1933 Act File No. 33-48847
1940 Act File No. 811-07021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 6 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 7 X
INVESTMENT SERIES FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on _________________ pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on _December 14, 1994_; or
intends to file the Notice required by that Rule on or about
____________; or
during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and,
pursuant to Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Charles H. Morin, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of Investment Series
Funds, Inc., which is comprised of two portfolios: (1) Capital Growth
Fund, consisting of two classes of shares, (a) Class A Shares, and (b)
Class C Shares, and (2) Federated Bond Fund (formerly Fortress Bond
Fund), consisting of four classes of shares (a) Class A Shares, (b)
Class B Shares, (c) Class C Shares, and (d) Fortress Shares, relates to
Federated Bond Fund (formerly Fortress Bond Fund), and is comprised of
the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page. (1-2) Cover Page
Item 2. Synopsis (1-2) Summaries of Fund Expenses.
Item 3. Condensed Financial
Information. (1)(2(d) to be filed by amendent
pursuant to 485(b)) Financial
Highlights; Performance
Information.
Item 4. General Description of
Registrant (2(a)-(c)) Synopsis;(1-2(d))
General Information; (2(a),(c))
Federated LifeTrack_ Program (Class
A and Class C Shares); (2)
Investment Objective; (2)
Investment Policies; Investment
Limitations; Portfolio Turnover; (1-
2(a)-(c)) Liberty Family of Funds;
Liberty Family Retirement Program;
(2(d)) Fortress Investment Program.
Item 5. Management of the Fund (1-2) Investment Series Funds, Inc.
Information; Management of the
Corporation; Administration of the
Fund; Brokerage Transactions; (1-
2(a)-(c)) Distribution of Shares;
(2(d)) Distribution of Fortress
Shares.
Item 6. Capital Stock and Other
Securities (2(a)-(c)) Dividends; Capital
Gains; (1-2(d)) Dividends and
Distributions; Retirement Plans; (1-
2) Shareholder Information; Voting
Rights; Tax Information; Federal
Income Tax; Pennsylvania Corporate
and Personal Property Taxes.
Item 7. Purchase of Securities Being
Offered. (1-2) Net Asset Value; (2)
Investing in the Fund; (1(a)-2(a))
Investing in Class A Shares; (2(b))
Investing in Class B Shares; (1(b)-
2(c)) Investing in Class C Shares;
(2(d)) Investing in Fortress
Shares; (2(a)-(c)) How to Purchase
Shares; (1-2(d)) Share Purchases;
Minimum Investment Required; What
Shares Cost; (2(d)) Eliminating the
Sales Load; (1(a)-2(a)-(c))
Reducing or Eliminating the Sales
Load; (1-2) Systematic Investment
Program; Certificates and
Confirmations; Exchange Privilege;
Requirements for Exchange; Tax
Consequences; Making an Exchange.
Item 8. Redemption or Repurchase. (2(a)-(c)) How to Redeem Shares;
(1) Redeeming (Class A, or Class C)
(2(d)) Redeeming Fortress Shares;
(1-2(d)) Through a Financial
Institution; (2(a)-(c)) Redeeming
Shares Through Your Financial
Institution; (1-2(d)) Directly from
the Fund; (2(a)-(c)) Redeeming
Shares By Mail; (2(a)-(c))
Redeeming Shares By Telephone; (2)
Other Classes of Shares; (2(d))
Directly by Mail; (2(d)) Exchanges
for Shares of Other Funds; (1-2)
Systematic Withdrawal Program;
Accounts with Low Balances;
Contingent Deferred Sales Charge.
Item 9. Pending Legal Proceedings. (1-2) None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page. (1-2) Cover Page.
Item 11. Table of Contents (1-2) Table of Contents.
Item 12. General Information and
History (1-2) General Information About the
Fund.
Item 13. Investment Objectives and
Policies (1-2) Investment Objective and
Policies; Investment Limitations.
Item 14. Management of the Fund (1-2) Investment Series Funds, Inc.
Management.
Item 15. Control Persons and Principal
Holders of Securities (1-2) Fund Ownership.
Item 16. Investment Advisory and Other
Services (1-2) Investment Advisory Services;
Administrative Services; Transfer
Agent and Dividend Disbursing
Agent.
Item 17. Brokerage Allocation (1-2) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities (1-2) Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered (1-2) Purchasing Shares;
Determining Net Asset Value;
Redeeming Shares; (2) Exchange
Privilege.
Item 20. Tax Status (1-2) Tax Status.
Item 21. Underwriters Not Applicable.
Item 22. Calculation of Performance
Data (1-2) Total Return; Yield;
Performance Comparisons.
Item 23. Financial Statements (Filed in Part A for 1, to be filed
by amendment for Federated Bond
Fund).
Federated 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
Summary of Fund Expenses
Class A Shares
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) 0.00%
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) None
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) (1) 0.00%
12b-1 Fee (2) 0.00%
Total Other Expenses 0.00%
Shareholder Services Plan Fee (after waiver) (3) 0.00%
Total Class A Shares Operating Expenses(4) 0.00%
(1)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
0.00%
(2)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 0.00% of its average daily
net assets for the 12b-1 fee. See "Investment Series Funds,
Inc. Information".
(3)The maximum Shareholder Services Plan Fee is 0.00%.
(4) The total Class A Shares operating expenses are estimated to be
0.00% 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.
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. $ 00 $00
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.
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) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Annual Class A Operating Expenses*
(As a percentage of average net assets)
Management Fee (after waiver) (2) 0.00%
12b-1 Fee 0.00%
Total Other Expenses 0.00%
Shareholder Services Plan Fee (after waiver) 0.00%
Total Class B Shares Operating Expenses(3)(4) 0.00%
(1)The contingent deferred sales charge is 0.00% in the first year
declining to 0.00% 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
0.00%
(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
0.00% 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.
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. $ 00 $00
You would pay the following expenses on the same
investment, assuming no redemption $00 $00
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.
Class C 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) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Annual Class C Operating Expenses*
(As a percentage of average net assets)
Management Fee (after waiver) (2) 0.00%
12b-1 Fee 0.00%
Total Other Expenses 0.00%
Shareholder Services Plan Fee (after waiver) 0.00%
Total Class C Shares Operating Expenses(3) 0.00%
(1)The contingent deferred sales charge is 0.00% in the first year
declining to 0.00% of the lesser of the original purchase price
or the net asset value of Shares redeemed within one year of
their purchase date. For a more complete description, see
"Redeeming Class C Shares".
(2)The 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
0.00%
(3)Class C Shares operating expenses are estimated to be 0.00%
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.
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. $ 00 $00
You would pay the following expenses on the same
investment, assuming no redemption $00 $00
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.
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."
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:
o American Leaders Fund, Inc., providing growth of capital and
income through high-quality stocks;
o Capital Growth Fund, providing appreciation of capital
primarily through equity securities;
o Fund for U.S. Government Securities, Inc., providing current
income through long-term U.S. government securities;
o International Equity Fund, providing long-term capital growth
and income through international securities;
o 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;
o Liberty Equity Income Fund, Inc., providing above-average
income and capital appreciation through income producing equity
securities;
o Liberty High Income Bond Fund, Inc., providing high current
income through high-yielding, lower-rated, corporate bonds;
o Liberty Municipal Securities Fund, Inc., providing a high
level of current income exempt from federal regular income tax
through municipal bonds;
o Liberty U.S. Government Money Market Trust, providing current
income consistent with stability of principal through high-
quality U.S. government securities;
o Liberty Utility Fund, Inc., providing current income and long-
term growth of income, primarily through electric, gas, and
communications utilities;
o Limited Term Fund, providing a high level of current income
consistent with minimum fluctuation in principal through
investment grade securities;
o 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;
o 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;
o 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;
o 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;
o 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
o 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 LifeTrack_ Program (Class A Shares and Class C Shares)
The Fund is also a member of the Federated LifeTrack_ 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.
Other funds available through the Federated LifeTrack_ 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 $l million invested in
funds participating in the Federated LifeTrack_ Program.
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:
o corporate debt obligations (as a matter of operating policy,
the lowest rated corporate debt obligations in which the Fund
will invest will be rated B or better by an NRSRO, or which
are of comparable quality in the judgment of the Fund's
investment adviser);
o obligations of the United States;
o 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;
o 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);
o asset-backed securities;
o commercial paper that matures in 270 days or less;
o 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;
o 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;
o preferred stock and other equity-related securities which
generally have bond-like attributes, including zero coupon
and/or convertible securities;
o 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
o 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.
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:
o direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes, and bonds; and
o 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:
o the issuer's right to borrow an amount limited to a specific
line of credit from the U.S. Treasury;
o discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or
o 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 into pools. Interests in these pools
are sold as individual securities. Payments from the asset pools may be
divided into several different tranches of debt securities, with some
tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call
dates, and other tranches only entitled to receive payments of principal
and accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to
higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods
of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending
upon market conditions, the yield that the Fund receives from the
reinvestment of such prepayments, or any scheduled principal payments,
may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of
"locking in" interest rates than other types of debt securities having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranch of
securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that
the prepaid mortgage securities were purchased at a market premium over
their stated amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would
be taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the
credit quality of the assets underlying such securities, how well the
entity issuing the securities is insulated from the credit risk of the
originator or any other affiliated entities, and the amount and quality
of any credit enhancement to such securities.
Non-Mortgage Related Asset-Backed Securities. The Fund may invest in
non-mortgage related asset-backed securities including, but not limited
to, interests in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase obligations
and leases. These securities may be in the form of pass-through
instruments or asset-backed obligations. The securities, all of which
are issued by non-governmental entities and carry no direct or indirect
government guarantee, are structurally similar to collateralized
mortgage obligations and mortgage pass-through securities, which are
described below.
Mortgage Related Asset-Backed Securities. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment
conduits, or other securities collateralized by or representing an
interest in real estate mortgages (collectively, "mortgage securities").
Many mortgage securities are issued or guaranteed by government
agencies.
Adjustable Rate Mortgage Securities ("ARMs"). ARMs are pass-
through mortgage securities representing interests in
adjustable rather than fixed interest rate mortgages. The ARMs
in which the Fund invests are issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying
mortgages which collateralize ARMs issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or
Veterans Administration ("VA"), while those collateralizing
ARMs issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size
and maturity constraints.
Collateralized Mortgage Obligations ("CMOs"). CMOs are bonds
issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction
industry. CMOs purchased by the Fund may be:
o 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;
o 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
o 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").
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 in fixed
income securities of foreign corporations or governmental units and to
purchase or sell various currencies on either a spot or forward basis in
connection with these investments. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations
which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation,
the unavailability of financial information or the difficulty of
interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social, or diplomatic developments,
and the difficulty of assessing economic trends in foreign countries. It
may also be more difficult to enforce contractual obligations abroad
than would be the case in the United States because of differences in
the legal systems. Transaction costs in foreign securities may be
higher. The Adviser will consider these and other factors before
investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards
and objectives.
Investing in Securities of Other Investment Companies. The Fund may
invest in the securities of other investment companies, but it will not
own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will only invest in other investment
companies that are money market funds having an investment objective and
policies similar to its own and primarily for the purpose of investing
short-term cash which has not yet been invested in other portfolio
instruments. The Adviser to the Fund will waive its investment advisory
fee on assets invested in securities of open-end investment companies.
Temporary Investments. The Fund may also invest temporarily in cash and
cash items during times of unusual market conditions for defensive
purposes and to maintain liquidity.
Repurchase Agreements. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or certificates of deposit to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon
time and price. 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 to generate income for the Fund. The Fund will write call
options on securities either held in its portfolio or which it has the
right to obtain without payment of further consideration or for which it
has segregated cash in the amount of any additional consideration. The
call options which the Fund writes and sells must be listed on a
recognized options exchange. Although the Fund reserves the right to
write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit
is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial
futures contracts and to write calls on financial futures contracts.
Risks. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying
security. In addition, when the Fund purchases puts on
financial futures contracts to protect against declines in
prices of portfolio securities, there is a risk that the prices
of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In such an
event, the Fund may lose the purchase price of the put option.
Finally, it is not certain that a secondary market for options
will exist at all times. Although the Adviser will consider
liquidity before entering into option transactions, there is no
assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. The
Fund's ability to establish and close out option positions
depends on this secondary market.
Investment Limitations
The Fund will not:
o 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;
o lend any of its assets except portfolio securities up to one-
third of the value of its total assets;
o 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
o 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:
o invest more than 5% of the value of its total assets in
securities of issuers that have records of less than three
years of continuous operations including the operation of any
predecessor.
Net Asset Value
The Fund's net asset value per share fluctuates. 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.
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.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sales Load as Dealer Concessions as
a Percentage Sales Load as a Percentage
of Public Percentage of Net of Public
Amount of Transaction Offering Price Amount Invested Offering 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 $1,000,000 2.00% 2.04% 1.80%
$1,000,000 or greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "Dealer Concession."
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 LifeTrack_
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:
o quantity discounts and accumulated purchases;
o concurrent purchases;
o signing a 13-month letter of intent;
o using the reinvestment privilege; or
o 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 fifteenth 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 Institutions").
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.
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 LifeTrack_ 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 LifeTrack_ 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.
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 Program_ 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:
o 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 Shares at
the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
o 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:
Year of Redemption Contingent Deferred
After Purchase Sales Charge
First...................................................................
.............. 5.50%
Second..................................................................
.......... 4.75%
Third...................................................................
............ 4%
Fourth..................................................................
........... 3%
Fifth...................................................................
.............. 2%
Sixth...................................................................
............. 1%
Seventh and thereafter.................................................
0%
oClass 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 LifeTrack_ Program.
o 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 LifeTrack_ Program funds or redemptions from the
Federated LifeTrack_ 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.
Account And Share Information
o 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.
o 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.
o CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.
o 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.
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 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 LifeTrack_ 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 Plans 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 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 distribution and distribution-related
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 unreimbursed expenses of the
distributor, including amounts expended by the distributor in excess of
amounts received by it from the Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by
Shares under the Plan.
In addition, the Fund has adopted a Shareholder Services Plan (the
"Services Plan") under which it 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").
The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors,
under which Federated Shareholder Services will either perform
shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees
based upon Shares owned by their clients or customers. The schedules of
such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder
Services.
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
LifeTrack_ 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:
Average Aggregate Daily Net
Assets
Maximum Administrative 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
ClassA, B and C Shares as classes are expenses under the Corporation's
Shareholder Services Plan and Distribution Plan. However, the Directors
reserve the right to allocate certain other expenses to holders of
ClassA, 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 ClassA, B and C Shares; fees under the Corporation's
Shareholder Services Plan; printing and postage expenses related to
preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid
to the Securities and Exchange Commission and to state securities
commissions; expenses related to administrative personnel and services
as required to support holders of 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 ClassA, 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 ____,
1995, ___________ acting in various capacities for numerous accounts,
was the owner of record of approximately ______ shares (__%) 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.
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.
Federated 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
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
LIBERTY CENTER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
<INSERT PRODUCT CODE> (6/95)
Federated 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
Summary of Fund Expenses
Fortress Shares
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) 0.00%
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) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) (1) None
Exchange Fee None
Annual Fortress Shares Operating Expenses*
(As a percentage of average net assets)
Management Fee (after waiver) (2) 0.00%
12b-1 Fee None
Total Other Expenses 0.00%
Shareholder Services Plan Fee (3) 0.00%
Total Fortress Shares Operating Expenses(4) 0.00%
(1)The contingent deferred sales charge is 0.00% in the first year
declining to 0.00% 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
0.00%
(3)The maximum Shareholder Services Plan Fee is 0.00%.
(4) The total Fortress Shares operating expenses are estimated to
be 0.00% absent the anticipated voluntary waiver of the management fee
and a portion of the shareholder services fee.
*The total Fortress 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
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.
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. $ 00 $00
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 Fortress
Shares' fiscal year ending October 31, 1995.
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.
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:
o American Leaders Fund, Inc. (Fortress Shares only), providing
growth of capital and income through high-quality stocks;
o California Municipal Income Fund (Fortress Shares only),
providing current income exempt from federal regular income
tax and California personal income taxes;
o 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;
o 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;
o Fortress Utility Fund, Inc., providing high current income
and moderate capital appreciation primarily through equity
and debt securities of utility companies;
o Government Income Securities, Inc., providing current income
through long-term U.S. government securities;
o Liberty Equity Income Fund, Inc. (Fortress Shares only),
providing above-average income and capital appreciation
through income producing equity securities;
o Limited Term Fund (Fortress Shares only), providing a high
level of current income consistent with minimum fluctuation
in principal value;
o 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;
o Money Market Management, Inc., providing current income
consistent with stability of principal through high-quality
money market instruments;
o 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;
o Ohio Municipal Income Fund (Fortress Shares only), providing
current income exempt from federal regular income tax and
Ohio personal income taxes;
o 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
o 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."
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:
o corporate debt obligations (as a matter of operating policy,
the lowest rated corporate debt obligations in which the Fund
will invest will be rated B or better by an NRSRO, or which
are of comparable quality in the judgment of the Fund's
investment adviser);
o obligations of the United States;
o 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;
o 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);
o asset-backed securities;
o commercial paper that matures in 270 days or less;
o 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;
o 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;
o preferred stock and other equity-related securities which
generally have bond-like attributes, including zero coupon
and/or convertible securities;
o 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
o 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.
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:
o direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes, and bonds; and
o 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:
o the issuer's right to borrow an amount limited to a specific
line of credit from the U.S. Treasury;
o discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or
o 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 into pools. Interests in these pools
are sold as individual securities. Payments from the asset pools may be
divided into several different tranches of debt securities, with some
tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call
dates, and other tranches only entitled to receive payments of principal
and accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to
higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods
of declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Depending
upon market conditions, the yield that the Fund receives from the
reinvestment of such prepayments, or any scheduled principal payments,
may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of
"locking in" interest rates than other types of debt securities having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranch of
securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that
the prepaid mortgage securities were purchased at a market premium over
their stated amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would
be taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the
credit quality of the assets underlying such securities, how well the
entity issuing the securities is insulated from the credit risk of the
originator or any other affiliated entities, and the amount and quality
of any credit enhancement to such securities.
Non-Mortgage Related Asset-Backed Securities. The Fund may invest in
non-mortgage related asset-backed securities including, but not limited
to, interests in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase obligations
and leases. These securities may be in the form of pass-through
instruments or asset-backed obligations. The securities, all of which
are issued by non-governmental entities and carry no direct or indirect
government guarantee, are structurally similar to collateralized
mortgage obligations and mortgage pass-through securities, which are
described below.
Mortgage Related Asset-Backed Securities. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment
conduits, or other securities collateralized by or representing an
interest in real estate mortgages (collectively, "mortgage securities").
Many mortgage securities are issued or guaranteed by government
agencies.
Adjustable Rate Mortgage Securities ("ARMS"). ARMs are pass-
through mortgage securities representing interests in
adjustable rather than fixed interest rate mortgages. The ARMs
in which the Fund invests are issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying
mortgages which collateralize ARMs issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or
Veterans Administration ("VA"), while those collateralizing
ARMs issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size
and maturity constraints.
Collateralized Mortgage Obligations ("CMOs"). CMOs are bonds
issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction
industry. CMOs purchased by the Fund may be:
o 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;
o 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
o 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").
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 in fixed
income securities of foreign corporations or governmental units and to
purchase or sell various currencies on either a spot or forward basis in
connection with these investments. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations
which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation,
the unavailability of financial information or the difficulty of
interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social, or diplomatic developments,
and the difficulty of assessing economic trends in foreign countries. It
may also be more difficult to enforce contractual obligations abroad
than would be the case in the United States because of differences in
the legal systems. Transaction costs in foreign securities may be
higher. The Adviser will consider these and other factors before
investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards
and objectives.
Investing in Securities of Other Investment Companies. The Fund may
invest in the securities of other investment companies, but it will not
own more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will only invest in other investment
companies that are money market funds having an investment objective and
policies similar to its own and primarily for the purpose of investing
short-term cash which has not yet been invested in other portfolio
instruments. The Adviser to the Fund will waive its investment advisory
fee on assets invested in securities of open-end investment companies.
Temporary Investments. The Fund may also invest temporarily in cash and
cash items during times of unusual market conditions for defensive
purposes and to maintain liquidity.
Repurchase Agreements. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or certificates of deposit to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon
time and price. 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 to generate income for the Fund. The Fund will write call
options on securities either held in its portfolio or which it has the
right to obtain without payment of further consideration or for which it
has segregated cash in the amount of any additional consideration. The
call options which the Fund writes and sells must be listed on a
recognized options exchange. Although the Fund reserves the right to
write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit
is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial
futures contracts and to write calls on financial futures contracts.
Risks. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying
security. In addition, when the Fund purchases puts on
financial futures contracts to protect against declines in
prices of portfolio securities, there is a risk that the prices
of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In such an
event, the Fund may lose the purchase price of the put option.
Finally, it is not certain that a secondary market for options
will exist at all times. Although the Adviser will consider
liquidity before entering into option transactions, there is no
assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. The
Fund's ability to establish and close out option positions
depends on this secondary market.
Investment Limitations
The Fund will not:
o 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;
o lend any of its assets except portfolio securities up to one-
third of the value of its total assets;
o 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
o 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:
o invest more than 5% of the value of its total assets in
securities of issuers that have records of less than three
years of continuous operations including the operation of any
predecessor.
Net Asset Value
The Fund's net asset value per Share fluctuates. 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.
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.:
o complete and sign the new account form available from the
Fund;
o enclose a check made payable to Federated Bond Fund -
Fortress Shares; and
o 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:
o quantity discounts and accumulated purchases;
o signing a 13-month letter of intent;
o using the reinvestment privilege; or
o concurrent purchases.
Quantity Discounts and Accumulated Purchases. There is no sales load for
purchases of $1 million or more. The Fund will combine purchases made on
the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load.
If an additional purchase of 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.
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:
o 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");
o a member of the New York, American, Boston, Midwest, or
Pacific Stock Exchange;
o 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
o 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:
Amount of Purchase Shares Held Contingent Deferred
Sales Charge
Up to $1,999,999.......................less than 4 years 1.00%
$2,000,000 to $4,999,999...............less than 2 years .50%
$5,000,000 or more.....................less than 1 year .25%
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 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 Plans. The Fund has adopted a Shareholder Services
Plan (the "Services Plan") under which it 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"). The
Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services
directly or will select financial institutions to perform shareholder
services. Financial institutions will receive fees based upon shares
owned by their clients or customers. The schedules of such fees and the
basis upon which such fees will be paid will be determined from time to
time by the Fund and Federated Shareholder Services.
Other Payments to Financial Institutions. The distributor will pay
financial institutions, for distribution and/or administrative services,
an amount equal to 1.00% of the offering price of the Shares acquired by
their clients or customers on purchases up to $1,999,999, .50% of the
offering price on purchases of $2,000,000 to $4,999,999, and .25% of the
offering price on purchases of $5,000,000 or more. (This fee is in
addition to the 1.00% sales load on purchases of less 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:
Average Aggregate Daily
Net Assets
Maximum Administrative Fee of the Federated
Funds
.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
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 ____, 1995,
___________ acting in various capacities for numerous accounts, was the
owner of record of approximately ______ shares (__%) 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.
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.
Federated Bond Fund
(A Portfolio of Investment Series
Funds, Inc.)
Fortress Shares
Prospectus
An Open-End. Diversified
Management Investment Company
Prospectus dated June 27, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
<INSERT PRODUCT CODE> (6/95)
Federated 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
Table of Contents will be
generated when document is
complete.
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.
Investment Series Funds, Inc. Management
Officers and Directors are listed with their addresses, present
positions with Investment Series Funds, Inc., and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
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, FL
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, PA
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, PA
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, MA
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, PA
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, PA
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, MA
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, PA
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, PA
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, PA
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, PA
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, PA
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, PA
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, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the
Board of Directors between meetings of the Board.
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 May, ___ 1995, the following shareholder of record owned 5%
or more of the outstanding Class A Shares of the Fund:
As of May, ____ 1995, the following shareholder of record owned 5%
or more of the outstanding Class B Shares of the Fund:
As of May, ___ 1995, the following shareholder of record owned 5%
or more of the outstanding Class C Shares of the Fund:
As of May, ___ 1995, the following shareholders of record owned 5%
or more of the outstanding Fortress Shares of the Fund:
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 and Shareholder Services Plan
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, payments in the amount of
$350,007, were made pursuant to the Shareholder Services Plan.
Purchases by Sales Representatives, Directors, and Employees
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., their spouses and their children under 21, may buy shares at net
asset value without a sales load. Shares may also be sold without a
sales load to trusts or pension or profit-sharing plans for these
persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. State Street Bank and Trust
Company acts as the shareholder's agent in depositing checks and
converting them to federal funds.
Other Payments to Financial Institutions (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)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Filed in Part A for Capital
Growth Fund, to be filed by amendment for
Federated Bond Fund);
(b) Exhibits:
(1) Copy of Articles of Incorporation of
the Registrant; (1)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) (i-iii) Copy of Specimen Certificates
for Shares of Capital Stock of
the Registrant; (to be filed
by amendment)
(5) Conformed Copy of Investment Advisory
Contract of the Registrant; (3)
(6) Copy of Distributor's Contract of
Registrant; (2)
(i) Conformed Copy of Exhibit D to
Distributor's Contract; (4)
(ii) Conformed Copy of Exhibit E, F,
G, and H to Distributor's
Contract; (to be filed by
amendment)
(7) Not applicable;
(8) Conformed Copy of Custodian Agreement
of the Registrant;(3)
(9) (i) Conformed Copy of Agreement for
Fund Accounting,
Shareholder Recordkeeping, and
Custody Services
Procurement; (4)
(ii) Conformed Copy of Shareholder
Services Plan dated
April, 13, 1993; (4)
(iii) Conformed Copy of Current
Shareholder Services Plan
dated March 1, 1994; (4)
(iv) Conformed Copy of Shareholder
Services Agreement; (4)
(v) Copy of Shareholder Services Sub-
contract; (4)
(vi) Conformed Copy of Administrative
Services Agreement;(4)
(10) Copy of Opinion and Consent of Counsel
as to legality of shares being
registered; (2)
(11) Copy of Consent of Independent
Auditors; (to be filed by amendment)
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i) Copy of Distribution Plan; (2)
(a) Conformed Copy of Exhibits B
and C to
Distribution Plan;(4)
(b) Conformed Copy of Exhibits D,
E, F, and G to Distribution
Plan; (to be filed by
amendment)
(ii) Copy of Dealer Agreement; (2)
(iii) Copy of 12b-1 Agreement; (2)
(a) Conformed Copy of Exhibits B,
C, D, and E to the 12b-1 agreement;(to
be filed by amendment)
(16) Not applicable;
(17) Financial Data Schedules;(to be filed
by amendment)
(18) Not applicable;
(19) (i) Power of Attorney;+
(ii) Limited Power of Attorney;(4)
_____________
+ All exhibits have been filed electronically via
EDGAR.
(1) Response is incorporated by reference to
Registrant's Initial Registration Statement on Form
N-1A filed August 21, 1992. (File No. 33-48847)
(2) Response is incorporated by reference to
Registrant's Pre-Effective Amendment No. 1 on Form
N-1A filed September 8, 1992. (File No. 33-48847)
(3) Response is incorporated by reference to
Registrant's Post-Effective Amendment No. 4 on Form
N-1A filed December 29, 1993 (File No. 33-48847)
(4) Response is incorporated by reference to
Registrant's Post-Effective Amendment No. 5 on Form
N-1A filed December 23, 1994 (File No. 33-48847)
Item 25. Persons Controlled by or Under Common Control
with
Registrant:
None
Item 26. Number of Holders of Securities:
Number of
Record Holders
Title of Class as of
April 21, 1995
Federated Bond Fund (formerly Fortress Bond Fund)
Shares of capital stock 4,84l
(no par value)
Capital Growth Fund
(Class A Shares) 1,630
Shares of capital stock
(no par value)
Capital Growth Fund
(Class C Shares) 191
Shares of capital stock
(no par value)
Item 27. Indemnification: (1)
Item 28. Business and Other Connections of Investment
Adviser:
(a) For a description of the other business
of the investment adviser, see the
section entitled "Investment Series
Funds, Inc., Information - Management of
the Corporation" in Part A. The
affiliations with the Registrant of four
of the Trustees and one of the Officers
of the investment adviser are included
in Part B of this Registration Statement
under "Investment Series Funds, Inc.
Management." The remaining Trustee of
the investment adviser, his position
with the investment adviser, and, in
parentheses, his principal occupation
is: Mark D. Olson (Partner, Wilson,
Halbrook & Bayard), 107 W. Market
Street, Georgetown, Delaware 19947.
The remaining Officers of the investment
adviser are: William D. Dawson, Henry A.
Frantzen, J. Thomas Madden, Mark L.
Mallon, Executive Vice Presidents; Henry
J. Gailliot, Senior Vice President-
Economist; Peter R. Anderson and J. Alan
Minteer, Senior Vice Presidents; J.
Scott Albrecht, Randall A. Bauer, David
A. Briggs, Jonathan C. Conley, Deborah
A. Cunningham, Michael P. Donnelly, Mark
E. Durbiano, Kathleen M. Foody-Malus,
Thomas M. Franks; Edward C. Gonzales,
Jeff A. Kozemchak, Marian R. Marinack,
John W. McGonigle, Susan M. Nason, Mary
Jo Ochson, Robert J. Ostrowski,
Frederick L. Plautz, Jr., Charles A.
Ritter, James D. Roberge, Sandra L.
Weber, and Christopher H. Wiles, Vice
Presidents; Edward C. Gonzales,
Treasurer; and John W. McGonigle,
Secretary. The business address of each
of the Officers of the investment
adviser is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779.
These individuals are also officers of a
majority of the investment advisers to
the Funds listed in Part B of this
Registration Statement.
________________
(1) Response is incorporated by reference to
Registrant's Pre-Effective Amendment No. 1 on Form
N-1A filed September 8, 1992. (File No. 33-48847)
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the
Distributor for shares of the
Registrant, also acts as principal
underwriter for the following open-end
investment companies: Alexander
Hamilton Funds; American Leaders Fund,
Inc.; Annuity Management Series; Arrow
Funds; Automated Cash Management Trust;
Automated Government Money Trust;
BayFunds; The Biltmore Funds; The
Biltmore Municipal Funds; California
Municipal Cash Trust; Cash Trust Series,
Inc.; Cash Trust Series II; DG Investor
Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated ARMs
Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated
Government Trust; Federated Growth
Trust; Federated High Yield Trust;
Federated Income Securities Trust;
Federated Income Trust; Federated Index
Trust; Federated Institutional Trust;
Federated Intermediate Government Trust;
Federated Master Trust; Federated
Municipal Trust; Federated Short-
Intermediate Government Trust; Federated
Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-
Free Trust; Federated U.S. Government
Bond Fund; First Priority Funds; First
Union Funds; Fixed Income Securities,
Inc.; Fortress Adjustable Rate U.S.
Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fountain Square
Funds; Fund for U.S. Government
Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Insight
Institutional Series, Inc.; Insurance
Management Series; Intermediate
Municipal Trust; International Series
Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity
Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty
Utility Fund, Inc.; Liquid Cash Trust;
Managed Series Trust; Marshall Funds,
Inc.; Money Market Management, Inc.;
Money Market Obligations Trust; Money
Market Trust; The Monitor Funds;
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; SouthTrust Vulcan
Funds; Star Funds; The Starburst Funds;
The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted
Duration Trust; Tax-Free Instruments
Trust; Tower Mutual Funds; Trademark
Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves;
Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury
Obligations; The Virtus Funds; Vision
Fiduciary Funds, Inc.; Vision Group of
Funds, Inc.; and World Investment
Series, Inc.
Federated Securities Corp. also acts as
principal underwriter for the following
closed-end investment company: Liberty
Term Trust, Inc.- 1999.
(b)
<TABLE>
<CAPTION>
<S> <C> <C>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Vice President and
Federated Investors Tower President, and Treasurer, Treasurer
Pittsburgh, PA 15222-3779 Federated Securities
Corp.
John W. McGonigle Director, Executive Vice Vice President and
Federated Investors Tower President, and Assistant Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph L. Epstein Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Stephen A. LaVersa Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John C. Shelar, Jr. Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Assistant
Federated Investors Tower Federated Securities Corp. Secretary
Pittsburgh, PA 15222-3779
</TABLE>
Item 30. Location of Accounts and Records: (1)
Item 31. Management Services: Not applicable.
(1) Response is incorporated by reference to
Registrant's Pre-Effective Amendment No. 1 on Form
N-1A filed September 8, 1992. (File No. 33-48847)
Item 32. Undertakings:
Registrant hereby undertakes, if requested to
do so by the holders of at least 10% of the
registrant's outstanding shares, to call a
meeting of shareholders for the purpose of
voting upon the question of removal of a
Director or Directors and to assist in
communications with other shareholders as
required by Section 16(c).
Registrant hereby undertakes to furnish each
person to whom a prospectus is delivered with
a copy of the Registrant's latest annual
report to shareholders, upon request and
without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the
Registrant, INVESTMENT SERIES FUNDS, INC., has duly
caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 28th day of April, 1995.
INVESTMENT SERIES FUNDS, INC.
BY: /s/Robert C. Rosselot
Robert C. Rosselot, Assistant Secretary
Attorney in Fact for John F. Donahue
April 28, 1995
Pursuant to the requirements of the Securities Act of
1933, this Amendment to its Registration Statement has
been signed below by the following person in the capacity
and on the date indicated:
NAME TITLE DATE
By: /s/Robert C. Rosselot
Robert C. Rosselot Attorney In Fact April 28, 1995
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director April 28, 1995
(Chief Executive
Officer)
J. Christopher Donahue* President and Director April 28, 1995
Edward C. Gonzales* Vice President and April 28, 1995
Treasurer (Principal
Financial and Accounting
Officer)
John T. Conroy, Jr.* Director April 28, 1995
William J. Copeland* Director April 28, 1995
James E. Dowd* Director April 28, 1995
Lawrence D. Ellis, M.D.* Director April 28, 1995
Edward L. Flaherty, Jr.* Director April 28, 1995
Peter E. Madden* Director April 28, 1995
Gregor F. Meyer* Director April 28, 1995
John E. Murray, Jr.* Director April 28, 1995
Wesley W. Posvar* Director April 28, 1995
Marjorie P. Smuts* Director April 28, 1995
* By Power of Attorney
Exhibit 19(i) under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of Investment Series Funds,
Inc. and the Assistant General Counsel of Federated Investors, and each of
them, their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and stead,
in any and all capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, by
means of the EDGAR; and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents, and each of them,
full power and authority to sign and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as each of them might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
SIGNATURES TITLE DATE
/s/John F. Donahue Chairman and April 28, 1995
John F. Donahue Director (Chief
Executive Officer)
/s/J. Christopher Donahue President and April 28, 1995
J. Christopher Donahue Director
/s/Edward C. Gonzales Vice President April 28, 1995
Edward C. Gonzales and Treasurer
(Principal
Financial and
Accounting Officer)
/s/John T. Conroy, Jr. Director April 28, 1995
John T. Conroy, Jr.
/s/William J. Copeland Director April 28, 1995
William J. Copeland
SIGNATURES TITLE DATE
/s/James E. Dowd Director April 28, 1995
James E. Dowd
/s/Lawrence D. Ellis, M.D. Director April 28, 1995
Lawrence D. Ellis, M.D.
/s/Edward L. Flaherty, Jr. Director April 28, 1995
Edward L. Flaherty, Jr.
/s/Peter E. Madden Director April 28, 1995
Peter E. Madden
/s/Gregor F. Meyer Director April 28, 1995
Gregor F. Meyer
/s/John E. Murray, Jr. Director April 28, 1995
John E. Murray, Jr.
/s/Wesley W. Posvar Director April 28, 1995
Wesley W. Posvar
/s/Marjorie P. Smuts Director April 28, 1995
Marjorie P. Smuts
Sworn to and subscribed before me this 28th day of April, 1995
Marie M. Hamm, Notary Public
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expire September 16, 1996
Member, Pennsylvania Association of Notaries
