services, or shareholder services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
The distributor will pay financial institutions, for distribution and/or
administrative services, an amount equal to 1.00% of the offering price of the
Shares acquired by their clients or customers on purchases up to $1,999,999,
.50% of the offering price on purchases of $2,000,000 to $4,999,999, and .25% of
the offering price on purchases of $5,000,000 or more. (This fee is in addition
to the 1.00% sales load on purchases of less that $1 million.) The financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on
depository institutions, the Directors will consider appropriate changes in the
services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Corporation and the Fund. Federated
Administrative Services provides these at an annual rate which relates to the
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
DAILY NET ASSETS
MAXIMUM FEE OF THE FEDERATED FUNDS
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, 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, P.O. Box 8604, Boston, Massachusetts 02266-8604, is
transfer agent for Shares of the Fund and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only shares of that portfolio or class are
entitled to vote. As of
June 22, 1995, Merrill Lynch Pierce Fenner & Smith, acting in various capacities
for numerous accounts, was the owner of record of approximately 4,625,053 shares
(25.60%) of the Fund, and therefore, may, for certain purposes, be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders as 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 Fund's
outstanding shares of all series 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 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 PERSONAL PROPERTY TAXES
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 for Fortress
Shares and the Fund's other classes of shares (described below under "Other
Classes of Shares").
Total return represents the change, over a specific period of time, in the value
of an investment in Fortress 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 Fortress Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
Fortress Shares over a thirty-day period by the maximum offering price per share
of Fortress Shares 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 Fortress Shares, and therefore, may not correlate to the
dividends or other distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return.
Total return and yield will be calculated separately for Class A Shares, Class C
Shares, and Fortress Shares.
From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares, and Fortress Shares of the Fund may refer to ratings, rankings, and
other information in certain financial publications and/or compare the
performance of Class A Shares, Class B Shares, Class C Shares and Fortress
Shares to certain indices.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER CLASSES OF SHARES
The Fund also offers other classes of shares called Class A Shares, Class B
Shares, and Class C Shares that are sold primarily to customers of financial
institutions.
Class A Shares are sold subject to a front-end sales load, a Rule 12b-1 Plan and
a Shareholder Services Plan. Investments in Class A Shares are subject to a
minimum initial investment of $500, unless the investment is in a retirement
account, in which the minimum investment is $50.
Class B Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments in
Class B Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which the minimum investment is $50.
Class C Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments in
Class C Shares are subject to a minimum investment of $1,500, unless the
investment is in a retirement account, in which the minimum investment is $50.
Class A, B and C Shares and Fortress Shares are subject to certain of the same
expenses. Expense differences, however, between Class A, B and C Shares and
Fortress Shares may affect the performance of each class.
To obtain more information and a combined prospectus for Class A , B and C
Shares, investors may call 1-800-235-4669.
Federated Bond Fund
(formerly, Fortress Bond Fund)
Portfolio of Investments
- --------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--88.3%
- -------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE--2.5%
-----------------------------------------------------------------------------------
$ 3,450,000 Grumman Corp., Deb., 10.375%, 1/1/99 $ 3,586,827
----------------------------------------------------------------------------------- --------------
AIR TRANSPORTATION--3.5%
-----------------------------------------------------------------------------------
2,000,000 AMR Corp., Deb., 10.00%, 2/1/2001 2,061,540
-----------------------------------------------------------------------------------
2,100,000 Southwest Airlines, Inc., Deb., 9.40%, 7/1/2001 2,213,169
-----------------------------------------------------------------------------------
1,000,000 US Air, Inc., Pass Thru Cert., Series 1993-A2, 9.625%, 9/1/2003 840,000
----------------------------------------------------------------------------------- --------------
Total 5,114,709
----------------------------------------------------------------------------------- --------------
AUTOMOTIVE--3.9%
-----------------------------------------------------------------------------------
500,000 Aftermarket Technology Corp., Sr. Sub. Note, 12.00%, 8/1/2004 508,750
-----------------------------------------------------------------------------------
2,000,000 Arvin Industries, Inc., Note, 6.875%, 2/15/2001 1,809,780
-----------------------------------------------------------------------------------
2,200,000 Chrysler Corp., Deb., 12.375%, 5/1/2020 2,892,846
-----------------------------------------------------------------------------------
500,000 Motor Wheel Corp., Sr. Note, Series B, 11.50%, 3/1/2000 491,250
----------------------------------------------------------------------------------- --------------
Total 5,702,626
----------------------------------------------------------------------------------- --------------
BANKING--0.4%
-----------------------------------------------------------------------------------
500,000 First Nationwide Holdings, Inc., Sr. Note, 12.25%, 5/15/2001 521,250
----------------------------------------------------------------------------------- --------------
BROADCAST RADIO & TV--1.7%
-----------------------------------------------------------------------------------
500,000 Allbritton Communications Co., Sr. Sub. Note, 11.50%, 8/15/2004 510,000
-----------------------------------------------------------------------------------
500,000 Chancellor Broadcasting Co., Sr. Sub. Note, 12.50%, 10/1/2004 500,000
-----------------------------------------------------------------------------------
1,000,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 1,015,000
-----------------------------------------------------------------------------------
500,000 Sinclair Broadcast Group Inc., Sr. Sub. Note, 10.00%, 12/15/2003 482,500
----------------------------------------------------------------------------------- --------------
Total 2,507,500
----------------------------------------------------------------------------------- --------------
BUSINESS EQUIPMENT & SERVICES--0.7%
-----------------------------------------------------------------------------------
500,000 Anacomp, Inc., Sr. Sub. Note, 15.00%, 11/1/2000 552,500
-----------------------------------------------------------------------------------
500,000 Bell & Howell Co., Sr. Sub. Note, Series B, 10.75%, 10/1/2002 482,500
----------------------------------------------------------------------------------- --------------
Total 1,035,000
----------------------------------------------------------------------------------- --------------
CABLE TELEVISION--2.2%
-----------------------------------------------------------------------------------
$ 500,000 Cablevision Systems Corp., Sr. Sub. Deb., 9.875%, 2/15/2013 $ 462,500
-----------------------------------------------------------------------------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
CABLE TELEVISION--CONTINUED
-----------------------------------------------------------------------------------
1,000,000 Continental Cablevision Inc., Sr. Deb., 9.50%, 8/1/2013 905,000
-----------------------------------------------------------------------------------
1,500,000 International Cabletel, Inc., Sr. Dfd. Coupon Note, 0/10.875%,
10/15/2003 836,250
-----------------------------------------------------------------------------------
500,000 Marcus Cable Operating Co. L.P., Sr. Deb., 11.875%, 10/1/2005 466,250
-----------------------------------------------------------------------------------
1,000,000 Rogers Cablesystems Ltd., Sr. Secd. Note, 9.65%, 1/15/2014 620,659
----------------------------------------------------------------------------------- --------------
Total 3,290,659
----------------------------------------------------------------------------------- --------------
CHEMICALS & PLASTICS--4.2%
-----------------------------------------------------------------------------------
1,500,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 1,473,750
-----------------------------------------------------------------------------------
500,000 Foamex Capital Corp., Sr. Sub. Deb., 11.875%, 10/1/2004 502,500
-----------------------------------------------------------------------------------
2,500,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 11.375%, 10/1/98 1,525,000
-----------------------------------------------------------------------------------
875,000 Harris Chemical North America, Inc., Sr. Secd. Disc. Note, 0/10.25%,
7/15/2001 710,938
-----------------------------------------------------------------------------------
500,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 478,750
-----------------------------------------------------------------------------------
500,000 Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 500,000
-----------------------------------------------------------------------------------
1,000,000 UCC Investors Holdings, Inc., Sr. Sub. Note, 11.00%, 5/1/2003 1,010,000
----------------------------------------------------------------------------------- --------------
Total 6,200,938
----------------------------------------------------------------------------------- --------------
CLOTHING & TEXTILES--1.9%
-----------------------------------------------------------------------------------
1,800,000 Reebok International Ltd., Deb., 9.75%, 9/15/98 1,846,548
-----------------------------------------------------------------------------------
1,000,000 Westpoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 902,500
----------------------------------------------------------------------------------- --------------
Total 2,749,048
----------------------------------------------------------------------------------- --------------
CONGLOMERATES--4.5%
-----------------------------------------------------------------------------------
2,500,000 Leucadia National Corp., Sr. Sub., 10.375%, 6/15/2002 2,637,500
-----------------------------------------------------------------------------------
2,000,000 Noranda, Inc., Deb., 8.125%, 6/15/2004 1,921,520
-----------------------------------------------------------------------------------
1,000,000 Noranda, Inc., Deb., 8.625%, 7/15/2002 1,001,100
-----------------------------------------------------------------------------------
1,000,000 Sherritt Gordon Ltd., Sr. Note, 9.75%, 4/1/2003 965,000
----------------------------------------------------------------------------------- --------------
Total 6,525,120
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
CONTAINER & GLASS PRODUCTS--1.9%
-----------------------------------------------------------------------------------
$ 1,000,000 Owens-Corning Fiberglass Corp., Deb., 9.375%, 6/1/2012 $ 1,010,760
-----------------------------------------------------------------------------------
750,000 Silgan Holdings, Inc., Sr. Disc. Deb., 0/13.25%, 12/15/2002 605,625
-----------------------------------------------------------------------------------
1,000,000 U.S. Can Co., Sr. Sub. Note, 13.50%, 1/15/2002 1,115,000
----------------------------------------------------------------------------------- --------------
Total 2,731,385
----------------------------------------------------------------------------------- --------------
COSMETICS & TOILETRIES--0.8%
-----------------------------------------------------------------------------------
2,000,000 Revlon World Wide Corp., Sr. Secd. Discount Note, Series B, 12.00% accrual, 3/15/98 1,110,000
----------------------------------------------------------------------------------- --------------
ECOLOGICAL SERVICES & EQUIPMENT--1.3%
-----------------------------------------------------------------------------------
500,000 Allied Waste Industries, Inc., Sr. Sub. Note, 10.75%, 2/1/2004 465,000
-----------------------------------------------------------------------------------
1,000,000 ICF Kaiser International, Inc., Sr. Sub. Note, 12.00% 12/31/2003 880,000
-----------------------------------------------------------------------------------
500,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 492,500
----------------------------------------------------------------------------------- --------------
Total 1,837,500
----------------------------------------------------------------------------------- --------------
FINANCE/AUTOMOTIVE--2.1%
-----------------------------------------------------------------------------------
1,000,000 Ford Capital, Deb., 9.00%, 8/15/98 1,032,440
-----------------------------------------------------------------------------------
2,000,000 General Motors Acceptance Corp., Medium Term Note, 7.50%, 5/18/98 1,980,740
----------------------------------------------------------------------------------- --------------
Total 3,013,180
----------------------------------------------------------------------------------- --------------
FINANCIAL INTERMEDIARIES--1.7%
-----------------------------------------------------------------------------------
500,000 Coldwell Banker Corp., Sr. Sub. Note, Series B, 10.25%, 6/30/2003 513,125
-----------------------------------------------------------------------------------
2,000,000 Merrill Lynch & Co., Inc., Medium Term Note, 7.25%, 6/14/2004 1,966,820
----------------------------------------------------------------------------------- --------------
Total 2,479,945
----------------------------------------------------------------------------------- --------------
FOOD & DRUG RETAILERS--4.0%
-----------------------------------------------------------------------------------
1,000,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 700,000
-----------------------------------------------------------------------------------
4,075,000 Hook-Superx, Inc., Sr. Note, 10.125%, 6/1/2002 4,217,625
-----------------------------------------------------------------------------------
1,000,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 888,750
----------------------------------------------------------------------------------- --------------
Total 5,806,375
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
FOOD PRODUCTS--3.5%
-----------------------------------------------------------------------------------
$ 500,000 Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005 $ 505,000
-----------------------------------------------------------------------------------
500,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 437,500
-----------------------------------------------------------------------------------
2,000,000 Grand Metropolitan Investment Corp., Company Guarantee, 7.00%,
6/15/99 1,930,540
-----------------------------------------------------------------------------------
1,000,000 PMI Acquisition Corp., Sr. Sub. Note, 10.25%, 9/1/2003 972,500
-----------------------------------------------------------------------------------
3,000,000 Specialty Foods Acquisition Corp., Sr. Secd. Disc. Deb., Series B,
0/13.00%, 8/15/2005 1,305,000
----------------------------------------------------------------------------------- --------------
Total 5,150,540
----------------------------------------------------------------------------------- --------------
FOOD SERVICES--1.6%
-----------------------------------------------------------------------------------
1,000,000 Americold Corp., First Mortgage Bond, Series B, 11.50%, 3/1/2005 900,000
-----------------------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.75%, 9/15/2001 472,500
-----------------------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 471,250
-----------------------------------------------------------------------------------
500,000 Flagstar Corp., Sr. Sub. Deb., 11.25%, 11/1/2004 427,500
----------------------------------------------------------------------------------- --------------
Total 2,271,250
----------------------------------------------------------------------------------- --------------
FOREST PRODUCTS--4.5%
-----------------------------------------------------------------------------------
500,000 Domtar, Inc., Deb., 11.25%, 9/15/2017 508,750
-----------------------------------------------------------------------------------
500,000 Domtar, Inc., Note, 12.00%, 4/15/2001 537,500
-----------------------------------------------------------------------------------
1,000,000 Georgia-Pacific Corp., Deb., 10.125%, 5/15/2000 1,019,740
-----------------------------------------------------------------------------------
2,500,000 Georgia-Pacific Corp., Deb., 9.50%, 5/15/2022 2,516,125
-----------------------------------------------------------------------------------
500,000 Riverwood International Corp., Sr. Sub. Note, 11.25%, 6/15/2002 518,750
-----------------------------------------------------------------------------------
500,000 Stone Container Corp., Sr. Note, 11.50%, 10/1/2004 505,625
-----------------------------------------------------------------------------------
1,000,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 943,750
----------------------------------------------------------------------------------- --------------
Total 6,550,240
----------------------------------------------------------------------------------- --------------
GOVERNMENT AGENCY--1.2%
-----------------------------------------------------------------------------------
2,000,000 Tennessee Valley Authority, Deb., 7.85%, 6/15/2044 1,769,420
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
HEALTH SERVICES--1.3%
-----------------------------------------------------------------------------------
$ 2,000,000 Columbia HCA Healthcare Corp., Medium Term Note, 8.05%,
8/25/2006 $ 1,904,000
----------------------------------------------------------------------------------- --------------
HEALTHCARE--0.8%
-----------------------------------------------------------------------------------
1,111,175 Amerisource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 1,122,287
----------------------------------------------------------------------------------- --------------
HOME PRODUCTS & FURNISHINGS--0.8%
-----------------------------------------------------------------------------------
1,750,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 6/1/2005 1,181,250
----------------------------------------------------------------------------------- --------------
HOTELS, MOTELS, INNS & CASINOS--0.4%
-----------------------------------------------------------------------------------
500,000 Motels of America, Inc., Sr. Sub. Note, 12.00%, 4/15/2004 567,500
----------------------------------------------------------------------------------- --------------
INDUSTRIAL PRODUCTS & EQUIPMENT--3.6%
-----------------------------------------------------------------------------------
500,000 Truck Components, Inc., Sr. Note, Series B, 12.25%, 6/30/2001 526,250
-----------------------------------------------------------------------------------
4,435,000 Varity Corp., Sr. Note, 11.375%, 11/15/98 4,734,362
----------------------------------------------------------------------------------- --------------
Total 5,260,612
----------------------------------------------------------------------------------- --------------
INSURANCE--3.0%
-----------------------------------------------------------------------------------
2,000,000 Delphi Financial Group Inc., Note, 8.00%, 10/1/2003 1,684,000
-----------------------------------------------------------------------------------
3,000,000 Sunamerica, Inc., Deb., 8.125%, 4/28/2023 2,664,390
----------------------------------------------------------------------------------- --------------
Total 4,348,390
----------------------------------------------------------------------------------- --------------
LEISURE & ENTERTAINMENT--0.6%
-----------------------------------------------------------------------------------
1,000,000 Paramount Communications, Inc., Sr. Deb., 8.25%, 8/1/2022 831,640
----------------------------------------------------------------------------------- --------------
OIL & GAS--9.9%
-----------------------------------------------------------------------------------
2,710,000 Ashland Oil, Inc., Deb., 11.125%, 10/15/2017 3,057,720
-----------------------------------------------------------------------------------
1,000,000 Burlington Resources, Note, 7.15%, 5/1/99 973,200
-----------------------------------------------------------------------------------
1,000,000 Falcon Drilling Co., Inc., Sr. Note, Series B, 9.75%, 1/15/2001 972,500
-----------------------------------------------------------------------------------
1,000,000 Giant Industries, Sr. Sub. Note, 9.75%, 11/15/2003 930,000
-----------------------------------------------------------------------------------
1,000,000 H.S. Resources, Inc., Sr. Sub. Note, 9.875%, 12/1/2003 942,500
-----------------------------------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Deb., 11.125%, 6/1/2019 1,130,940
-----------------------------------------------------------------------------------
1,000,000 Triton Energy Corp., Sr. Sub. Disc. Note, 0/9.75%, 12/15/2000 755,000
-----------------------------------------------------------------------------------
$ 2,000,000 USX Corp., Deb., 9.125%, 1/15/2013 $ 1,919,120
-----------------------------------------------------------------------------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
OIL & GAS--CONTINUED
-----------------------------------------------------------------------------------
1,000,000 USX Corp., Note, 6.375%, 7/15/98 940,520
-----------------------------------------------------------------------------------
3,000,000 Western Atlas, Inc., Deb., 8.55%, 6/15/2024 2,827,440
----------------------------------------------------------------------------------- --------------
Total 14,448,940
----------------------------------------------------------------------------------- --------------
PRINTING & PUBLISHING--3.1%
-----------------------------------------------------------------------------------
500,000 Affiliated Newspaper, Sr. Disc. Note, Class B, 0/13.25%, 7/1/2006 260,000
-----------------------------------------------------------------------------------
250,000 Garden State Newspapers, Inc., Sr. Sub. Note, 12.00%, 7/1/2004 248,750
-----------------------------------------------------------------------------------
1,000,000 News America Holdings, Inc., Sr. Note, 12.00%, 12/15/2001 1,132,220
-----------------------------------------------------------------------------------
3,000,000 News America Holdings, Inc., Sr. Note, 8.50%, 2/15/2005 2,881,590
----------------------------------------------------------------------------------- --------------
Total 4,522,560
----------------------------------------------------------------------------------- --------------
RETAILERS--1.4%
-----------------------------------------------------------------------------------
1,000,000 Brylane Capital Corp., Sr. Sub. Note, Series B, 10.00%, 9/1/2003 947,500
-----------------------------------------------------------------------------------
1,000,000 J.C. Penney Co., S.F. Deb., 9.75%, 6/15/2021 1,058,850
----------------------------------------------------------------------------------- --------------
Total 2,006,350
----------------------------------------------------------------------------------- --------------
SOVEREIGN GOVERNMENT--8.8%
-----------------------------------------------------------------------------------
2,500,000 Freeport Terminal (Malta) Ltd., Gtd. Global Note, 7.50%, 3/29/2009 2,281,475
-----------------------------------------------------------------------------------
1,400,000 New Zealand Government, Deb., 10.50%, 7/16/2000 1,498,000
-----------------------------------------------------------------------------------
1,000,000 Province of New Brunswick, Local Government Guarantee, 9.75%,
5/15/2020 1,091,100
-----------------------------------------------------------------------------------
1,500,000 Province of Quebec, Deb., 13.25%, 9/15/2014 1,854,525
-----------------------------------------------------------------------------------
2,000,000 Province of Quebec, Deb., 7.50%, 7/15/2023 1,687,020
-----------------------------------------------------------------------------------
2,000,000 Republic of Columbia, Note, 8.75%, 10/6/99 1,977,420
-----------------------------------------------------------------------------------
2,500,000 Victoria Public Authority, Local Government Guarantee, 8.25%,
1/15/2002 2,484,375
----------------------------------------------------------------------------------- --------------
Total 12,873,915
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------------------------
STEEL--2.8%
-----------------------------------------------------------------------------------
$ 500,000 Armco, Inc., Sr. Note, 11.375%, 10/15/99 $ 511,250
-----------------------------------------------------------------------------------
500,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 464,375
-----------------------------------------------------------------------------------
1,000,000 Carbide/Graphite Group Inc., Sr. Note, 11.50%, 9/1/2003 1,010,000
-----------------------------------------------------------------------------------
1,250,000 Envirosource, Inc., Sr. Note, 9.75%, 6/15/2003 1,109,375
-----------------------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 11.125%, 3/15/2001 497,500
-----------------------------------------------------------------------------------
500,000 Geneva Steel, Sr. Note, 9.50%, 1/15/2004 445,625
----------------------------------------------------------------------------------- --------------
Total 4,038,125
----------------------------------------------------------------------------------- --------------
SURFACE TRANSPORTATION--2.8%
-----------------------------------------------------------------------------------
2,000,000 American President Co. Ltd., Sr. Note, 7.125%, 11/15/2003 1,764,060
-----------------------------------------------------------------------------------
1,000,000 Sea Containers Ltd., Sr. Note, 9.50%, 7/1/2003 928,750
-----------------------------------------------------------------------------------
500,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 492,500
-----------------------------------------------------------------------------------
1,000,000 Trism, Inc., Sr. Sub. Note, 10.75%, 12/15/2000 985,000
----------------------------------------------------------------------------------- --------------
Total 4,170,310
----------------------------------------------------------------------------------- --------------
TELECOMMUNICATIONS & CELLULAR--0.5%
-----------------------------------------------------------------------------------
1,000,000 Panamsat, L.P., Sr. Sub. Disc. Note, 0/11.375%, 8/1/2003 677,500
----------------------------------------------------------------------------------- --------------
TOBACCO--0.5%
-----------------------------------------------------------------------------------
750,000 Philip Morris, Deb., 8.625%, 3/1/99 769,462
----------------------------------------------------------------------------------- --------------
UTILITIES--0.4%
-----------------------------------------------------------------------------------
750,000 California Energy Co., Inc., Sr. Disc. Note, 0/10.25%, 1/15/2004 533,438
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $136,358,135) 129,209,791
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
CONVERTIBLE PREFERRED STOCKS--2.0%
- -------------------------------------------------------------------------------------------------
BANKING--2.0%
-----------------------------------------------------------------------------------
150,000 Citicorp., PERCS, Series 15, 8.25% $ 2,943,750
----------------------------------------------------------------------------------- --------------
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $2,975,000) 2,943,750
----------------------------------------------------------------------------------- --------------
COMMON STOCKS--0.0%
- -------------------------------------------------------------------------------------------------
ECOLOGICAL SERVICES & EQUIPMENT--0.0%
-----------------------------------------------------------------------------------
4,800 (a)ICF Kaiser International, Inc., Warrants 2,400
----------------------------------------------------------------------------------- --------------
PRINTING & PUBLISHING--0.0%
-----------------------------------------------------------------------------------
500 (a)Affiliated Newspaper 12,562
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $16,831) 14,962
----------------------------------------------------------------------------------- --------------
ASSET-BACKED SECURITIES--4.7%
- -------------------------------------------------------------------------------------------------
STRUCTURED PRODUCTS--4.7%
-----------------------------------------------------------------------------------
$ 1,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/15/98 1,023,810
-----------------------------------------------------------------------------------
1,000,000 GE Capital Home Equity Loan 1991-1, Class B, 8.70%, 8/30/2011 988,330
-----------------------------------------------------------------------------------
1,000,000 Greentree Financial Corp., 1992-2, Class B, 9.15%, 1/15/2018 1,003,750
-----------------------------------------------------------------------------------
2,000,000 MBNA Master Credit Card Trust, 1992-2, Class A, 6.20%, 8/15/99 1,928,720
-----------------------------------------------------------------------------------
1,000,000 Merrill Lynch Mortgage Investment, Inc., 1988-H, Class B, 9.70%,
6/15/2008 1,021,880
-----------------------------------------------------------------------------------
1,000,000 Residential Funding Corp., 1993-S26, Class A10, 7.50%, 7/25/2023 843,120
----------------------------------------------------------------------------------- --------------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $7,290,312) 6,809,610
----------------------------------------------------------------------------------- --------------
MORTGAGE-BACKED SECURITIES--1.5%
- -------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--1.5%
-----------------------------------------------------------------------------------
2,420,238 Government National Mortgage Association, Pool 379983, 7.50%,
2/15/2024 2,246,998
----------------------------------------------------------------------------------- --------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,443,684) 2,246,998
----------------------------------------------------------------------------------- --------------
</TABLE>
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--1.1%
- -------------------------------------------------------------------------------------------------
$ 1,605,000 J.P. Morgan Securities, Inc., 4.82%, dated 10/31/94, due 11/1/94
(at amortized cost) $ 1,605,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $150,688,962) $ 142,830,111+
----------------------------------------------------------------------------------- --------------
</TABLE>
The cost of investments for federal tax purposes amounts to $150,688,962. The
net unrealized depreciation on a federal tax cost basis amounts to $7,858,851,
and is comprised of $329,907 appreciation and $8,188,758 depreciation at
October 31, 1994.
* The repurchase agreement is fully collateralized by U.S. government
obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(a) Non-income producing.
Note: The categories of investments are shown as a percentage of net assets
($146,270,055) at October 31, 1994.
The following abbreviations are used in this portfolio:
PERCS--Preferred Equity Redeemable Preferred Stock
PIK --Payment in Kind
SF --Sinking Fund
(See Notes which are an integral part of the Financial Statements.)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost: $150,688,962) $ 142,830,111
- -------------------------------------------------------------------------------------------------
Cash 19,855
- -------------------------------------------------------------------------------------------------
Receivable for investments sold 3,706,172
- -------------------------------------------------------------------------------------------------
Interest receivable 3,546,494
- -------------------------------------------------------------------------------------------------
Receivable for capital stock sold 699,579
- ------------------------------------------------------------------------------------------------- --------------
Total assets 150,802,211
- ------------------------------------------------------------------------------------------------- --------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for investments purchased $ 2,487,041
- -----------------------------------------------------------------------------------
Payable for capital stock redeemed 1,299,169
- -----------------------------------------------------------------------------------
Dividends payable 623,242
- -----------------------------------------------------------------------------------
Accrued expenses and other liabilities 122,704
- ----------------------------------------------------------------------------------- ------------
Total liabilities 4,532,156
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 16,110,377 shares of capital stock outstanding $ 146,270,055
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 157,260,387
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (7,858,851)
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (3,335,869)
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 204,388
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 146,270,055
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, and Redemption Proceeds Per Share:
(net assets of $146,270,055 / 16,110,377 shares of capital stock outstanding) $9.08
- ------------------------------------------------------------------------------------------------- --------------
COMPUTATION OF OFFERING PRICE:
- -------------------------------------------------------------------------------------------------
Offering Price Per Share (100/99 of $9.08)* $9.17
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
*See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Statement of Operations
- --------------------------------------------------------------------------------
October 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest $ 12,799,966
- ---------------------------------------------------------------------------------------------------
Dividends 118,106
- --------------------------------------------------------------------------------------------------- ------------
Total investment income 12,918,072
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee $ 1,081,066
- --------------------------------------------------------------------------------------
Directors' fees 5,008
- --------------------------------------------------------------------------------------
Administrative personnel and services 192,379
- --------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 66,297
- --------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 134,126
- --------------------------------------------------------------------------------------
Shareholder services fee 350,007
- --------------------------------------------------------------------------------------
Fund share registration costs 41,758
- --------------------------------------------------------------------------------------
Auditing fees 13,508
- --------------------------------------------------------------------------------------
Legal fees 9,189
- --------------------------------------------------------------------------------------
Printing and postage 41,014
- --------------------------------------------------------------------------------------
Insurance premiums 6,784
- --------------------------------------------------------------------------------------
Taxes 40,247
- --------------------------------------------------------------------------------------
Miscellaneous 6,621
- -------------------------------------------------------------------------------------- -----------
Total expenses 1,988,004
- --------------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 481,690
- -------------------------------------------------------------------------------------- -----------
Net expenses 1,506,314
- --------------------------------------------------------------------------------------------------- ------------
Net investment income 11,411,758
- --------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (3,358,420)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (13,277,162)
- --------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (16,635,582)
- --------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ (5,223,824)
- --------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1994 1993
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------------
Net investment income $ 11,411,758 $ 6,888,178
- ---------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($3,359,826 net loss and
$2,084,112 net gain, respectively, as computed for federal tax purposes) (3,358,420) 2,082,462
- ---------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (13,277,162) 6,719,114
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets resulting from operations (5,223,824) 15,689,754
- --------------------------------------------------------------------------------- -------------- --------------
NET EQUALIZATION CREDITS 81,055 116,945
- --------------------------------------------------------------------------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------------
Dividends to shareholders from net investment income (11,262,574) (7,005,123)
- ---------------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment transactions (1,863,673) --
- ---------------------------------------------------------------------------------
Distributions in excess of net investment income -- (20,955)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets from distributions to shareholders (13,126,247) (7,026,078)
- --------------------------------------------------------------------------------- -------------- --------------
CAPITAL STOCK TRANSACTIONS--(EXCLUSIVE OF AMOUNTS
ALLOCATED TO NET INVESTMENT INCOME)
- ---------------------------------------------------------------------------------
Proceeds from sale of shares 84,985,424 84,195,992
- ---------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of dividends declared 4,135,607 2,669,825
- ---------------------------------------------------------------------------------
Cost of shares redeemed (50,343,919) (24,770,792)
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets from capital stock transactions 38,777,112 62,095,025
- --------------------------------------------------------------------------------- -------------- --------------
Change in net assets 20,508,096 70,875,646
- ---------------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------------
Beginning of period 125,761,959 54,886,313
- --------------------------------------------------------------------------------- -------------- --------------
End of period (including undistributed net investment income of $204,388 and $0,
respectively) $ 146,270,055 $ 125,761,959
- --------------------------------------------------------------------------------- -------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
(formerly, Fortress Bond Fund)
Notes to Financial Statements
- --------------------------------------------------------------------------------
October 31, 1994
(1) ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of two diversified
portfolios. The financial statements included herein present only those of
Federated Bond Fund (the "Fund"). The financial statements of the other
portfolio are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. Effective February 3, 1993, the Fund was registered into a portfolio of
Investment Series Funds, Inc. Prior to that date, the Fund was operated as a
portfolio of Investment Series Trust.
Effective June 30, 1995, the Board of Directors of the Corporation (the
"Directors") changed the name of the Fund from Fortress Bond Fund to Federated
Bond Fund.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed corporate bonds and other fixed income and
asset backed securities are valued at the last sale price reported on
national securities exchanges. Unlisted bonds and securities and short-term
obligations are valued at the prices provided by an independent pricing
service. Listed equity securities are valued at the last sale price
reported on national securities exchanges. Unlisted securities and
short-term obligations (and private placement securities) are generally
valued at the prices provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less may be stated at
amortized cost, which approximates value.
During the year ended October 31, 1994, the Fund changed its method of
accounting for costing securities and calculating gains and losses for
financial reporting purposes from the average cost method to the specific
identification method. This accounting change resulted only in
reclassification between unrealized and realized gains and losses, and
therefore had no effect on the net results from operations, net assets or
net asset value per share. The specific identification method is the
preferred method used in the industry and it more closely agrees with the
costing method for federal tax purposes.
B. REPURCHASE AND REVERSE REPURCHASE AGREEMENTS--It is the policy of the Fund
to require the custodian bank to take possession, to have legally
segregated in the Federal Reserve Book Entry System, or to have segregated
within the custodian bank's vault, all securities held as collateral in
support of repurchase and reverse repurchase agreement investments.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's underlying
collateral to ensure that the value
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
of collateral at least equals the principal amount of the repurchase
agreement, including accrued interest.
The Fund is also permitted to enter into reverse repurchase agreements, in
which the Fund sells U.S. government securities to financial institutions
and agrees to repurchase the securities at an agreed upon price and date.
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.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. At October 31,
1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $3,359,826, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 2002 ($3,359,826).
E. EQUALIZATION--The Fund follows the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
redemptions of capital stock equivalent, on a per share basis, to the
amount of undistributed net investment income on the date of the
transaction is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of capital stock.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At October 31, 1994, there were 1,000,000,000,000 shares ($0.0001 par value per
share) of capital stock of the Fund authorized. Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
----------------------
1994 1993
<S> <C> <C>
Shares sold 8,746,756 8,508,866
- ---------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 436,461 269,258
- ---------------------------------------------------------------------------------------
Shares redeemed (5,284,540) (2,510,109)
- --------------------------------------------------------------------------------------- ----------- -----------
Net change resulting from Fund share transactions 3,898,677 6,268,015
- --------------------------------------------------------------------------------------- ----------- -----------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.75 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee and to reimburse certain operating expenses
of the Fund. The Adviser can modify or terminate this voluntary waiver or
reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is incurred to
obtain certain personal services for shareholders and to maintain the
shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
Federated Bond Fund
(formerly, Fortress Bond Fund)
- --------------------------------------------------------------------------------
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended
October 31, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 140,759,517
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 103,126,151
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
Report of Ernst & Young LLP,
Independent Auditors
- --------------------------------------------------------------------------------
To the Directors and Shareholders of
INVESTMENT SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Bond Fund (formerly, Fortress Bond
Fund), (one of the portfolios comprising Investment Series Funds, Inc.) as of
October 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights (see page 2 of this prospectus)
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Bond Fund (formerly, Fortress Bond Fund) at October 31, 1994, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 9, 1994
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX
(UNAUDITED)
STANDARD AND POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB
rating.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
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.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligator's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
ADDRESSES
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<TABLE>
<S> <C> <C>
Investment Series Fund, Inc.
Federated 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 8602
Trust Company Boston, Massachusetts 02266-8602
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Independent Auditors
Ernst & Young LLP One Oxford Center
Pittsburgh, Pennsylvania 15219
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</TABLE>
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
(A PORTFOLIO OF INVESTMENT
SERIES FUNDS, INC.)
FORTRESS SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
Prospectus dated June 27, 1995
[logo] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 461444309
G01271-02 (6/95)
FEDERATED BOND FUND
(FORMERLY, FORTRESS BOND FUND)
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
FORTRESS SHARES
Combined Statement of Additional Information
This Combined Statement of Additional Information should be read with
the combined prospectus for Class A Shares, Class B Shares, and Class C
Shares, and the prospectus for Fortress Shares of Federated Bond Fund
(the "Fund") dated June 27, 1995. 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 June 27, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Futures and Options Transactions 1
Investing in Foreign Currencies 3
When-Issued and Delayed Delivery
Transactions 4
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 5
INVESTMENT LIMITATIONS 5
INVESTMENT SERIES FUNDS, INC.
MANAGEMENT 7
Directors' Compensation 11
INVESTMENT ADVISORY SERVICES 12
Adviser to the Fund 12
Advisory Fees 12
ADMINISTRATIVE SERVICES 12
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 12
BROKERAGE TRANSACTIONS 13
PURCHASING SHARES 13
Distribution Plan and Shareholder
Services Agreement 13
Purchases by Sales
Representatives, Directors, and
Employees 14
Conversion to Federal Funds 14
Other Payments to Financial
Institutions (Fortress Shares
Only) 14
Determining Market Value of
Securities 14
REDEEMING SHARES 15
Redemption in Kind 15
EXCHANGE PRIVILEGE (FORTRESS SHARES
ONLY) 15
Reduced Sales Load 15
Requirements for Exchange 15
Tax Consequences 16
Making an Exchange 16
REDEEMING SHARES 16
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
TOTAL RETURN 16
YIELD 17
PERFORMANCE COMPARISONS 17
Duration 18
APPENDIX 19
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.
Shares of the Fund are offered in four classes known as Class A Shares, Class
B Shares, Class C Shares, and Fortress Shares (individually and collectively
referred to as "Shares," as the context may require). This Combined Statement
of Additional Information relates to all classes of Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital. The investment
objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
As a matter of investment policy, which may be changed without shareholder
approval, the Fund will, under normal circumstances, invest at least 65% of
the value of its total net assets in investment grade bonds. Permitted
investments include:
o domestically-issued corporate debt obligations;
o asset-backed securities;
o obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
o taxable municipal debt obligations; and
o repurchase agreements.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio
securities and listed put options on futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options on
portfolio securities to attempt to increase its current income. The Fund
currently does not intend to invest more than 5% of its total assets in
options transactions.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery
of the security ("going long") at a certain time in the future.
In the fixed income securities market, price generally moves inversely
to interest rates. Thus, a rise in rates generally means a drop in
price. Conversely, a drop in rates generally means a rise in price. In
order to hedge its holdings of fixed income securities against a rise in
market interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income securities
may decline during the Fund's anticipated holding period. The Fund would
"go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option
will increase in value. In such an event, the Fund will normally close
out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by
the Fund for the original option plus the decrease in value of the
hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against
an increase in market interest rates. When the Fund writes a call option
on a futures contract, it is undertaking the obligation of assuming a
short futures position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option is
exercised. As market interest rates rise, causing the prices of futures
to go down, the Fund's obligation under a call option on a future (to
sell a futures contract) costs less to fulfill, causing the value of the
Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can offset the drop in value of the Fund's fixed income
portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then offset the decrease in
value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts to
bring its open futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark-to-
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) as a specified price during
the term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it has
the right to obtain without payment of further consideration (or has
segregated cash in the amount of any additional consideration).
INVESTING IN FOREIGN CURRENCIES
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts in
order to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and a foreign
currency involved in an underlying transaction. However, forward foreign
currency exchange contracts may limit potential gains which could result
from a positive change in such currency relationships. The Fund's
investment adviser, Federated Advisers (the "Adviser"), believes that it
is important to have the flexibility to enter into forward foreign
currency exchange contracts whenever it determines that it is in the
Fund's best interest to do so. The Fund will not speculate in foreign
currency exchange.
There is no limitation as to the percentage of the Fund's assets that
may be committed to such contracts.
The Fund does not enter into forward foreign currency exchange contracts
or maintain a net exposure in such contracts when the Fund would be
obligated to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in
that currency or, in the case of a "cross-hedge" denominated in a
currency or currencies that the Adviser believes will tend to be closely
correlated with the currency with regard to price movements. Generally,
the Fund does not enter into a forward foreign currency exchange
contract with a term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price on
a specified date or during the option period. The owner of a call option
has the right, but not the obligation, to buy the currency. Conversely,
the owner of a put option has the right, but not the obligation to sell
the currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position
during the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency depreciates
in value. Although purchasing a foreign currency option can protect the
Fund against an adverse movement in the value of a foreign currency, the
option will not limit the movement in the value of such currency. For
example, if the Fund were holding securities denominated in a foreign
currency that was appreciating and had purchased a foreign currency put
to hedge against a decline in the value of the currency, the Fund would
not have to exercise its put option. Likewise, if the Fund were to enter
into a contract to purchase a security denominated in foreign currency
and, in conjunction with that purchase, were to purchase a foreign
currency call option to hedge against a rise in value of the currency,
and if the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise
its call. Instead, the Fund could acquire in the spot market the amount
of foreign currency needed for settlement.
Special Risks Associated With Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally.
In addition, there are certain additional risks associated with foreign
currency options. The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market.
Although the Fund will not purchase or write such options unless and
until, in the opinion of the Adviser, the market for them has developed
sufficiently to ensure that the risks in connection with such options
are not greater than the risks in connection with the underlying
currency, there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or
both currencies and may have no relationship to the investment merits of
a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those
that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis.
Available quotation information is generally representative of very
large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e. less than $1 million) where rates
may be less favorable. The interbank market in foreign currencies is a
global, around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options markets until
they reopen.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the
Fund's records at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Fund does not have the right to vote securities on loan,
but would terminate the loan and regain the right to vote if that were
considered important with respect to the investment.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements, and these securities are marked to market daily. To
the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor
of the Fund and allow retention or disposition of such securities. The Fund
will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the
Adviser to be creditworthy pursuant to guidelines established by the
Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but the
ability to enter into reverse repurchase agreements does not ensure that the
Fund will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. The securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objectives. Securities in the Fund's portfolio
will be sold whenever the Adviser believes it is appropriate to do so in light
of the Fund's investment objective, without regard to the length of time a
particular security may have been held. The Adviser does not anticipate that
portfolio turnover will result in adverse tax consequences. Any such trading
will increase the Fund's portfolio turnover rate and transaction costs. For
the fiscal years ended October 31, 1994, and 1993, the portfolio turnover
rates were 74% and 51%,, respectively.
INVESTMENT LIMITATIONS
Buying on Margin
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of
transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its net assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while any
such borrowings in excess of 5% of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed
or 10% of the value of total assets at the time of the borrowing.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or
interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on portfolio securities and on financial futures
contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell calls
on financial futures contracts. The Fund will notify shareholders before
such a change in its operating policies is implemented.
Investing in Restricted Securities
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the federal securities laws
(except for commercial paper issued under Section 4(2) of the Securities
Act of 1933).
Underwriting
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objectives, policies, and limitations.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities, on
a short-term or long-term basis, up to one-third of the value of its
total assets, to broker/dealers, banks, or other institutional borrowers
of securities.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry. However, investing in U.S. government obligations
shall not be considered investments in any one industry.
Selling Short
The Fund will not sell securities short unless:
o during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into
or exchangeable, without payment of additional consideration, for
securities of the same issuer as, and equal in amount to, the
securities sold short; and
o not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any
material change in those limitations becomes effective.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets
in portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
Investing in Issuers Whose Securities Are Owned by Officers and Directors
of the Corporation
The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Corporation or its investment adviser
owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
Writing Covered Call Options and Purchasing Put Options
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment. The Fund will not purchase put
options on securities unless the securities are held in the Fund's
portfolio.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will limit its investments in
the securities of other investment companies to those of money market
funds having investment objectives and policies similar to its own. The
Fund will purchase securities of closed-end investment companies only in
open market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization or acquisition of
assets. While it is the Fund's policy to waive its investment advisory
fee on assets invested in securities of open-end investment companies,
it should be noted that investment companies incur certain expenses such
as custodian and transfer agent fees, and therefore any investment by a
Fund in shares of another investment company would be subject to such
duplicate expenses.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its limitations, the Fund considers instruments issued by a
U.S. branch of a domestic bank having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment to be "cash items."
The use of short sales will allow the Fund to retain certain bonds in its
portfolio longer than it would without such sales. To the extent the Fund
receives the current income produced by such bonds for a longer period than it
might otherwise, the Fund's investment objective of current income is
furthered.
The Fund did not borrow money, sell securities short, engage in foreign
currency options, or purchase financial futures contracts in excess of 5% of
the value of its net assets during the last fiscal year and has no present
intent to do so in the coming fiscal year.
Investment Series Funds, Inc. Management
Officers and Directors are listed with their addresses, present positions
with Investment Series Funds, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue,
President and Director of the Fund.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, Florida
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds;
formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, Pennsylvania
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: April 11, 1949
President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Director of the Fund.
James E. Dowd
571 Hayward Mill Road
Concord, Massachusetts
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, Pennsylvania
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, Pennsylvania
Birthdate: June 18, 1924
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, Massachusetts
Birthdate: April 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, Pennsylvania
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, Pennsylvania
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, Pennsylvania
Birthdate: September 14, 1925
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management
Center; Director, Trustee, or Managing General Partner of the Funds; President
Emeritus, University of Pittsburgh; formerly, Chairman, National Advisory
Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, Pennsylvania
Birthdate: July 21, 1935
Director
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President
or Vice President of some of the Funds; Director or Trustee of some of the
Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President
and Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated Securities Corp.; Trustee,
Federated Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services; Trustee or Director
of some of the Funds; Vice President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: October 26, 1938
Vice President and Secretary
Services;
Services; Executive Vice President and Director, Federated Securities Corp.;
Vice President and Secretary of the Funds.
* This Director is deemed to be an "interested person" as defined in
the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilities of the Board of
Directors between meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding Shares.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Cash Management Trust; Automated Government Money
Trust; California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S.
Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; New York Municipal Cash
Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust For Government Cash Reserves; Trust
for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
As of June 22, 1995, the following shareholders of record owned 5% or
more of the outstanding Fortress Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith, Jacksonville, Florida, owned approximately
4,625,052 Shares (25.60%).
DIRECTORS' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND * FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Fund and
Chairman and Director 68 other investment companies in
the Fund Complex
John T. Conroy, Jr., $617 $117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex
William J. Copeland, $617 $117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex
J. Christopher Donahue, $0 $0 for the Fund and
Vice President and Director 14 other investment companies in
the Fund Complex
James E. Dowd, $617 $117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex
Lawrence D. Ellis, M.D., $559 $106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
Edward L. Flaherty, Jr., $617 $117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex
Peter E. Madden, $559 $90,563 for the Fund and
Director 64 other investment companies in
the Fund Complex
Gregor F. Meyer, $559 $106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
John E. Murray, Jr., $0 $0 for the Fund and
Director 64 other investment companies in
the Fund Complex
Wesley W. Posvar, $559 $106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
Marjorie P. Smuts, $559 $106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex
*Information is furnished for the fiscal year ended October 31, 1994.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue.
The Adviser shall not be liable to the Corporation, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the purchase,
holding, or sale of any security, or for anything done or omitted by it,
except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its
contract with the Corporation.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee for the Fund as described in the prospectus. For the fiscal years
ended October 31, 1994, and 1993, and the period from January 1, 1992 to
October 31, 1992, the Adviser earned $1,081,066, $671,751 and $113,009,
respectively, of which $481,690, $548,973, and $113,009 were voluntarily
waived because of undertakings to limit the Fund's expenses. In addition, for
the fiscal year ended October 31, 1994, and 1993, and for the period from
January 1, 1992 to October 31, 1992, the Adviser voluntarily reimbursed, with
respect to this Fund, $0, $0, and $200,470, respectively.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1 1/2%
per year of the remaining average net assets, the Adviser will reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated Administrative
Services, Inc., also a subsidiary of Federated Investors, served as the Fund's
administrator. (For purposes of this Statement of Additional Information,
Federated Administrative Services and Federated Administrative Services, Inc.,
may hereinafter collectively be referred to as, the "Administrators"). For the
fiscal year ended October 31, 1994, the Administrators collectively earned
$192,379. For the fiscal year ended October 31, 1993, and the period from
January 1, 1992 to October 31, 1992, Federated Administrative Services, Inc.
earned $288,504 and $131,503, respectively. Dr. Henry J. Gailliot, an officer
of Federated Advisers, the Adviser to the Fund, holds approximately 20% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type, and number of accounts
and transactions made by shareholders.
Federated Services Company also maintains the Corporation's accounting
records. The fee paid for this service is based on the level of the Fund's
average net assets for the period plus out-of -pocket expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Board of Directors.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage
and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising the Funds and other accounts. To
the extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales load on days the New York Stock
Exchange is open for business. The procedure for purchasing shares of the Fund
is explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and
assisting clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Directors expects that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Fund's objectives, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended October 31, 1994, the Fund paid shareholder service
fees in the amount of $350,007.
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities Corp.,
their spouses and their children under 21, may buy shares at net asset value
without a sales load. Shares may also be sold without a sales load to trusts
or pension or profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the purchase
is for investment purposes and that the securities will not be resold except
through redemption by the Fund.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. State Street Bank and Trust Company acts as the shareholder's
agent in depositing checks and converting them to federal funds.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS (FORTRESS SHARES ONLY)
The administrative services for which the Distributor will pay financial
institutions include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory and
computer personnel, as is necessary or beneficial to establish and maintain
shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, addresses, and providing such other
services as the Fund may reasonably request.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices, and for bonds and
other fixed income securities as determined by an independent pricing
service;
o for short-term obligations, according to the mean bid and asked prices,
as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of less than 60 days at the time
of purchase, at amortized cost unless the Board determines this is not
fair value; or
o at fair value as determined in good faith by the Fund's Board of
Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter put options will be valued at the mean between the bid and
the asked prices.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares,
Class C Shares, and Fortress Shares may be subject to a contingent deferred
sales charge. Redemption procedures are explained in the respective
prospectuses under "Redeeming Class A Shares," "Redeeming Class B Shares,"
"Redeeming Class C Shares" or "Redeeming Fortress Shares." Although the
transfer agent does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of less
than $5,000.
Fortress Shares redeemed within one to four years of purchase may be subject
to a contingent deferred sales charge. The amount of the contingent deferred
sales charge is based upon the amount of the advance payment paid at the time
of purchase by the distributor to the financial institutions for services
rendered, and the length of time the investor remains a shareholder in the
Fund. Should financial institutions elect to receive an amount
less than the advance payment that is stated in the prospectus for servicing a
particular shareholder, the contingent deferred sales charge and/or holding
period for that particular shareholder will be reduced accordingly.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
EXCHANGE PRIVILEGE (FORTRESS SHARES ONLY)
This section relates only to Fortress Shares of the Fund. For information
regarding the Exchange Privilege for Class A Shares, Class B Shares, and Class
C Shares of the Fund, please see the respective prospectuses for these classes
of Shares.
The Securities and Exchange Commission (the "SEC") has issued an order
exempting the Corporation from certain provisions of the Investment Company
Act of 1940, as amended. As a result, Fund shareholders are allowed to
exchange all or some of their shares for shares in other Fortress Funds or
certain Federated Funds which are sold with a sales load that differs from
that of the Fund's or which impose no sales load so long as the Federated
Funds are advised by subsidiaries or affiliates of Federated Investors. These
exchanges are made at net asset value plus the difference between the Fund's
sales load already paid and any sales load of the fund into which the shares
are to be exchanged, if higher. The order also allows certain other funds,
including funds that are not advised by subsidiaries or affiliates of
Federated Investors, which do not have a sales load, to exchange their shares
for Fund shares on a basis other than their current offering price. These
exchanges may be made to the extent that such shares were acquired in a prior
exchange, at net asset value, for shares of a Federated Fund carrying a sales
load.
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales load, the shareholder must notify Federated
Securities Corp. or Federated Services Company in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net asset
value equal to the minimum investment requirements of the fund into which the
exchange is being made. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders residing in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, Fortress 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.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares,
Class C Shares, and Fortress Shares may be subject to a contingent deferred
sales charge. Redemption procedures are explained in the respective
prospectuses under "Redeeming Class A Shares," "Redeeming Class B Shares,"
"Redeeming Class C Shares" or "Redeeming Fortress Shares." Although the
transfer agent does not charge for telephone redemptions, it reserves the
right to charge a fee for the cost of wire-transferred redemptions of less
than $5,000.
Fortress Shares redeemed within one to four years of purchase may be subject
to a contingent deferred sales charge. The amount of the contingent deferred
sales charge is based upon the amount of the advance payment paid at the time
of purchase by the distributor to the financial institutions for services
rendered, and the length of time the investor remains a shareholder in the
Fund. Should financial institutions elect to receive an amount less than the
advance payment that is stated in the prospectus for servicing a particular
shareholder, the contingent deferred sales charge and/or holding period for
that particular shareholder will be reduced accordingly.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid
by the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable
as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
TOTAL RETURN
Fortress Shares' average annual total returns for the one-year and five-year
periods ended October 31, 1994, and for the period from July 8, 1988
(effective date of the Fund's registration statement) to October 31, 1994,
were (5.28%), 10.69%, and 9.29%, respectively.
Class A Shares, Class B Shares, and Class C Shares were created on June 27,
1995, and therefore do not have average annual total returns.
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, adjusted over the period by any additional
Shares, assuming a quarterly reinvestment of all dividends and distributions.
Any applicable contingent deferred sales charge is deducted from the ending
value of the investments based on the lesser of the original purchase price or
the offering price of Shares redeemed.
Cumulative total return reflects total performance over a specific period of
time. Total return assumes and is reduced by the payment of the maximum sales
load and contingent deferred sales charge, if applicable.
YIELD
Fortress Shares' yield for the thirty-day period ended October 31, 1994, was
8.69%. Class A Shares, Class B Shares, and Class C Shares were created on June
27, 1995, and therefore do not have yield figures.
The yield for all classes of Shares of the Fund is determined each day by
dividing the net investment income per share (as defined by the SEC) earned by
the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends or
other distributions paid to shareholders. To the extent that financial
institutions and broker/dealers charge fees in connection with services
provided in conjunction with an investment in the Fund, performance will be
reduced for those shareholders paying those fees.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any
class of Shares, the performance will be reduced for those shareholders paying
those fees.
PERFORMANCE COMPARISONS
The Fund's performance of each class of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds
guaranteed by the U.S. government and quasi-federal corporations; and
publicly issued, fixed rate, non-convertible domestic bonds of companies
in industry, public utilities, and finance. The average maturity of
these bonds approximates nine years. Tracked by Lehman Brothers, Inc.,
the index calculates total returns for one-month, three-month, twelve-
month, and ten-year periods and year-to-date.
o SALOMON BROTHERS AAA-AA CORPORATES INDEX calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
o MERRILL LYNCH CORPORATE & GOVERNMENT MASTER INDEX is an unmanaged index
comprised of approximately 4,821 issues which include corporate debt
obligations rated BBB or better and publicly issued, non-convertible
domestic debt of the U.S. government or any agency thereof. These
quality parameters are based on composites of ratings assigned by
Standard and Poor's Ratings Group and Moody's Investors Service, Inc.
Only notes and bonds with a minimum maturity of one year are included.
o MERRILL LYNCH CORPORATE MASTER is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better.
These quality parameters are based on composites of ratings assigned by
Standard and Poor's Corporation and Moody's Investors Service, Inc. Only
bonds with a minimum maturity of one year are included.
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in offering price over a
specific period of time. From time to time, the Fund will quote its
Lipper ranking in advertising and sales literature.
o THE LEHMAN BROTHERS CORPORATE BOND INDEX is comprised of a large
universe of bonds issued by industrial, utility and financial companies
which have a minimum rating of Baa by Moody's Investors Service, Inc.,
BBB by Standard and Poor's Ratings Group or, in the case of bank bonds
not rated by either of the previously mentioned services, BBB by Fitch
Investors Service, Inc.
o MORNINGSTAR, INC., an independent rating service, is the publisher of
the bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than
1,000 NASDAQ-listed Mutual Funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on nonstandardized 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.
From time to time, the Fund may advertise the performance of any class of
Shares 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 money market
instruments average. In addition, advertising and sales literature for the
Fund may use charts and graphs to illustrate the principals of dollar-cost
averaging and may disclose the amount of dividends paid by the Fund over
certain periods of time.
Advertisements may quote performance information which does not reflect the
effect of a sales load or contingent deferred sales charge, as applicable.
DURATION
Duration is a commonly used measure of the potential volatility in the price
of a bond, or other fixed income security, or in a portfolio of fixed income
securities, prior to maturity. Volatility is the magnitude of the change in
the price of a bond relative to a given change in the market rate of interest.
A bond's price volatility depends on three primary variables: the bond's
coupon rate; maturity date; and the level of market yields of similar fixed
income securities. Generally, bonds with lower coupons or longer maturities
will be more volatile than bonds with higher coupons or shorter maturities.
Duration combines these variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values of the
cash flows of a bond or bonds, including interest and principal payments, by
the sum of the present values of the cash flows. When the Fund invests in
mortgage pass-through securities, its duration will be calculated in a manner
which requires assumptions to be made regarding future principal prepayments.
A more complete description of this calculation is available upon request from
the Fund.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. 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--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The B rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied BB or
BB rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal.
CC--The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
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.
CAA--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligator's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the limited margin of safety
and the need for reasonable business and economic activity throughout the life
of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
STANDARD AND POOR'S RATINGS GROUP 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: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
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.
461444309
2041304B (12/94)
