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. 15 .................. X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 16 ................................. X
------ -----
INVESTMENT SERIES FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds, Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
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)
x on _ December 31, 1997,__ pursuant to paragraph (b)
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.
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of Investment Series
Funds, Inc., which consists of one portfolio, Federated Bond Fund, consisting of
four classes of shares (a) Class A Shares, (b) Class B Shares, (c) Class C
Shares, and (d) Class F Shares, is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
<TABLE>
<CAPTION>
<S> <C> <C>
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page................. (a-d)Cover Page.
Item 2. Synopsis................... (a-d) Summary of Fund Expenses.
Item 3. Condensed Financial
Information................ (a-d) Financial Highlights; (a-d) Performance Information.
Item 4. General Description of
Registrant................. (a-d)General Information; (a-d) Investment Information; (a-d)
Investment Objective; (a-d) Investment Policies;
(a-d) Investment Limitations.
Item 5. Management of the Fund..... (a-d) Fund Information; (a-d) Management of the Corporation; (a-d)
Administration of the Fund; (a-d)
Distribution of Shares.
Item 6. Capital Stock and Other
Securities................. (a-d) Account and Share Information; (a-d) Dividends and Distributions;
(a-d) Retirement Plans; (a-d) Shareholder Information; (a-d)
Shareholder Information; (a-d) Tax Information; (a-d) Federal Income Tax; (a-d)
State and Local Taxes.
Item 7. Purchase of Securities Being
Offered.................... (a-d) Net Asset Value; (a-d) Investing in the Fund; (a-d) Purchasing Shares;
(a-d) Purchasing Shares through a Financial Intermediary; (a-d)
Purchasing Shares by Wire; (a-d) Purchasing Shares by Check; (d) Reducing or
Eliminating the Sales Charge; (a-d) Systematic Investment Program;
(a) Class A Shares; (b) Class B Shares; (c) Class C Shares; (a-d)
Confirmations and Account Statements.
Item 8. Redemption or Repurchase... (a-d) Redeeming and Exchanging Shares; (a-d) Redeeming Shares though a
Financial Intermediary; (a-d) Redeeming or Exchanging Shares by Telephone;
(a-d)Redeeming or Exchanging Shares by Mail; (a-d) Requirements for
Redemption; (a-d) Systematic Withdrawal Program; (a-d) Contingent Deferred
Sales Charge; (a-d) Account and Share Information; (a-d)Accounts with Low Balances.
Item 9. Pending Legal Proceedings.. None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page................. (a-d) Cover Page.
Item 11. Table of Contents.......... (a-d) Table of Contents.
Item 12. General Information and
History.................... (a-d) General Information About the Fund; (a-d) About Federated Investors.
Item 13. Investment Objectives and
Policies................... (a-d) Investment Objective and Policies; (a-d) Investment Limitations.
Item 14. Management of the Fund..... (a-d) Investment Series Funds, Inc. Management; (a-d) Directors' Compensation.
Item 15. Control Persons and Principal
Holders of Securities...... (a-d) Fund Ownership.
Item 16. Investment Advisory and Other
Services................... (a-d) Investment Advisory Services; (a-d) Other Services.
Item 17. Brokerage Allocation....... Brokerage Transactions.
Item 18. Capital Stock and Other
Securities................. Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered.................... (a-d) Purchasing Shares; (a-d) Determining Net Asset Value; (a-d)
Redeeming Shares; (d) Exchange Privilege (Class F Shares Only).
Item 20. Tax Status................. (a-d) Tax Status.
Item 21. Underwriters............... Not Applicable.
Item 22. Calculation of Performance
Data....................... (a-d) Total Return; (a-d) Yield; (a-d) Performance Comparisons.
Item 23. Financial Statements...... The Financial Statements for the fiscal year ended October 31, 1997,
are hereby incorporated by reference from the Fund's Annual Report
dated October 31, 1997.
</TABLE>
Federated Bond Fund
(A Portfolio of Investment Series Funds, Inc.)
Class A Shares, Class B Shares, Class C 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 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 ("SEC") a
Statement of Additional Information dated December 31, 1997 for Class A Shares,
Class B Shares, Class C Shares, and Class F Shares. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge, by calling 1-800-341-7400. To obtain other
information, or to make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses...................... 1
Financial Highlights_Class A Shares........... 2
Financial Highlights_ Class B Shares.......... 3
Financial Highlights_Class C Shares........... 4
General Information........................... 5
Calling the Fund............................. 5
Investment Information........................ 5
Investment Objective......................... 5
Investment Policies.......................... 5
Investment Limitations....................... 12
Net Asset Value............................... 12
Investing in the Fund......................... 13
Purchasing Shares............................. 13
Purchasing Shares through a
Financial Intermediary....................... 13
Purchasing Shares by Wire.................... 14
Purchasing Shares by Check................... 14
Systematic Investment Program................ 14
Retirement Plans............................. 14
Class A Shares............................... 14
Class B Shares............................... 14
Class C Shares............................... 15
Redeeming and Exchanging Shares............... 15
Redeeming or Exchanging Shares Through a
Financial Intermediary....................... 15
Redeeming or Exchanging Shares by Telephone.. 15
Redeeming or Exchanging Shares by Mail....... 15
Requirements for Redemption.................. 15
Requirements for Exchange.................... 16
Systematic Withdrawal Program................ 16
Contingent Deferred Sales Charge............. 16
Account and Share Information................. 17
Confirmations and Account Statements......... 17
Dividends and Distributions.................. 17
Accounts with Low Balances................... 17
Fund Information.............................. 17
Management of the Corporation................ 17
Distribution of Shares....................... 18
Administration of the Fund................... 19
Shareholder Information....................... 19
Tax Information............................... 19
Federal Income Tax........................... 19
State and Local Taxes........................ 20
Performance Information....................... 20
Other Classes of Shares....................... 20
Appendix...................................... 21
</TABLE>
SUMMARY OF FUND EXPENSES
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).......... 4.50% None None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage
of offering price)..................................................................... None None None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................................... None 5.50%(1) 1.00%(1)
Redemption Fee (as a percentage of amount redeemed, if applicable)..................... None None None
Exchange Fee........................................................................... None None None
<CAPTION>
Annual Operating Expenses
(As a percentage of average net assets)
<S>.................................................................................... <C> <C> <C>
Management Fee (after waiver)(2)....................................................... 0.60% 0.60% 0.60%
12b-1 Fee.............................................................................. 0.00%(3) 0.75% 0.75%
Total Other Expenses................................................................... 0.45% 0.50% 0.50%
Shareholder Services Fee (after waiver)................................................ 0.20%(4) 0.25% 0.25%
Total Operating Expenses(5)............................................................ 1.05% 1.85%(6) 1.85%
</TABLE>
(1) For shareholders of Class B Shares, the contingent deferred sales charge is
5.50% in the first year declining to 1.00% in the sixth year and 0.00%
thereafter. For shareholders of Class C Shares, the contingent deferred
sales charge assessed is 1.00% of the lesser of the original purchase price
or the net asset value of Shares redeemed within one year of their purchase
date. For a more complete description, see "Contingent Deferred Sales
Charge."
(2) The management fee for all classes has been reduced to reflect the voluntary
waiver of a portion of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.75%.
(3) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during the period ending October 31, 1998. If Class A Shares were paying
or accruing the 12b-1 fee, the Class A Shares would be able to pay up to
0.25% of its average daily net assets for the 12b-1 fee. See "Fund
Information."
(4) The shareholder services fee for Class A Shares has been reduced to reflect
the voluntary waiver of a portion of the shareholder services fee. The
shareholder service provider can terminate this voluntary waiver at any time
at its sole discretion. The maximum shareholder services fee is 0.25%.
(5) The total operating expenses for Class A Shares, Class B Shares, and Class C
Shares would have been 1.25%, 2.00%, and 2.00% respectively, absent the
voluntary waivers described in note 2 above and the voluntary waiver of a
portion of the shareholder services fee for Class A Shares.
(6) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Investing in the Fund" and "Fund Information." Wire-transferred redemptions
of less than $5,000 may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
Example Class A Class B Class C
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual
return, (2) redemption at the end of each time period, and (3) payment of the maximum
sales charge.
1 Year..................................................................................... $ 55 $ 76 $ 29
3 Years.................................................................................... $ 77 $102 $ 58
5 Years.................................................................................... $100 $123 $100
10 Years................................................................................... $167 $195 $217
You would pay the following expenses on the same investment, assuming no redemption.
1 Year..................................................................................... $ 55 $ 19 $ 19
3 Years.................................................................................... $ 77 $ 58 $ 58
5 Years.................................................................................... $100 $100 $100
10 Years................................................................................... $167 $195 $217
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS_CLASS A SHARES
(For a share outstanding throughout each period)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 12, 1997, on the Fund's
financial statements for the year ended October 31, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
Year Ended October 31,
1997 1996 1995(a)
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.72 $ 9.76 $ 9.64
Income from investment operations
Net investment income 0.74 0.71 0.26
Net realized and unrealized gain (loss) on investments 0.26 (0.04) 0.11
Total from investment operations 1.00 0.67 0.37
Less distributions
Distributions from net investment income (0.70) (0.71) (0.25)
Net asset value, end of period $ 10.02 $ 9.72 $ 9.76
Total return(b) 10.73% 7.21% 3.92%
Ratios to average net assets
Expenses 1.05% 1.05% 1.02%*
Net investment income 7.30% 7.46% 8.22%*
Expense waiver/reimbursement(c) 0.20% 0.25% 0.35%*
Supplemental data
Net assets, end of period (000 omitted) $111,377 $37,045 $ 5,070
Portfolio turnover 55% 49% 77%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1997, which can be obtained
free of charge.
FINANCIAL HIGHLIGHTS_CLASS B SHARES
(For a share outstanding throughout each period)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 12, 1997, on the Fund's
financial statements for the year ended October 31, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
Year Ended October 31,
1997 1996 1995(a)
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.72 $ 9.76 $ 9.64
Income from investment operations
Net investment income 0.64 0.64 0.24
Net realized and unrealized gain (loss) on investments 0.28 (0.04) 0.11
Total from investment operations 0.92 0.60 0.35
Less distributions
Distributions from net investment income (0.62) (0.64) (0.23)
Net asset value, end of period $ 10.02 $ 9.72 $ 9.76
Total return(b) 9.86% 6.40% 3.72%
Ratios to average net assets
Expenses 1.85% 1.85% 1.81%*
Net investment income 6.50% 6.66% 7.36%*
Expense waiver/reimbursement(c) 0.15% 0.20% 0.30%*
Supplemental data
Net assets, end of period (000 omitted) $191,600 $125,620 $27,768
Portfolio turnover 55% 49% 77%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1997, which can be obtained
free of charge.
FINANCIAL HIGHLIGHTS_CLASS C SHARES
(For a share outstanding throughout each period)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 12, 1997, on the Fund's
financial statements for the year ended October 31, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
Year Ended October 31,
1997 1996 1995(a)
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.72 $ 9.76 $ 9.64
Income from investment operations
Net investment income 0.64 0.64 0.24
Net realized and unrealized gain (loss) on investments 0.28 (0.04) 0.11
Total from investment operations 0.92 0.60 0.35
Less distributions
Distributions from net investment income (0.62) (0.64) (0.23)
Net asset value, end of period $ 10.02 $ 9.72 $ 9.76
Total return(b) 9.86% 6.40% 3.72%
Ratios to average net assets
Expenses 1.85% 1.85% 1.81%*
Net investment income 6.50% 6.70% 7.31%*
Expense waiver/reimbursement(c) 0.15% 0.20% 0.30%*
Supplemental data
Net assets, end of period (000 omitted) $39,398 $22,897 $ 5,508
Portfolio turnover 55% 49% 77%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1997, which can be obtained
free of charge.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on May
20, 1992. Class A Shares, Class B Shares and Class C Shares of the Fund
("Shares") are designed 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.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
Calling the Fund
Call the Fund at 1-800-341-7400.
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.
Investment Policies
Acceptable Investments
The Fund invests primarily in a professionally managed, diversified portfolio of
bonds. Under normal circumstances, at least 65% of the Fund's net assets will be
invested in such bonds. Additionally, at least 65% of the Fund's net assets will
be invested in investment grade securities, including repurchase agreements
collateralized by such investment grade securities. Investment grade securities
are generally described as securities that are rated in one of the top four
ratings 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") or that are
unrated but determined by the Fund's investment adviser to be of comparable
quality. A description of the ratings categories is contained in the Appendix to
this prospectus. Permitted investments include:
.. domestic or foreign corporate debt obligations;
.. obligations of the United States;
..notes, bonds, and discount notes of the following U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Farm Credit System
(including the National Bank for Cooperatives and Banks for Cooperatives),
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union
Administration;
..taxable municipal debt obligations (as a matter of operating policy, the
lowest rated municipal debt obligations in which the Fund will invest will be
rated BBB or better by an NRSRO, or which are of comparable quality in the
judgment of the Fund's Adviser);
.. asset-backed securities;
.. commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
..time and savings deposits (including certificates of deposit) in commercial or
savings banks whose accounts are insured by the Bank Insurance Fund ("BIF"), or
in institutions whose accounts are insured by the Savings Association Insurance
Fund ("SAIF"), including certificates of deposit issued by, and other time
deposits in, foreign branches of BIF-insured banks which, if negotiable, mature
in six months or less or if not negotiable, either mature in ninety days or
less, or may be withdrawn upon notice not exceeding ninety days;
..bankers' acceptances issued by a BIF-insured bank, or issued by the bank's
Edge Act subsidiary and guaranteed by the bank, with remaining maturities of
nine months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits according to the bank's last
published statement of condition preceding the date of acceptance;
.. preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
.. convertible securities, irrespective of their ratings;
.. equity securities;
.. other securities which are deemed by the Fund's Adviser, to be consistent
with the Fund's investment objective; and
.. repurchase agreements collateralized by
acceptable investments.
Under normal circumstances, the Fund will not invest more than 10% of its total
assets in equity securities.
Corporate Debt Obligations
Although the corporate debt obligations in which the Fund will invest primarily
are rated as investment grade by an NRSRO, or of comparable quality in the
judgment of the Adviser, the Fund may invest not more than 35% of its net assets
in corporate debt obligations that are not investment grade, but are rated in
any category below BBB or Baa or are of comparable quality in the judgment of
the Adviser (i.e., "junk bonds") and may include bonds in default. Corporate
debt obligations that are below investment grade are high-yield, high-risk
securities, 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 securities, lower rated securities 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 securities
may be more difficult to dispose of or to value than higher rated,
lower-yielding securities. Changes in economic conditions or other circumstances
are more likely to lead to weakened capacity to make principal and interest
payments with respect to these securities than for higher rated securities.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
<TABLE>
<CAPTION>
As a Percentage of Total
Market Value of Bond
Holdings as of
Credit Rating October 31, 1997
<S> <C>
BB 14.6%
B 16.3
CC & CCC 0.1
31.0%
</TABLE>
The Fund may invest in the High Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities.
Federated Core Trust currently is not charged an advisory fee and is sold
without any sales charge. Any administrative fee charged to Federated Core Trust
by an affiliate of the Fund's adviser will be for services provided in addition
to the administrative services provided to the Fund. The Fund's adviser
anticipates that the High Yield Bond Portfolio will provide the Fund broad
diversity and exposure to all aspects of the high-yield bond sector of the
market while at the same time providing greater liquidity than if high-yield
debt obligations were purchased separately for the Fund.
U.S. Government Obligations
The U.S. government obligations in which the Fund invests are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities. These
securities include, but are not limited to:
.. direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;
.. notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
.. notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
.. notes, bonds, and discount notes of other U.S. government instrumentalities
supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These agencies and instrumentalities are supported by:
.. the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
.. discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
.. the credit of the agency or instrumentality.
Municipal Securities
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
Asset-Backed Securities
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets
including vehicle installment purchase obligations and credit card receivables
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. Payments
from the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one branch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
Non-Mortgage Related Asset-Backed Securities
The Fund may invest in non-mortgage related asset-backed securities including,
but not limited to, interests in pools of receivables, such as credit card and
accounts receivable and motor vehicle and other installment purchase obligations
and leases. These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities, all of which are issued by
non-governmental entities and carry no direct or indirect government guarantee,
are structurally similar to collateralized mortgage obligations and mortgage
pass-through securities, which are described below.
Mortgage Related Asset-Backed Securities
The Fund may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities are
issued or guaranteed by government agencies.
Adjustable Rate Mortgage Securities ("ARMs")
ARMs are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMs in which the Fund invests
are issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMs issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMs issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Collateralized Mortgage Obligations ("CMOs")
CMOs are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment bankers, or
companies related to the construction industry. CMOs purchased by the Fund may
be:
.. collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the
U.S. government;
.. collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or
.. securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the
credit of an agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a NRSRO.
Real Estate Mortgage Investment Conduits ("REMICs")
REMICs are offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code (the "Code"). Issuers of REMICs may take several forms, such as
trusts, partnerships, corporations, associations, or segregated pools of
mortgages. Once REMIC status is elected and obtained, the entity is not subject
to federal income taxation. Instead, income is passed through the entity and is
taxed to the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest, and a single class of "residual interests."
To qualify as a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.
Resets of Interest
The interest rates paid on the ARMs, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, adjustable rate mortgage securities
which use indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that closely mirror
the market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market rates, even
after the interest rate is reset, and are subject to correspondingly increased
price volatility. In the event the Fund purchases such residual interest
mortgage securities, it will factor in the increased interest and price
volatility of such securities when determining its dollar-weighted average
duration.
Caps and Floors
The underlying mortgages which collateralize the ARMs, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes.
These payment caps may result in negative amortization. The value of mortgage
securities in which the Fund invests may be affected if market interest rates
rise or fall faster and farther than the allowable caps or floors on the
underlying residential mortgage loans. Additionally, even though the interest
rates on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities stated in
the underlying mortgages.
Bank Instruments
The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, recordkeeping, and the public availability of information,
these investments may present additional risks to investors.
Convertible Securities
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock of the issuer or a related financial entity
(for example, a merged or acquired company or partner). Convertible securities
may include, but are not limited to: convertible bonds or debentures;
convertible preferred stock; units consisting of usable bonds and warrants; or
securities which cap or otherwise limit returns to the convertible security
held, such as DECS_(Dividend Enhanced Convertible Stock, or Debt Exchangeable
for Common Stock when issued as a debt security), LYONS_(Liquid Yield Option
Notes, which are corporate bonds that are purchased at prices below par with no
coupons and are convertible into stock), PERCS_(Preferred Equity Redeemable
Stock, an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES_(Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. The Fund does not limit convertible
securities by rating, and there is no minimal acceptance rating for a
convertible security to be purchased or held in the Fund. Therefore, the Fund
invests in convertible securities irrespective of their ratings. This could
result in the Fund purchasing and holding, without limit, convertible securities
rated below investment grade by an NRSRO or in the Fund holding such securities
where they have acquired a rating below investment grade after the Fund has
purchased it. Convertible securities rated below investment grade may be subject
to some of the same risks as those inherent in junk bonds.
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 and as a matter of
fundamental investment policy, which may not be changed without shareholder
approval, will limit such investments to no more than 10% of its net assets.
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 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 may invest in foreign securities within the parameters of its
investment objective, policies, and limitations. 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.
With respect to foreign governmental securities, the Fund reserves the right to
invest up to 25% of its total assets in fixed income securities of foreign
governmental units located within an individual foreign nation and to purchase
or sell various currencies on either a spot or forward basis in connection with
these investments. The Adviser will allocate investments among securities of
particular issuers on the basis of its views as to the best values then
currently available in the marketplace. Such values are a function of yield,
maturity, issue classification and quality characteristics, coupled with
expectations regarding the economy, movements in the general level and term of
interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it.
Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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. Repurchase
agreements are included within the definition of investment grade 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.
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 associations) deemed
creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from the Clearing Corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange traded options have a continuous liquid
market while over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
Risks
When the Fund writes a call option, the Fund risks not participating in any rise
in the value of the underlying security. In addition, when the Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio securities to market
changes. In addition, the Adviser could be incorrect in its expectations about
the direction or extent of market factors such as interest rate movements. In
such an event, the Fund may lose the purchase price of the put option. Finally,
it is not certain that a secondary market for options will exist at all times.
Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Fund's ability to establish and close out option positions depends on this
secondary market.
Derivative Contracts and Securities
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including ARMs, CMOs, and REMICs, it will only do so
in a manner consistent with its investment objectives, policies and limitations.
Investment Limitations
The Fund will not:
.. borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of
the value of its total assets and pledge up to 10% of the value of those
assets to secure such borrowings;
.. lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
.. sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets
is held as collateral for those positions; nor
.. with respect to 75% of the value of its total assets, invest more than 5% in
securities of any one issuer other than cash, cash items or securities issued
or guaranteed by the government of the United States, its agencies, or
instrumentalities and repurchase agreements collateralized by such
securities.
The above investment limitations cannot be changed without shareholder approval.
NET ASSET VALUE
The Fund's net asset value ("NAV") per share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
Investing in the Fund
This prospectus offers three classes of Shares each with the characteristics
described below.
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Minimum and
Subsequent
Investment Amounts $500/$100 $1500/$100 $1500/$100
Minimum and
Subsequent
Investment Amount
for Retirement Plans $50 $50 $50
Maximum Sales Charge 4.50%* None None
Maximum Contingent
Deferred Sales
Charge** None 5.50%+ 1.00%#
Conversion Feature No Yes No
</TABLE>
* Class A Shares are sold at NAV, plus a sales charge as follows:
<TABLE>
<CAPTION>
Sales Charge Dealer
as a Percentage of Concession as
Public Net a Percentage of
Offering Amount Public Offering
Amount of Transaction Price Invested Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%
</TABLE>
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
+ The following contingent deferred sales charge schedule applies to Class B
Shares:
<TABLE>
<CAPTION>
Year of Redemption Contingent Deferred
After Purchase Sales Charge
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
++ Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase. See "Conversion of Class B Shares."
# The contingent deferred sales charge is assessed on Shares redeemed within
one year of their purchase date.
PURCHASING 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 intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their Shares
for Shares of the corresponding class of the Fund. The Fund reserves the right
to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
Purchasing Shares through a
Financial Intermediary
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary 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 intermediaries may be subject to reclaim by the
distributor for accounts transferred to financial intermediaries which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
Purchasing Shares by Wire
Shares may be purchased by Federal Reserve wire by calling the Fund. All
information needed will be taken over the telephone, and the order is considered
received when State Street Bank receives payment by wire. Federal funds should
be wired as follows: Federated Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Share Class); (Fund Number_this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
Purchasing Shares by Check
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
Systematic Investment Program
Under this program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member and
invested in the Fund. Shareholders should contact their financial intermediary
or the Fund to participate in this program.
Retirement Plans
Fund Shares can be purchased as an investment for retirement plans or Individual
Retirement Accounts ("IRAs"). For further details, contact the Fund and consult
a tax adviser.
Class A Shares
CLASS A SHARES ARE SOLD AT NAV, PLUS A SALES CHARGE. HOWEVER:
No sales charge is imposed for Class A Shares purchased:
.. through financial intermediaries that do not receive sales charge dealer
concessions;
.. by Federated Life Members who maintain a $500 minimum balance in at least one
of the Federated Funds; or
.. through "wrap accounts" or similar programs under which clients pay a fee for
services.
In addition, the sales charge can be reduced or eliminated by:
.. purchasing in quantity and accumulating purchases at the levels in the table
under "Investing in the Fund";
.. combining concurrent purchases of two or more funds;
.. signing a letter of intent to purchase a specific quantity of shares within
13 months; or
.. using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
Dealer Concession
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor may offer
to pay dealers up to 100% of the sales charge 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 charge; 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 charge for Shares sold other
than through registered broker/dealers will be retained by Federated Securities
Corp.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the establishment of customer accounts and
purchases of Shares.
Class B Shares
Class B Shares are sold at NAV. Under certain circumstances, a contingent
deferred sales charge will be assessed at the time of a redemption. Orders for
$250,000 or more of Class B Shares will automatically be invested in Class A
Shares.
Conversion of Class B Shares
Class B Shares will automatically convert into Class A Shares after eight full
years from the purchase date. Such conversion will be on the basis of the
relative NAVs per Share, without the imposition of any charges. Class B Shares
acquired by exchange from Class B Shares of another Federated Fund will convert
into Class A Shares based on the time of the initial purchase.
Class C Shares
Class C Shares are sold at NAV. A contingent deferred sales charge of 1.00% will
be charged on assets redeemed within the first full 12 months following
purchase.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
Exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares, of a like class, in a pre-determined amount on a monthly, quarterly, or
annual basis may take advantage of a systematic exchange privilege. Information
on this privilege is available from the Fund or your financial intermediary.
Depending upon the circumstances, a capital gain or loss may be realized when
Shares are redeemed or exchanged.
Redeeming or Exchanging Shares Through a Financial Intermediary
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
Redeeming or Exchanging Shares
by Telephone
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check to the shareholder's address of record or wire-transferred to
the shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System. 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 or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
Redeeming or Exchanging Shares by Mail
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Share Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
Requirements for Redemption
Shareholders requesting 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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
Requirements for Exchange
Shareholders must exchange Shares having an NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
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. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
Systematic Withdrawal Program
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. To be eligible to participate
in this program, a shareholder must have an account value of at least $10,000,
other than retirement accounts subject to required minimum distributions. A
shareholder may apply for participation in this program through his financial
intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class A Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge may be imposed on Class B and C
Shares.
Contingent Deferred Sales Charge
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. 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. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
Eliminating the Contingent Deferred Sales Charge
Upon written notification to Federated Securities Corp. or the transfer agent,
no contingent deferred sales charge will be imposed on redemptions:
.. following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
.. representing minimum required distributions from an IRA or other retirement
plan to a shareholder who has attained the age of 70 1/2;
.. which are involuntary redemptions of shareholder accounts that do not comply
with the minimum balance requirements;
.. which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
.. which are reinvested in the Fund under the reinvestment privilege;
.. 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 intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons;
and
.. of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement
plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any other
financial intermediary, to the extent that no payments were advanced for
purchases made through such entities.
For more information regarding the elimination of the contingent deferred sales
charge through a Systematic Withdrawal Program, or any of the above provisions,
contact your financial intermediary or the Fund. The Fund reserves the right to
discontinue or modify these provisions. Shareholders will be notified of such
action.
ACCOUNT AND SHARE INFORMATION
Confirmations and Account Statements
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
Dividends and Distributions
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
Accounts with Low Balances
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FUND 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.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
Advisory Fees
The Adviser receives an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fee paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion.
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. With over $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992 and
is responsible for managing the allocation of fixed income assets (between
investment grade and high yield). Mr. Balestrino also manages the investment
grade portion of the Fund. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's
investment adviser and Federated Research Corp. since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment adviser and Federated
Research Corp. from 1991 until 1995. Mr. Balestrino is a Chartered Financial
Analyst and received his Master's Degree in Urban and Regional Planning from the
University of Pittsburgh.
Mark E. Durbiano has been the Fund's portfolio manager since June, 1992 and is
responsible for managing the high yield portion of the Fund. Mr. Durbiano joined
Federated Investors in 1982 and has been a Senior Vice President of the Fund's
investment adviser and Federated Research Corp. since January 1996. From 1988
through 1995, Mr. Durbiano was a Vice President of the Fund's investment adviser
and Federated Research Corp.
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. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
Distribution Plan and Shareholder Services
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to 0.25% for Class A Shares and up to 0.75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor may
not exceed an annual rate of 0.75% of each class of Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related support services
pursuant to the Plan. The Distribution Plan is a compensation type plan. As
such, the Fund makes no payments to the distributor except as described above.
Therefore, the Fund does not pay for 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 entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("shareholder services"). Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
Supplemental Payments to Financial Institutions
With respect to Class A Shares, Class B Shares, and Class C Shares, in addition
to payments made pursuant to the Distribution Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services may pay
supplemental fees from their own assets to financial institutions as financial
assistance for providing substantial sales services, distribution-related
support services, or shareholder services. 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 Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services)
necessary to operate the Corporation. Federated Services Company provides these
at an annual rate which relates to the average aggregate daily net assets of all
Federated Funds as specified below:
<TABLE>
<CAPTION>
Maximum Average Aggregate
Fee Daily Net Assets
<S> <C>
0.150% on the first $250 million 0.125% on the next $250 million 0.100% on the
next $250 million 0.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
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.
Directors may be removed by the Directors or 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.
As of December 3, 1997, the following shareholder of record owned 25% or more of
the outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida (as record owner holding Shares for its clients), owned
approximately 1,354,756 Shares (33.19%) 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.
TAX INFORMATION
Federal Income Tax
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
The Fund will be treated as a single separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Unless otherwise exempt, shareholders 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.
State and Local 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 Class F 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 charge 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 Class F Shares.
From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares, and Class F 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 Class F
Shares to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge, 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 Class F Shares are subject to certain of the same expenses; however,
the front-end sales charge for Class F Shares is lower than that for Class A
Shares. Expense differences, however,between shares and Class F Shares may
affect the performance of each class.
To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial institution.
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. Of ten 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.
Investment Series Funds, Inc.
Federated Bond Fund
Class A Shares
Class B Shares
Class C Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Distributor
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Investment Adviser
Federated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
Custodian
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
Transfer Agent and
Dividend Disbursing
Agent
Federated Shareholder
Services Company
Federated Investors Tower
Pittsburgh, PA 15222-3779
Independent Auditors
Ernst & Young LLP
One Oxford Center
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 461444507
Cusip 461444606
Cusip 461444705
G01271-01 (12/97)
[LOGO] FEDERATED INVESTORS
Federated Bond Fund
(A Portfolio of Investment Series Funds, Inc.)
Class A Shares, Class B Shares,
Class C Shares
Prospectus
December 31, 1997
An Open-End, Diversified
Management Investment Company
Federated Bond Fund
(A Portfolio of Investment Series Funds, Inc.)
Class F 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 Class F Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed with the Securities and Exchange Commission ("SEC") a
Statement of Additional Information dated December 31, 1997 for Class A Shares,
Class B Shares, Class C Shares, and Class F Shares. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge, by calling 1-800-341-7400. To obtain other
information, or make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document and other information regarding the Fund is
maintained electronically with the Sec at Internet Web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses...................... 1
Financial Highlights--Class F Shares........... 2
General Information........................... 3
Calling the Fund............................. 3
Investment Information........................ 3
Investment Objective......................... 3
Investment Policies.......................... 3
Investment Limitations....................... 10
Net Asset Value............................... 10
Investing in the Fund......................... 10
Purchasing Shares............................. 11
Purchasing Shares Through a
Financial Intermediary....................... 11
Purchasing Shares by Wire.................... 11
Purchasing Shares by Check................... 11
Systematic Investment Program................ 11
Retirement Plans............................. 11
Reducing or Eliminating the Sales Charge..... 11
Redeeming and Exchanging Shares............... 12
Redeeming or Exchanging Shares Through a
Financial Intermediary....................... 12
Redeeming or Exchanging Shares by Telephone.. 12
Redeeming or Exchanging Shares by Mail....... 13
Requirements for Redemption.................. 13
Requirements for Exchange.................... 13
Systematic Withdrawal Program................ 13
Contingent Deferred Sales Charge............. 13
Account and Share Information................. 14
Confirmations and Account Statements......... 14
Dividends and Distributions.................. 14
Accounts with Low Balances................... 14
Fund Information.............................. 14
Management of the Corporation................ 14
Distribution of Class F Shares............... 15
Administration of the Fund................... 16
Shareholder Information....................... 16
Tax Information............................... 16
Federal Income Tax........................... 16
State and Local Taxes........................ 16
Performance Information....................... 16
Other Classes of Shares....................... 17
Appendix...................................... 17
</TABLE>
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
Class F Shares
Shareholder Transaction Expenses
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).............................................. 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)........................................................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)(1).................................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)......................................................... None
Exchange Fee............................................................................................................... None
<CAPTION>
Annual Operating Expenses
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2)........................................................................................... 0.60%
12b-1 Fee.................................................................................................................. None
Total Other Expenses....................................................................................................... 0.48%
Shareholder Services Fee (after waiver)(3)........................................................................ 0.23%
Total Operating Expenses(4)................................................................................................ 1.08%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within four
years of their purchase date. (See "Contingent Deferred Sales Charge").
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.75%.
(3) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder service
provider can terminate this voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.
(4) The total operating expenses were 1.25% absent the voluntary waivers of
portions of the management fee and shareholder services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class F Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in the Fund" and "Fund Information". Wire-
transferred redemptions of less than $5,000 may be subject to additional fees.
Example
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment of
the maximum sales charge.
<TABLE>
<S> <C>
1 Year................................................................................. $ 31
3 Years................................................................................ $ 55
5 Years................................................................................ $ 69
10 Years............................................................................... $140
You would pay the following expenses on the same investment, assuming no redemption.
1 Year................................................................................. $ 21
3 Years................................................................................ $ 44
5 Years................................................................................ $ 69
10 Years............................................................................... $140
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS--CLASS F SHARES
(For a share outstanding throughout each period)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December12,1997, on the Fund's
financial statements for the year ended October 31, 1997, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
Year Ended October 31,
1997 1996 1995 1994 1993 1992(a)
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.72 $ 9.76 $ 9.08 $ 10.30 $ 9.23 $ 8.81
Income from investment
operations
Net investment income 0.72 0.71 0.79 0.76 0.77 0.59
Net realized and unrealized
gain (loss) on investments 0.28 (0.04) 0.65 (1.09) 1.07 0.43
Total from investment
operations 1.00 0.67 1.44 (0.33) 1.84 1.02
Less distributions
Distributions from net
investment income (0.70) (0.71) (0.76) (0.75) (0.77) (0.60)
Distributions from
net realized gain on
investment transactions -- -- -- (0.14) -- --
Total distributions (0.70) (0.71) (0.76) (0.89) (0.77) (0.60)
Net asset value, end of period $ 10.02 $ 9.72 $ 9.76 $ 9.08 $ 10.30 $ 9.23
Total return(c) 10.70% 7.18% 16.51% (3.41%) 20.61% 11.79%
Ratios to average net assets
Expenses 1.08% 1.08% 1.03% 1.05% 1.04% 0.49%*
Net investment income 7.27% 7.38% 8.20% 7.92% 7.69% 8.05%*
Expense waiver/
reimbursement(d) 0.17% 0.22% 0.31% 0.33% 0.61% 2.01%*
Supplemental data
Net assets, end of
period (000 omitted) $325,531 $267,720 $195,502 $146,270 $125,762 $54,886
Portfolio turnover 55% 49% 77% 74% 51% 49%
<CAPTION>
Year Ended December 31,
1991 1990 1989 1988(b)
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 6.89 $ 8.79 $ 9.86 $ 10.06
Income from investment
operations
Net investment income 1.01 1.08 1.23 0.61
Net realized and unrealized
gain (loss) on investments 1.92 (1.84) (1.07) (0.16)
Total from investment
operations 2.93 (0.76) 0.16 0.45
Less distributions
Distributions from net
investment income (1.01) (1.14) (1.23) (0.65)
Distributions from
net realized gain on
investment transactions -- -- -- --
Total distributions (1.01) (1.14) (1.23) (0.65)
Net asset value, end of period $ 8.81 $ 6.89 $ 8.79 $ 9.86
Total return(c) 44.62% (9.59%) 1.32% 4.62%
Ratios to average net assets
Expenses 1.00% 1.01% 1.14% 1.00%*
Net investment income 12.17% 13.43% 12.81% 12.58%*
Expense waiver/
reimbursement(d) 1.50% 1.49% 1.36% 1.00%*
Supplemental data
Net assets, end of
period (000 omitted) $6,068 $7,484 $4,734 $ 4,968
Portfolio turnover 33% 28% 38% 31%
</TABLE>
* Computed on an annualized basis.
(a) During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
(b) Reflects operations for the period from July 8, 1988 (date of initial
public investment) to December 31, 1988.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1997, which can be obtained
free of charge.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on May
20, 1992. Class F Shares of the Fund ("Shares") are designed 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.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
Calling the Fund
Call the Fund at 1-800-341-7400.
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.
Investment Policies
Acceptable Investments
The Fund invests primarily in a professionally managed, diversified portfolio of
bonds. Under normal circumstances, at least 65% of the Fund's net assets will be
invested in such bonds. Additionally, at least 65% of the Fund's net assets will
be invested in investment grade securities, including repurchase agreements
collateralized by such investment grade securities. Investment grade securities
are generally described as securities 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") or that
are unrated but determined by the Fund's investment adviser to be of comparable
quality. A description of the ratings categories is contained in the Appendix to
this prospectus. Permitted investments include:
.. domestic or foreign corporate debt obligations;
.. obligations of the United States;
..notes, bonds, and discount notes of the following U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Farm Credit System
(including the National Bank for Cooperatives and Banks for Cooperatives),
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union
Administration;
..taxable municipal debt obligations (as a matter of operating policy, the
lowest rated municipal debt obligations in which the Fund will invest will be
rated BBB or better by an NRSRO, or which are of comparable quality in the
judgment of the Fund's investment adviser);
.. asset-backed securities;
.. commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
..time and savings deposits (including certificates of deposit) in commercial or
savings banks whose accounts are insured by the Bank Insurance Fund ("BIF"), or
in institutions whose accounts are insured by the Savings Association Insurance
Fund ("SAIF"), including certificates of deposit issued by, and other time
deposits in, foreign branches of BIF-insured banks which, if negotiable, mature
in six months or less or if not negotiable, either mature in ninety days or
less, or may be withdrawn upon notice not exceeding ninety days;
..bankers' acceptances issued by a BIF-insured bank, or issued by the bank's
Edge Act subsidiary and guaranteed by the bank, with remaining maturities of
nine months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits according to the bank's last
published statement of condition preceding the date of acceptance;
.. convertible securities, irrespective of their ratings;
.. preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
.. equity securities;
.. other securities which are deemed by the Fund's investment adviser, Federated
Advisers (the "Adviser"), to be consistent with the Fund's investment
objective; and
.. repurchase agreements collateralized by acceptable investments.
Under normal circumstances, the Fund will not invest more than 10% of its total
assets in equity securities.
Corporate Debt Obligations
Although the corporate debt obligations in which the Fund will invest primarily
are rated as investment grade by an NRSRO, or of comparable quality in the
judgment of the Adviser, the Fund may invest not more than 35% of its net assets
in corporate debt obligations that are not investment grade, but are rated in
any category below BBB or Baa or are of comparable quality in the judgment of
the Adviser (i.e. "junk bonds") and may include bonds in default. Corporate debt
obligations that are below investment grade are high-yield, high-risk
securities, 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 securities, lower rated securities 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 securities
may be more difficult to dispose of or to value than higher rated,
lower-yielding securities. Changes in economic conditions or other circumstances
are more likely to lead to weakened capacity to make principal and interest
payments with respect to these securities than for higher rated securities.
The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
<TABLE>
<CAPTION>
As a Percentage of Total
Market Value of Bond
Credit Rating Holdings as of October 31, 1997
<S> <C>
BB 14.6%
B 16.3
CC & CCC 0.1
31.0%
</TABLE>
The Fund may invest in the High Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities.
Federated Core Trust currently is not charged an advisory fee and is sold
without any sales charge. Any administrative fee charged to Federated Core Trust
by an affiliate of the Fund's adviser will be for services provided in addition
to the administrative services provided to the Fund. The Fund's adviser
anticipates that the High Yield Bond Portfolio will provide the Fund broad
diversity and exposure to all aspects of the high-yield bond sector of the
market while at the same time providing greater liquidity than if high-yield
debt obligations were purchased separately for the Fund.
U.S. Government Obligations
The U.S. government obligations in which the Fund invests are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities. These
securities include, but are not limited to:
.. direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;
.. notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
.. notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
.. notes, bonds and discount notes of other U.S. government instrumentalities
supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These agencies and instrumentalities are supported by:
.. the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
.. discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
.. the credit of the agency or instrumentality.
Municipal Securities
Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
Asset-Backed Securities
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets
including vehicle installment purchase obligations and credit card receivables
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. Payments
from the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
Non-Mortgage Related Asset-Backed Securities
The Fund may invest in non-mortgage related asset-backed securities including,
but not limited to, interests in pools of receivables, such as credit card and
accounts receivable and motor vehicle and other installment purchase obligations
and leases. These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities, all of which are issued by
non-governmental entities and carry no direct or indirect government guarantee,
are structurally similar to collateralized mortgage obligations and mortgage
pass-through securities, which are described below.
Mortgage Related Asset-Backed Securities
The Fund may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities are
issued or guaranteed by government agencies.
Adjustable Rate Mortgage Securities ("ARMs")
ARMs are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMs in which the Fund invests
are issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMs issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMs issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Collateralized Mortgage Obligations ("CM's")
CM's 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. CM's purchased by the Fund may
be:
.. collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the
U.S. government;
.. collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; or
.. securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
All CM's 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 (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
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, CM's, 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 CM's 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, CM's, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes.
These payment caps may result in negative amortization. The value of mortgage
securities in which the Fund invests may be affected if market interest rates
rise or fall faster and farther than the allowable caps or floors on the
underlying residential mortgage loans. Additionally, even though the interest
rates on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities stated in
the underlying mortgages.
Bank Instruments
The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, recordkeeping, and the public availability of information,
these investments may present additional risks to investors.
Convertible Securities
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock of the issuer or a related financial entity
(for example, a merged or acquired company or partner). Convertible securities
may include, but are not limited to: convertible bonds or debentures;
convertible preferred stock; units consisting of usable bonds and warrants; or
securities which cap or otherwise limit returns to the convertible security
held, such as DECS--(Dividend Enhanced Convertible Stock, or Debt Exchangeable
for Common Stock when issued as a debt security), LYONS--(Liquid Yield Option
Notes, which are corporate bonds that are purchased at prices below par with no
coupons and are convertible into stock), PERCS--(Preferred Equity Redeemable
Stock, an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES--(Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. The Fund does not limit convertible
securities by rating, and there is no minimal acceptance rating for a
convertible security to be purchased or held in the Fund. Therefore, the Fund
invests in convertible securities irrespective of their ratings. This could
result in the Fund purchasing and holding, without limit, convertible securities
rated below investment grade by an NRSRO or in the Fund holding such securities
where they have acquired a rating below investment grade after the Fund has
purchased it. Convertible securities rated below investment grade may be subject
to some of the same risks as those inherent in junk bonds.
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 and as a matter of
fundamental investment policy, which may not be changed without shareholder
approval, will limit such investments to no more than 10% of its net assets.
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 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 may invest in foreign securities within the parameters of its
investment objective, policies, and limitations. 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.
With respect to foreign governmental securities, the Fund reserves the right to
invest up to 25% of its total assets in fixed income securities of foreign
governmental units located within an individual foreign nation and to purchase
or sell various currencies on either a spot or forward basis in connection with
these investments. The Adviser will allocate investments among securities of
particular issuers on the basis of its views as to the best values then
currently available in the marketplace. Such values are a function of yield,
maturity, issue classification and quality characteristics, coupled with
expectations regarding the economy, movements in the general level and term of
interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it.
Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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. Repurchase
agreements are included within the definition of investment grade 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.
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 associations) deemed
creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from the Clearing Corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange traded options have a continuous liquid
market while over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.
Risks
When the Fund writes a call option, the Fund risks not participating in any
rise in the value of the underlying security. In addition, when the Fund
purchases puts on financial futures contracts to protect against declines in
prices of portfolio securities, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the
futures contract and its corresponding put to react differently than the
portfolio securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of market factors
such as interest rate movements. In such an event, the Fund may lose the
purchase price of the put option. Finally, it is not certain that a secondary
market for options will exist at all times. Although the Adviser will consider
liquidity before entering into option transactions, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option
or at any particular time. The Fund's ability to establish and close out option
positions depends on this secondary market.
Derivative Contracts and Securities
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including ARMs, CM's, and REMICs, it will only do so
in a manner consistent with its investment objectives, policies and limitations.
Investment Limitations
The Fund will not:
..borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge up to 10% of the value of those assets to
secure such borrowings;
.. lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
.. sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets is
held as collateral for those positions; nor
..with respect to 75% of the value of its total assets, invest more than 5% in
securities of any one issuer other than cash, cash items or securities issued
or guaranteed by the government of the United States, its agencies, or
instrumentalities and repurchase agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder approval.
NET ASSET VALUE
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers Class F Shares with the characteristics described below.
<TABLE>
<CAPTION>
Class F
<S> <C>
Minimum and Subsequent Investment Amount $1,500/$100
Minimum and Subsequent Investment Amount
for Retirement Plans $ 50
Maximum Sales Charge 1.00%*
Maximum Contingent Deferred Sales Charge** 1.00%**
</TABLE>
* There is no sales charge for purchases of $1 million or more. In addition, no
sales charge is imposed for Shares purchased through certain entities or
programs. Please see the section entitled "Reducing or Eliminating the Sales
Charge."
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
The following contingent deferred sales charge schedule applies to Class F
Shares:
<TABLE>
<CAPTION>
Contingent
Deferred
Amount of Purchase Shares Held Sales Charge
<S> <C> <C>
Up to $1,999,999 Four Years or less 1.00%
$2,000,000 to $4,999,999 Two Years or less 0.50%
$5,000,000 or more One Year or less 0.25%
</TABLE>
PURCHASING 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 intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in Class F Shares of certain other funds advised and
distributed by affiliates of Federated Investors ("Federated Funds") may
exchange their Shares for Class F Shares of the Fund. The Fund reserves the
right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
Purchasing Shares Through a
Financial Intermediary
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class F 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 intermediaries may be subject to reclaim by the distributor for
accounts transferred to financial intermediaries which do not maintain investor
accounts on a fully disclosed basis and do not account for share ownership
periods.
Purchasing Shares by Wire
Shares may be purchased by Federal Reserve wire by calling the Fund. All
information needed will be taken over the telephone, and the order is considered
received when State Street Bank receives payment by wire. Federal funds should
be wired as follows: Federated Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Share Class); (Fund Number--this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
Purchasing Shares by Check
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
Systematic Investment Program
Under this program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member and
invested in the Fund. Shareholders should contact their financial intermediary
or the Fund to participate in this program.
Retirement Plans
Fund Shares can be purchased as an investment for retirement plans or Individual
Retirement Accounts ("IRAs"). For further details, contact the Fund and consult
a tax adviser.
Reducing or Eliminating the Sales Charge
Class F Shares are sold at NAV, plus a sales charge. However:
No sales charge is imposed for Class F Shares purchased:
.. through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients;
.. by sales representatives, Directors, and employees of the Fund, Federated
Advisers, Federated Securities Corp. or their affiliates and their immediate
family members;
.. by any investment dealer who has a sales agreement with Federated Securities
Corp. and their immediate family members, or by 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.
In addition, the sales charge can be reduced or eliminated by:
.. purchasing in quantity and accumulating purchases;
.. combining concurrent purchases of two or more funds;
.. signing a letter of intent to purchase a specific quantity of shares within
13 months; or
.. using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
<PAGE>
Dealer Concession
For sales of Shares, a dealer will normally receive up to 100% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the distributor. However, the distributor may offer to pay
dealers up to 100% of the sales charge retained by it. The sales charge for
Shares sold other than through registered broker/dealers will be retained by
Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the establishment of customer accounts and
purchases of Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Class F Shares of
other Federated Funds on days on which the Fund computes its NAV. Shares are
redeemed at NAV less any applicable contingent deferred sales charge. Exchanges
are made at NAV. Shareholders who desire to automatically exchange Shares, of a
like Share class, in a pre-determined amount on a monthly, quarterly, or annual
basis may take advantage of a systematic exchange privilege. Information on this
privilege is available from the Fund or your financial intermediary. Depending
upon the circumstances, a capital gain or loss may be realized when Shares are
redeemed or exchanged.
Redeeming or Exchanging Shares Through a Financial Intermediary
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
Redeeming or Exchanging Shares by Telephone
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check to the shareholder's address of record or wire-transferred to
the shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System. 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 or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
Redeeming or Exchanging Shares by Mail
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Share Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
Requirements for Redemption
Shareholders requesting 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 their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
Requirements for Exchange
Shareholders must exchange Shares having a NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
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. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
Systematic Withdrawal Program
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. To be eligible to participate
in this program, a shareholder must have an account value of at least $10,000,
other than retirement accounts subject to required minimum distributions. A
shareholder may apply for participation in this program through his financial
intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete, the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class F Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge will be imposed on Shares redeemed
through this program within four years of their purchase dates.
Contingent Deferred Sales Charge
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. 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. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
Eliminating the Contingent Deferred Sales Charge
Upon written notification to Federated Securities Corp. or the transfer agent,
no contingent deferred sales charge will be imposed on redemptions:
.. following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
.. representing a total or partial distribution from an IRA, Keogh Plan, or a
custodial account to a shareholder who has attained the age of 70/1/U\\2;\\
.. representing a total or partial distribution from a qualified plan, other
than an Individual Retirement Account, Keogh Plan, or a custodial account
following retirement;
.. which are involuntary redemptions of shareholder accounts that do not comply
with the minimum balance requirements;
.. which are reinvested in the Fund under the reinvestment privilege;
..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 intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons; and
..of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement
plans where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
intermediary, to the extent that no payments were advanced for purchases made
through such entities.
For more information regarding the contingent deferred sales charge or any of
the above provisions, contact your financial intermediary or the Fund. The Fund
reserves the right to discontinue or modify these provisions. Shareholders will
be notified of such action.
ACCOUNT AND SHARE INFORMATION
Confirmations and Account Statements
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
Dividends and Distributions
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
Accounts with Low Balances
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
FUND 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.
Both the Fund and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors, and could
result in severe penalties.
Advisory Fees
The Adviser receives an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fee paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion.
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. With over $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992 and
is responsible for managing the allocation of fixed income assets (between
investment grade and high yield). Mr. Balestrino also manages the investment
grade portion of the Fund. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's investment adviser and Federated
Research Corp. since 1995. Mr.Balestrino served as an Assistant Vice President
of the investment adviser and Federated Research Corp. from 1991 until 1995. Mr.
Balestrino is a Chartered Financial Analyst and received his Master's Degree in
Urban and Regional Planning from the University of Pittsburgh.
Mark E. Durbiano has been the Fund's portfolio manager since June, 1992 and is
responsible for managing the high yield portion of the Fund. Mr. Durbiano joined
Federated Investors in 1982 and has been a Senior Vice President of the Fund's
investment adviser and Federated Research Corp. since January 1996. From 1988
through 1995, Mr. Durbiano was a Vice President of the Fund's investment adviser
and Federated Research Corp. Mr.Durbiano is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Pittsburgh.
Distribution of Class F Shares
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on
November 14, 1969, and is the principal distributor for a number of investment
companies. Federated Securities Corp. is a subsidiary of Federated Investors.
Shareholder Services
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to 0.25% of the average daily net asset value of Class F
Shares, computed at an annual rate, to obtain certain personal services for
shareholders and to maintain shareholder accounts. Under the Shareholder
Services Agreement, Federated Shareholder Services will either perform
shareholder services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.
Supplemental Payment 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,
0.50% of the offering price on purchases of $2,000,000 to $4,999,999, and 0.25%
of the offering price on purchases of $5,000,000 or more. (This fee is in
addition to the 1.00% sales charge 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, in addition to payments made pursuant to the Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of sales services, distribution-related support services, or
shareholder services. 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.
Administration of the Fund
Administrative Services
Federated Services Company, 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
Services Company provides these at an annual rate which relates to the average
aggregate daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
Maximum Average Aggregate
Fee Daily Net Assets
<S> <C>
0.150% on the first $250 million 0.125% on the next $250 million 0.100% on the
next $250 million 0.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
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.
Directors may be removed by the Directors or by 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 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.
State and Local 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 Class F
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 Class F Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Class F Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by Class
F Shares over a thirty-day period by the maximum offering price per share of
Class F 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 Class F 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 charge 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 F Shares, and
Class F Shares.
From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares, and Class F 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 Class F 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 which are all sold primarily to customers of
financial institutions.
Class A Shares are sold subject to a front-end sales charge, a Rule 12b-1 Plan
and a Shareholder Services Agreement. 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 Agreement.
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 Agreement.
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 Shares, Class B Shares, Class C Shares and Class F Shares are subject to
certain of the same expenses. Expense differences, however, between Class A
Shares, Class B Shares, Class C Shares and Class F Shares may affect the
performance of each class.
To obtain more information and a combined prospectus for Class A Shares, Class B
Shares and Class C Shares, investors may call 1-800-341-7400.
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. Of ten 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.
Investment Transfer Agent and Dividend Disbursing Agent
Series Funds, Inc. Federated Shareholder Services Company
Federated Bond Fund Federated Investors Tower
Class F Shares Pittsburgh, PA 15222-3779
Federated Investors Funds
5800 Corporate Drive Independent Auditors
Pittsburgh, PA 15237-7000 Ernst & Young LLP
One Oxford Center
Pittsburgh, PA 15219
Distributor
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Investment Adviser
Federated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
Custodian
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 461444309 [LOGO OF RECYCLED PAPER]
G01271-02-F (12/97)
[LOGO] FEDERATED INVESTORS
Federated Bond Fund
(A Portfolio of Investment Series
Funds, Inc.)
Class F Shares
Prospectus
December 31, 1997
An Open-End, Diversified
Management Investment Company
Federated Bond Fund
(A Portfolio of Investment Series Funds, Inc.)
Class A Shares
Class B Shares
Class C Shares
Class F Shares
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus for
Class A Shares, Class B Shares, and Class C Shares and the prospectus of Class F
Shares of Federated Bond Fund (the "Fund") dated December 31, 1997. This
Statement is not a prospectus. You may request a copy of a prospectus or a paper
copy of this Statement, if you have received it electronically, free of charge
by calling 1-800-341-7400.
Investment Series Funds, Inc.
Federated Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
Statement dated December 31, 1997
Cusip 461444507
Cusip 461444606
Cusip 461444705
Cusip 461444309
2041304b (12/97)
<PAGE>
i
Table of Contents
<PAGE>
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Equity Securities 1
Convertible Securities 1
Futures and Options Transactions 2
Investing in Foreign Currencies 4
Investing in the Securities of Other investment Companies 5
When-Issued and Delayed Delivery Transactions 5
Lending of Portfolio Securities 5
Repurchase Agreements 6
Reverse Repurchase Agreements 6
Portfolio Turnover 6
Investment Limitations 6
Investment Series Funds, Inc. Management 9
Fund Ownership 12
Directors' Compensation 14
Investment Advisory Services 15
Adviser to the Fund 15
Advisory Fees 15
Brokerage Transactions 15
Other Services 16
Fund Administration 16
Custodian and Portfolio Accountant 16
Transfer Agent 16
Independent Auditors 16
Purchasing Shares 16
Quantity Discounts and Accumulated Purchases 16
Concurrent Purchases 17
Letter of Intent 17
Reinvestment Privilege 17
Conversion of Class B Shares 18
Distribution Plan and Shareholder Services 18
Other Payments to Financial Institutions (Class F Shares Only) 18
Purchases by Sales Representatives, Directors and Employees 18
Conversion to Federal Funds 19
Determining Net Asset Value 19
Determining Market Value of Securities 19
Redeeming Shares 20
Redemption in Kind 20
Contingent Deferred Sales Charge 20
Exchange Privilege (Class F Shares Only) 21
Reduced Sales Charge 21
Requirements For Exchange 21
Tax Consequences 21
Making an Exchange 21
Tax Status 21
The Fund's Tax Status 21
Shareholder's Tax Status 21
Total Return 22
Yield 22
Performance Comparisons 23
Duration 24
About Federated Investors 24
Financial Statements 26
<PAGE>
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. On February 3, 1993, the
shareholders of the Fund voted to reorganize the Fund as a portfolio of the
Corporation, effective February 5, 1993, which is organized under the laws of
the State of Maryland. On June 27, 1995, shareholders approved the name of the
Fund to be changed to "Federated Bond Fund." On June 2, 1996, the name of the
"Fortress Shares" class of the Fund was changed to "Class F Shares." The
Corporation 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 Class F Shares (individually and collectively
referred to as "Shares" as the context may require.) This Statement of
Additional Information relates to all four of the above-mentioned classes of
Shares.
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 net assets in investment grade bonds. Permitted investments
include:
o domestically-issued and foreign-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.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants, or rights. The
Fund's investment adviser, Federated Advisers (the "Adviser"), may choose to
exceed this 10% limitation if unusual market conditions suggest such investments
represent a better opportunity to reach the Fund's investment objective.
Convertible Securities
DECS offer a substantial dividend advantage with the possibility of unlimited
upside potential if the price of the underlying common stock exceeds a certain
level. DECS convert to common stock at maturity. The amount received is
dependent on the price of the common at the time of maturity. DECS contain two
call options at different strike prices. The DECS participate with the common up
to the first call price. They are effectively capped at that point unless the
common rises above a second price point, at which time they participate with
unlimited upside potential.
PERCS offer a substantial dividend advantage, but capital appreciation potential
is limited to a predetermined level. PERCS are less risky and less volatile than
the underlying common stock because their superior income mitigates declines
when the common falls, while the cap price limits gains when the common rises.
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 Exchange 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.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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 Fund's Board of Directors
(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, 1997 and 1996, the portfolio turnover rates were 55% and 49%,
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 limitation, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
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.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
For purposes of its limitations, the Fund considers instruments issued by a U.S.
branch of a domestic bank having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
The use of short sales will allow the Fund to retain certain bonds in its
portfolio longer than it would without such sales. To the extent the Fund
receives the current income produced by such bonds for a longer period than it
might otherwise, the Fund's investment objective of current income is furthered.
The Fund did not borrow money, sell securities short, engage in foreign currency
options, or purchase financial futures contracts in excess of 5% of the value of
its net assets during the last fiscal year and has no present intent to do so in
the coming fiscal year.
<PAGE>
Investment Series Funds, Inc. Management
Officers and Directors are listed with their addresses, birthdates, 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. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue, President and Director of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
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; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
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.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
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. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, 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 or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
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; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
<PAGE>
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Directors handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Directors own less than 1% of the Fund's outstanding shares.
As of December 3, 1997, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Fund: Trust Company of St. Joseph, St.
Joseph, Missouri, owned approximately 661,764 shares (5.50%); FNB Nominee Co.,
Indiana, Pennsylvania, owned approximately 701,208 shares (5.83%); Strafe & Co.,
for the account of ASR Stauton Employee Retirement Plan, Columbus, Ohio, owned
approximately 1,059,025 shares (8.81%); and BHC Securities, Inc., Philadelphia,
Pennsylvania, owned approximately 651,424 shares (5.42%).
As of December 3, 1997, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, owned approximately 1,596,612 shares (8.11%).
As of December 3, 1997, the following shareholder of record owned 5% or more of
the outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, owned approximately 1,354,756 shares (33.19%).
As of December 3, 1997, the following shareholders of record owned 5% or more of
the outstanding Class F Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, owned approximately 5,407,338 shares (16.61%); and
Hawaiian Trust Company Ltd., Honolulu, Hawaii, owned approximately 2,118,473
shares (6.51%).
<PAGE>
Directors' Compensation
<TABLE>
<CAPTION>
<S> <C> <C>
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 56 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $-0- for the Fund and
President and Director 18 other investment companies in the Fund Complex
Thomas G. Bigley $1,384 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $1,523 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
William J. Copeland $1,523 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
James E. Dowd $1,523 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $1,384 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $1,523 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Peter E. Madden $1,384 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John E. Murray, Jr. $1,384 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Wesley W. Posvar $1,384 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Marjorie P. Smuts $1,384 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended October 31, 1997.
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 prospectuses. For the fiscal years
ended October 31, 1997, 1996, and 1995, the Adviser earned $4,127,217,
$2,650,984, and $1,271,771, respectively, of which $842,462, $705,603, and
$505,263, were voluntarily waived because of undertakings to limit the Fund's
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
guidelines established by the Directors. The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the adviser or its affiliates in advising the Fund 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. 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. During the fiscal
years ended October 31, 1997, 1996, and 1995, the Fund paid total brokerage
commissions of $0, $0, and $5,595, respectively.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Other Services
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectuses. From March 1, 1994, to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Fund's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
October 31, 1997, 1996, and 1995, the Administrators collectively earned
$415,495, $267,242, and $156,316, respectively.
Custodian and Portfolio Accountant
State Street Bank and Trust Company, Boston, MA, is custodian for the securities
and cash of the Fund. Federated Services Company, Pittsburgh, PA provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments.
Transfer Agent
Federated Services Company, through its registered transfer agent Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the size, type and
number of accounts and transactions made by shareholders.
Independent Auditors
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
Purchasing Shares
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A Shares
and Class F Shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares is explained in the respective
prospectuses under "Investing in the Fund" and "Purchasing Shares."
Quantity Discounts and Accumulated Purchases
As described in the prospectuses, larger purchases reduce or eliminate the sales
charge paid. The Fund will combine purchases of Class A Shares and Class F
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 charge. In
addition, the sales charge, 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 and Class F 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 charge on the additional purchase according to the
schedule now in effect would be 3.75%, not 4.50%.
In addition, the Fund will also combine purchases for the purpose of reducing
the contingent deferred sales charge imposed on Class F Share redemptions. For
example, if a shareholder already owns Class F Shares having current value at
the 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 0.50% of those additional Class F Shares.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary at the
time the purchase is made that Class A Shares or Class F Shares are already
owned or that purchases are being combined. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
Concurrent Purchases
For purposes of qualifying for a sales charge reduction or elimination, a
shareholder has the privilege of combining concurrent purchases of Class A
Shares or Class F Shares of two or more funds for which affiliates of Federated
Investors serve as investment adviser and principal underwriter (the "Federated
Funds"), the purchase prices of which include a sales charge. For example, if a
shareholder concurrently invested $80,000 in the Class A Shares of one of the
other Federated Funds with a sales charge, and $20,000 in this Fund, the sales
charge would be reduced.
To receive this sales charge reduction or elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
intermediary at the time the concurrent purchases are made. The Fund will reduce
or eliminate the sales charge after it confirms the purchases.
Letter of Intent
If a shareholder intends to purchase at least $100,000 of Class A Shares or at
least $1 million of Class F Shares of Federated Funds (excluding money market
funds) over the next 13 months, the sales charge may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales charge adjustment depending on the amount actually purchased within the
13-month period and a provision for the custodian to hold up to 4.50% (in the
case of Class A Shares) or 1.00% (in the case of Class F Shares) 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
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
sales charge.
The letter of intent for Class F Shares 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.
While this letter of intent will not obligate the shareholder to purchase Class
A Shares or Class F Shares, each purchase during the period will be at the sales
charge 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 or Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards fulfillment of
the letter of intent. The letter may be dated as of a prior date to include any
purchase made within the past 90 days. Prior trade prices will not be adjusted.
Reinvestment Privilege
The reinvestment privilege is available for all Shares of the Fund. If Class A
Shares in the Fund have been redeemed, the shareholder has the privilege, within
120 days, to reinvest the redemption proceeds at the next-determined net asset
value without any sales charge. Similarly, shareholders who redeem Class B
Shares, Class C Shares or Class F Shares may be reinvested in the same Share
class within 120 days but would not be entitled to a reimbursement of the
contingent deferred sales charge if paid at the time of redemption. However,
such reinvested shares would not be subject to a contingent deferred sales
charge upon later redemption. In addition, if the Class B, Class C or Class F
Shares were reinvested through a financial intermediary, the financial
intermediary would not be entitled to an advanced payment from Federated
Securities Corp. on the reinvested Shares. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary of the
reinvestment in order to eliminate a sales charge or a contingent deferred sales
charge. If the shareholder redeems Shares in the Fund, there may be tax
consequences.
Conversion of Class B Shares
Class B Shares will automatically convert into Class A Shares on or around the
15th of the month eight full years from the purchase date and will no longer be
subject to a fee under the distribution plan. 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 a 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.
Distribution Plan and Shareholder Services
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses. By
adopting the Distribution Plan, the Directors expect that the Fund will be able
to achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Fund in pursuing its investment objectives. By identifying potential
investors whose needs are served by the Fund's objectives, and properly
servicing these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended October 31, 1997, payments in the amounts of
$1,176,910 and $226,139 were made pursuant to the Distribution Plan for Class B
Shares and Class C Shares, respectively. For the fiscal year ended October 31,
1997, payments in the amounts of $166,913, $392,303, $75,380, and $741,143 (of
which $33,383, $0, $0, and $59,291 were waived) were made pursuant to the
Shareholder Services Agreement for Class A Shares, Class B Shares, Class C
Shares, and Class F Shares, respectively.
Federated Investors and its subsidiaries may benefit from arrangements where the
Rule 12b-1 Plan fees related to Class B Shares may be paid to third-party
financial providers who have advanced commissions to financial intermediaries.
Other Payments to Financial Institutions (Class F 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.
Purchases by Sales Representatives, Fund Directors, and Employees
The following individuals and their immediate family members may buy Class A
Shares and Class F Shares at net asset value without a sales charge:
o Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
o Federated Life Members (Class A Shares only);
o any associated person of an investment dealer who has a sales
agreement with Federated Securities Corp.; and
o trusts, pensions, or profit-sharing plans for these individuals.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. State Street Bank and Trust Company acts as the shareholder's
agent in depositing checks and converting them to federal funds.
Determining Net Asset Value
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.
Net asset value is not determined 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, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
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 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 may be subject to a
contingent deferred sales charge. Redemption procedures are explained in the
respective prospectuses under "Redeeming and Exchanging 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.
Redemption in Kind
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
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.
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; (3) Shares held for fewer than six years with respect to Class B
Shares and for less than one full year from the date of purchase with respect to
Class C Shares on a first-in, first-out basis.
Elimination of the Contingent Deferred Sales Charge--Class B Shares
To qualify for elimination of the contingent deferred sales charge through
a Systematic Withdrawal Program, the redemptions of Class B Shares must be
from an account that is at least 12 months old, has all Fund distributions
reinvested in Fund Shares, and has an account value of at least $10,000
when the Systematic Withdrawal Program is established. Qualifying
redemptions may not exceed 1.00% monthly of the account value as
periodically determined by the Fund. The amounts that a shareholder may
withdraw under a Systematic Withdrawal Program that qualify for
elimination of the Contingent Deferred Sales Charge may not exceed 12%
annually with reference initially to the value of the Class B Shares upon
establishment of the Systematic Withdrawal Program and then as calculated
at the annual valuation date. Redemptions on a qualifying Systematic
Withdrawal Program can be made at a rate of 1.00% monthly, 3.00%
quarterly, or 6.00% semi-annually with reference to the applicable account
valuation amount. Amounts that exceed the 12.00% annual limit for
redemption, as described, may be subject to the Contingent Deferred Sales
Charge. To the extent that a shareholder exchanges Shares for Class B
Shares of other Federated 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 12-month holding
requirement. However, for purposes of meeting the $10,000 minimum account
value requirement, Class B Share accounts will be not be aggregated. Any
Shares purchased prior to the termination of this program would have the
contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of the purchase of the Shares.
Exchange Privilege (Class F Shares Only)
This section relates only to Class F 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 a result, Fund shareholders are allowed to exchange all or some of
their shares for shares in certain Federated Funds which are sold with a sales
charge that differs from that of the Fund's or which impose no sales charge 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 charge already paid and any sales charge of
the fund into which the shares are to be exchanged, if higher. The order also
allows certain other funds, including funds that are not advised by subsidiaries
or affiliates of Federated Investors, which do not have a sales charge, to
exchange their shares for Fund shares on a basis other than their current
offering price. These exchanges may be made to the extent that such shares were
acquired in a prior exchange, at net asset value, for shares of a Federated Fund
carrying a sales charge.
Reduced Sales Charge
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or Federated Shareholder 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,
Class F 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 the Federated 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 exchanging Shares must be given in writing by the shareholder.
Written instructions may require a signature guarantee.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code 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 invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholder's Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
Total Return
The Fund's average annual total returns based on offering price for the
following periods ended October 31, 1997 were:
Date of Initial
Public
Share Class Investment One-Year Five-YearsTen-YearsSince Inception
Class A 6/28/95 10.73% N/A N/A 9.39%
Class B 6/28/95 9.86% N/A N/A 8.57%
Class C 6/28/95 9.86% N/A N/A 8.57%
Class F 7/8/88 10.70% 10.00% N/A 9.99%
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
charge, 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.
Yield
The Fund's yields for the thirty-day period ended October 31, 1997 were:
Share Class Yield
Class A 6.61%
Class B 6.11%
Class C 6.11%
Class F 6.82%
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of Shares because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in 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 Lehman Brothers High Yield Index covers the universe of fixed rate, publicly
issued, noninvestment grade debt registered with the SEC. All bonds included
in the High Yield Index must be dollar-denominated and nonconvertible and
have at least one year remaining to maturity and an outstanding par value of
at least $100 million. Generally securities must be rated Ba1 or lower by
Moody's Investors Service, including defaulted issues. If no Moody's rating
is available, bonds must be rated BB+ or lower by S&P; and if no S&P rating
is available, bonds must be rated below investment grade by Fitch Investor's
Service. A small number of unrated bonds is included in the index; to be
eligible they must have previously held a high yield rating or have been
associated with a high yield issuer, and must trade accordingly.
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 charge 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.
About Federated Investors
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making-structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers. The company's disciplined security selection process is firmly
rooted in sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders handle
trillions of dollars in annual trading volume.
In the equity sector, Federated Investors has more than 26 years' experience. As
of December 31, 1996, Federated managed 31 equity funds totaling approximately
$7.6 billion in assets across growth, value, equity income, international, index
and sector (i.e. utility) styles. Federated's value-oriented management style
combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds and 17 bond funds with assets approximating $17.2
billion and $4.0 billion, respectively. Federated's corporate bond decision
making--based on intensive, diligent credit analysis--is backed by over 21 years
of experience in the corporate bond sector. In 1972, Federated introduced one of
the first high-yield bond funds in the industry. In 1983, Federated was one of
the first fund managers to participate in the asset-backed securities market, a
market totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international and global portfolios.
<PAGE>
Mutual Fund Market
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated Funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
Financial Statements
The Financial Statements for the fiscal year ended October 31, 1997, are
incorporated herein by reference to the Annual Report of the Fund dated October
31, 1997. (File Nos. 33-48847 and 811-07021). A copy of this report may be
obtained without charge by contacting the Fund.
*Source: Investment Company Institute
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements for the fiscal year ended October 31, 1997,
are hereby incorporated by reference from the Fund's Annual Report
dated October 31, 1997.
(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)
Copies of Specimen Certificates for Shares of Capital Stock of
Federated Bond Fund; (5)
(ii) Copy of Specimen Certificate for Shares of Common Stock
of Class F Shares of Federated Bond Fund; (7)
(5) Conformed copy of Investment Advisory Contract of the
Registrant; (3)
(6) (i) Copy of Distributor's Contract of Registrant; (2)
(a) Conformed copy of Exhibits C and D to
Distributor's Contract; (4) (b) Conformed copy of
Exhibits E, F, and G to Distributor's Contract; (5)
(ii)Conformed copy of Distributor's Contract (Class B
Shares) including Exhibit 1 and Schedule A; (+) (iii) The
Registrant hereby incorporates the conformed copy of the
specimen Mutual Funds Sales and Service Agreement;
Mutual Funds Service Agreement; and Plan Trustee/
Mutual Funds Service Agreement from Item 24(b)(6) of
the Cash Trust Series II Registration Statement on
Form N-1A, filed with the Commission on
July 24, 1995. (File Nos. 33-38550 and
811-6269);
(7) Not applicable;
+ 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)
(5) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed July 27, 1995 (File No. 33-48847)
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed February 18, 1997 (File No. 33-48847)
<PAGE>
(8) (i) Conformed copy of Custodian Agreement of the
Registrant;(3) (ii) Conformed copy of State Street Domestic
Custody Fee Schedule; (9)
(9) (i) Conformed copy of Principal Shareholder Servicer's
Agreement (Class B Shares) including Exhibit 1 and Schedule A;
(+) (ii) Conformed copy of Shareholder Services Agreement
(Class B Shares) including Exhibit 1 and Schedule A; (+) (iii)
Conformed copy of Agreement for Fund Accounting Services,
Administrative Services, Transfer Agency Services, and Custody
Services Procurement; (7)
(iv) The Registrant hereby incorporates by reference the
conformed copy of the Shareholder Services Sub-Contract
between Fidelity and Federated Shareholder Services from
Item 24(b)(9)(iii) of the Federated GNMA Trust
Registration Statement on Form N-1A, filed with the
Commission on March 25, 1996 (File Nos. 2-75670 and
811-3375);
(v) Conformed copy of Amended and Restated Shareholder
Services Agreement; (9) (vi) The responses described in Item
24(b)(6)(ii) are hereby incorporated by reference;
(10)Copy of Opinion and Consent of Counsel as to legality of
shares being registered; (2) (11)Copy of Consent of Independent
Auditors; (+)
(12)Not applicable;
(13)Not applicable;
(14)Not applicable;
(15)(i) Copy of Distribution Plan; (2)
(ii) Conformed Copy of Exhibits B and C to Distribution Plan;
(4) (iii) Conformed Copy of Exhibits D, E, and F to
Distribution Plan; (5)
(iv) Conformed copy of Exhibit 1 to the 12b-1 Distribution
Plan (Class B Shares) of the Registrant; (+) (v) The responses
described in Item 24(b)(6)(ii) are hereby incorporated by
reference;
+ All exhibits have been filed electronically via EDGAR.
(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)
(5) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed July 27, 1995 (File No. 33-48847)
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed February 18, 1997 (File No. 33-48847)
(9) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 13 on Form N-1A filed October 24, 1997 (File No. 33-48847)
<PAGE>
(16)Not applicable;
(17)Copies of Financial Data Schedules; (+)
(18)The Registrant hereby incorporates the conformed copy of the
specimen Multiple Class Plan from Item 24(b)(18) of the World
Investment Series, Inc. Registration Statement on Form N-1A,
filed with the Commission on January 26, 1996. (File Nos.
33-52149 and 811-07141);
(19)Power of Attorney. (7)
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 December 1, 1997
-------------- -----------------------
Federated Bond Fund
Shares of Capital Stock
(.0001 par value)
Class A Shares 3,075
Class B Shares 9.668
Class C Shares 1,160
Class F Shares 7,812
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 "Fund Information - Management of the Corporation"
in Part A. The affiliations with the Registrant of three of the
Trustees and two 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 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:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
+ All exhibits have been filed electronically via EDGAR.
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed February 18, 1997 (File No. 33-48847)
Senior Vice Presidents: Peter R. Anderson
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
(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)
<PAGE>
Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
Randall S. Bauer
David F. Belton
David A. Briggs
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Steven Lehman
Marian R. Marinack
Sandra L. McInerney
Charles A. Ritter
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
Christopher Smith
William F. Stotz
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Assistant Vice Presidents: Todd A. Abraham
Stefanie L. Bachhuber
Arthur J. Barry
Micheal W. Casey
Robert E. Cauley
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
Joseph M. Natoli
Keith J. Sabol
Michael W. Sirianni
Gregg S. Tenser
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle
Assistant Treasurer: Richard B. Fisher
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.
<PAGE>
Item 29. Principal Underwriters:
(a) Federated Securities Corp. the Distributor for shares of the
Registrant, acts as principal underwriter for the following open-end investment
companies, including the Registrant:
111 Corcoran Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Obligations Trust II; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds;
SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Virtus Funds; The Wachovia Funds; The
Wachovia Municipal Funds; Tower Mutual Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; 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.
<PAGE>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp.
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger 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
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
Teresa M. Antoszyk 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
Byron F. Bowman Vice President, Secretary, --
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
R. Leonard Corton, 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
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Jill Ehrenfeld 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
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher 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
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy 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
Thomas A. Peters III 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
Richard A. Recker 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
George D. Riedel 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
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith 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
John A. Staley 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
Richard Suder 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
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
John F. Wallin 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
Edward J. Wojnarowski 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
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth C. Dell 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
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Shareholder Services Company P.O. Box 8600
("Transfer Agent and Dividend Boston, MA 02266-8600
Disbursing Agent")
Federated Services Company Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779
Federated Advisers Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600
Item 31. Management Services: Not applicable.
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, INVESTMENT SERIES FUNDS,
INC., certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and 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
24th day of December, 1997.
INVESTMENT SERIES FUNDS, INC.
BY: /s/ Matthew S. Hardin
Matthew S. Hardin, Assistant Secretary
Attorney in Fact for John F. Donahue
December 24, 1997
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/ Matthew S. Hardin
Matthew S. Hardin Attorney In Fact December 24, 1997
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
J. Christopher Donahue* President and Director
John W. McGonigle* Executive Vice President, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
John E. Murray, Jr.* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
*By Power of Attorney
Exhibit 6 under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
DISTRIBUTOR'S CONTRACT
AGREEMENT made this 24th day of October, 1997, by and between those
Investment Companies on behalf of the Portfolios and Classes of Shares
listed on Schedule A to Exhibit 1, as may be amended from time to time,
having their principal place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779, and who have approved this form of
Agreement, and FEDERATED SECURITIES CORP. ("FSC"), a Pennsylvania
Corporation. Each of the Exhibits hereto is incorporated herein in its
entirety and made a part hereof. In the event of any inconsistency between
the terms of this Agreement and the terms of any applicable Exhibit, the
terms of the applicable Exhibit shall govern.
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. Each of the Investment Companies hereby appoint FSC as agent to sell and
distribute shares of the Investment Companies which may be offered in
one or more series (the "Funds") consisting of one or more classes (the
"Classes") of shares (the "Shares"), as described and set forth on one
or more exhibits to this Agreement, at the current offering price
thereof as described and set forth in the current Prospectuses of the
Funds. FSC hereby accepts such appointment and agrees to provide such
other services for the Investment Companies, if any, and accept such
compensation from the Investment Companies, if any, as set forth in the
applicable exhibits to this Agreement.
2. The sale of any Shares may be suspended without prior notice whenever in
the judgment of the applicable Investment Company it is in its best
interest to do so.
3. Neither FSC nor any other person is authorized by the Investment Companies
to give any information or to make any representation relative to any
Shares other than those contained in the Registration Statement,
Prospectuses, or Statements of Additional Information ("SAIs") filed with
the Securities and Exchange Commission, as the same may be amended from
time to time, or in any supplemental information to said Prospectuses or
SAIs approved by the Investment Companies. FSC agrees that any other
information or representations other than those specified above which it or
any dealer or other person who purchases Shares through FSC may make in
connection with the offer or sale of Shares, shall be made entirely without
liability on the part of the Investment Companies. No person or dealer,
other than FSC, is authorized to act as agent for the Investment Companies
for any purpose. FSC agrees that in offering or selling Shares as agent of
the Investment Companies, it will, in all respects, duly conform to all
applicable state and federal laws and the rules and regulations of the
National Association of Securities Dealers, Inc., including its Rules of
Fair Practice. FSC will submit to the Investment Companies copies of all
sales literature before using the same and will not use such sales
literature if disapproved by the Investment Companies.
4. This Agreement is effective with respect to each Class as of the date of
execution of the applicable exhibit and shall continue in effect with
respect to each Class presently set forth on an exhibit and any subsequent
Classes added pursuant to an exhibit during the initial term of this
Agreement for one year from the date set forth above, and thereafter for
successive periods of one year if such continuance is approved at least
annually by the Trustees/Directors of the Investment Companies including a
majority of the members of the Board of Trustees/Directors of the
Investment Companies who are not interested persons of the Investment
Companies and have no direct or indirect financial interest in the
operation of any Distribution Plan relating to the Investment Companies or
in any related documents to such Plan ("Disinterested Trustees/Directors")
cast in person at a meeting called for that purpose. If a Class is added
after the first annual approval by the Trustees/Directors as described
above, this Agreement will be effective as to that Class upon execution of
the applicable exhibit and will continue in effect until the next annual
approval of this Agreement by the Trustees/Directors and thereafter for
successive periods of one year, subject to approval as described above.
5. This Agreement may be terminated with regard to a particular Fund or
Class at any time, without the payment of any penalty, by the vote of a
majority of the Disinterested Trustees/Directors or by a majority of the
outstanding voting securities of the particular Fund or Class on not
more than sixty (60) days' written notice to any other party to this
Agreement.
6. This Agreement may not be assigned by FSC and shall automatically
terminate in the event of an assignment by FSC as defined in the
Investment Company Act of 1940, as amended, provided, however, that FSC
may employ such other person, persons, corporation or corporations as it
shall determine in order to assist it in carrying out its duties under
this Agreement.
7. FSC shall not be liable to the Investment Companies 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
by this Agreement.
8. This Agreement may be amended at any time by mutual agreement in writing
of all the parties hereto, provided that such amendment is approved by
the Trustees/Directors of the Investment Companies including a majority
of the Disinterested Trustees/Directors of the Investment Companies cast
in person at a meeting called for that purpose.
9. This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Pennsylvania.
10. (a) Subject to the conditions set forth below, the Investment Companies
agree to indemnify and hold harmless FSC and each person, if any, who
controls FSC within the meaning of Section 15 of the Securities Act of 1933
and Section 20 of the Securities Act of 1934, as amended, against any and
all loss, liability, claim, damage and expense whatsoever (including but
not limited to any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement, any Prospectuses or SAIs (as from time to
time amended and supplemented) or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading, unless such statement or
omission was made in reliance upon and in conformity with written
information furnished to the Investment Companies about FSC by or on behalf
of FSC expressly for use in the Registration Statement, any Prospectuses
and SAIs or any amendment or supplement thereof.
If any action is brought against FSC or any controlling person
thereof with respect to which indemnity may be sought against any
Investment Company pursuant to the foregoing paragraph, FSC shall
promptly notify the Investment Company in writing of the
institution of such action and the Investment Company shall assume
the defense of such action, including the employment of counsel
selected by the Investment Company and payment of expenses. FSC or
any such controlling person thereof shall have the right to employ
separate counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of FSC or such controlling
person unless the employment of such counsel shall have been
authorized in writing by the Investment Company in connection with
the defense of such action or the Investment Company shall not
have employed counsel to have charge of the defense of such
action, in any of which events such fees and expenses shall be
borne by the Investment Company. Anything in this paragraph to the
contrary notwithstanding, the Investment Companies shall not be
liable for any settlement of any such claim of action effected
without their written consent. The Investment Companies agree
promptly to notify FSC of the commencement of any litigation or
proceedings against the Investment Companies or any of their
officers or Trustees/Directors or controlling persons in
connection with the issue and sale of Shares or in connection with
the Registration Statement, Prospectuses, or SAIs.
(b) FSC agrees to indemnify and hold harmless the Investment Companies, each of
its Trustees/Directors, each of its officers who have signed the
Registration Statement and each other person, if any, who controls the
Investment Companies within the meaning of Section 15 of the Securities Act
of 1933, but only with respect to statements or omissions, if any, made in
the Registration Statement or any Prospectus, SAI, or any amendment or
supplement thereof in reliance upon, and in conformity with, information
furnished to the Investment Companies about FSC by or on behalf of FSC
expressly for use in the Registration Statement or any Prospectus, SAI, or
any amendment or supplement thereof. In case any action shall be brought
against any Investment Company or any other person so indemnified based on
the Registration Statement or any Prospectus, SAI, or any amendment or
supplement thereof, and with respect to which indemnity may be sought
against FSC, FSC shall have the rights and duties given to the Investment
Companies, and the Investment Companies and each other person so
indemnified shall have the rights and duties given to FSC by the provisions
of subsection (a) above.
(c) Nothing herein contained shall be deemed to protect any person
against liability to the Investment Companies or their
shareholders to which such person would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in
the performance of the duties of such person or by reason of the
reckless disregard by such person of the obligations and duties of
such person under this Agreement.
(d) Insofar as indemnification for liabilities may be permitted pursuant to
Section 17 of the Investment Company Act of 1940, as amended, for
Trustees/Directors, officers, FSC and controlling persons of the Investment
Companies by the Trustees/Directors pursuant to this Agreement, the
Investment Companies are aware of the position of the Securities and
Exchange Commission as set forth in the Investment Company Act Release No.
IC-11330. Therefore, the Investment Companies undertakes that in addition
to complying with the applicable provisions of this Agreement, in the
absence of a final decision on the merits by a court or other body before
which the proceeding was brought, that an indemnification payment will not
be made unless in the absence of such a decision, a reasonable
determination based upon factual review has been made (i) by a majority
vote of a quorum of non-party Disinterested Trustees/Directors, or (ii) by
independent legal counsel in a written opinion that the indemnitee was not
liable for an act of willful misfeasance, bad faith, gross negligence or
reckless disregard of duties. The Investment Companies further undertakes
that advancement of expenses incurred in the defense of a proceeding (upon
undertaking for repayment unless it is ultimately determined that
indemnification is appropriate) against an officer, Trustees/Directors, FSC
or controlling person of the Investment Companies will not be made absent
the fulfillment of at least one of the following conditions: (i) the
indemnitee provides security for his undertaking; (ii) the Investment
Companies is insured against losses arising by reason of any lawful
advances; or (iii) a majority of a quorum of non-party Disinterested
Trustees/Directors or independent legal counsel in a written opinion makes
a factual determination that there is reason to believe the indemnitee will
be entitled to indemnification.
Error! Reference source not found.=*trust "11.FSC is hereby expressly put
on notice of the limitation of liability as set forth in the Declaration of
Trust and agrees that the obligations assumed by the Trust pursuant to this
Agreement shall be limited "
11. If at any time the Shares of any Fund are offered in two or more
Classes, FSC agrees to adopt compliance standards as to when a class of
shares may be sold to particular investors.
12. This Agreement will become binding on the parties hereto upon the
execution of the attached exhibits to the Agreement.
<PAGE>
Exhibit 1
to the
Distributor's Contract
The following provisions are hereby incorporated and made part of the
Distributor's Contract (the "Distributor's Contract") dated October 24, 1997,
between the Investment Companies and Federated Securities Corp. as principal
distributor (the "Principal Distributor") with respect to the Class B Shares of
the portfolios (the "Funds") set forth on the attached Schedule A. References
herein to this Distributor's Contract refer to the Distributor's Contract as
supplemented hereby and made applicable hereby to the Class B Shares of the
Funds. In the event of any inconsistency between the terms of this Exhibit and
the terms of the Distributor's Contract, the terms of this Exhibit will govern.
Once effective in respect of the Class of Shares of any Fund set forth above,
the Distributors Contract as amended by this Exhibit shall be effective in
respect of all shares of such class outstanding whether issued prior to or after
such effectiveness.
1. The Investment Companies hereby appoints the Principal Distributor to
engage in activities principally intended to result in the sale of Class B
Shares ("Class B Shares") of each Fund. Pursuant to this appointment, the
Principal Distributor is authorized to select a group of financial
institutions ("Financial Institutions") to sell Class B Shares of a Fund
at the current offering price thereof as described and set forth in the
respective prospectuses of the Fund.
2. (a) In consideration of the Principal Distributor's services under this
Distributor's Contract in respect of each Fund the Investment Companies
on behalf of the Fund agree: (I) to pay the Principal Distributor or at
its direction its "Allocable Portion" (as hereinafter defined) of a fee
(the "Distribution Fee") equal to 0.75 of 1% per annum of the average
daily net asset value of the Class B Shares of the Fund outstanding
from time to time, and (II) to withhold from redemption proceeds in
respect of Class B Shares of the Fund such Principal Distributor's
Allocable Portion of the Contingent Deferred Sales Charges ("CDSCs")
payable in respect of such redemption as provided in the Prospectus for
the Fund and to pay the same over to such Principal Distributor or at
its direction at the time the redemption proceeds in respect of such
redemption are payable to the holder of the Class B Shares redeemed.
(b)The Principal Distributor will be deemed to have performed all
services required to be performed in order to be entitled to receive
its Allocable Portion of the Distribution Fee payable in respect of the
Class B Shares of a Fund upon the settlement of each sale of a
"Commission Share" (as defined in the Allocation Schedule attached
hereto as Schedule B) of the Fund taken into account in determining
such Principal Distributor's Allocable Portion of such Distribution
Fees.
(c)Notwithstanding anything to the contrary set forth in this Exhibit,
the Distributor's Contract or (to the extent waiver thereof is
permitted thereby) applicable law, the Investment Companies' obligation
to pay the Principal Distributor's Allocable Portion of the
Distribution Fees payable in respect of the Class B Shares of a Fund
shall not be terminated or modified for any reason (including a
termination of this Distributor's Contract as it relates to Class B
Shares of a Fund) except to the extent required by a change in the
Investment Company Act of 1940 (the "Act") or the Conduct Rules of the
National Association of Securities Dealers, Inc., in either case
enacted or promulgated after May 1, 1997, or in connection with a
"Complete Termination" (as hereinafter defined) of the Distribution
Plan in respect of the Class B Shares of a Fund.
(d)The Investment Companies will not take any action to waive or change
any CDSC in respect of the Class B Shares of a Fund, except as provided
in the Investment Companies' prospectus or statement of additional
information as in effect as of the date hereof without the consent of
the Principal Distributor and the permitted assigns of all or any
portion of its right to its Allocable Portion of the CDSCs.
(e)Notwithstanding anything to the contrary set forth in this Exhibit,
the Distributor's Contract, or (to the extent waiver thereof is
permitted thereby) applicable law, neither the termination of the
Principal Distributor's role as principal distributor of the Class B
Shares of a Fund, nor the termination of this Distributor's Contract
nor the termination of the Distribution Plan will terminate such
Principal Distributor's right to its Allocable Portion of the CDSCs in
respect of the Class B Shares of a Fund.
(f)Notwithstanding anything to the contrary in this Exhibit, the
Distributor's Contract, or (to the extent waiver thereof is permitted
thereby) applicable law, the Principal Distributor may assign, sell or
pledge (collectively, a "Transfer") its rights to its Allocable Portion
of the Distribution Fees and CDSCs earned by it (but not its
obligations to the Investment Companies under this Distributor's
Contract) in respect of the Class B Shares of a Fund to raise funds to
make the expenditures related to the distribution of Class B Shares of
the Fund and in connection therewith upon receipt of notice of such
Transfer, the Investment Companies shall pay, or cause to be paid to
the assignee, purchaser or pledgee (collectively with their subsequent
transferees, "Transferees") such portion of the Principal Distributor's
Allocable Portion of the Distribution Fees and CDSCs in respect of the
Class B Shares of the Fund so Transferred. Except as provided in (c)
above and notwithstanding anything to the contrary set forth elsewhere
in this Exhibit, the Distributor's Contract, or (to the extent waiver
thereof is permitted thereby) applicable law, to the extent the
Principal Distributor has Transferred its rights thereto to raise funds
as aforesaid, the Investment Companies' obligation to pay to the
Principal Distributor's Transferees the Principal Distributor's
Allocable Portion of the Distribution Fees payable in respect of the
Class B Shares of each Fund shall be absolute and unconditional and
shall not be subject to dispute, offset, counterclaim or any defense
whatsoever, including without limitation, any of the foregoing based on
the insolvency or bankruptcy of the Principal Distributor (it being
understood that such provision is not a waiver of the Investment
Companies' right to pursue such Principal Distributor and enforce such
claims against the assets of such Principal Distributor other than the
Distributor's right to the Distribution Fees, CDSCs and servicing fees,
in respect of the Class B Shares of any Fund which have been so
transferred in connection with such Transfer). The Fund agrees that
each such Transferee is a third party beneficiary of the provisions of
this clause (f) but only insofar as those provisions relate to
Distribution Fees and CDSCs transferred to such Transferee.
(g)For purposes of this Distributor's Contract, the term Allocable
Portion of Distribution Fees payable in respect of the Class B Shares
of any Fund shall mean the portion of such Distribution Fees allocated
to such Principal Distributor in accordance with the Allocation
Schedule attached hereto as Schedule B.
(h)For purposes of this Distributor's Contract, the term "Complete
Termination" of the Plan in respect of any Fund means a termination of
the Plan involving the complete cessation of the payment of
Distribution Fees in respect of all Class B Shares of such Fund, and
the termination of the distribution plans and the complete cessation of
the payment of distribution fees pursuant to every other Distribution
Plan pursuant to rule 12b-1 of the Investment Companies in respect of
such Fund and any successor Fund or any Fund acquiring a substantial
portion of the assets of such Fund and for every future class of shares
which has substantially similar characteristics to the Class B Shares
of such Fund including the manner of payment and amount of sales
charge, contingent deferred sales charge or other similar charges borne
directly or indirectly by the holders of such shares.
3. The Principal Distributor may enter into separate written agreements with
various firms to provide certain of the services set forth in Paragraph 1
herein. The Principal Distributor, in its sole discretion, may pay
Financial Institutions a lump sum fee on the settlement date for the sale
of each Class B Share of the Fund to their clients or customers for
distribution of such share. The schedules of fees to be paid such firms or
Financial Institutions and the basis upon which such fees will be paid
shall be determined from time to time by the Principal Distributor in its
sole discretion.
4. The Principal Distributor will prepare reports to the Board of
Trustees/Directors of the Investment Companies on a quarterly basis
showing amounts expended hereunder including amounts paid to Financial
Institutions and the purpose for such expenditures.
In consideration of the mutual covenants set forth in the Distributor's
Contract between the Investment Companies and the Principal Distributor, the
Principal Distributor and the Investment Companies hereby execute and deliver
this Exhibit with respect to the Class B Shares of the Fund.
<PAGE>
Witness the due execution hereof this 24th day of October, 1997.
ATTEST: INVESTMENT COMPANIES (listed on Schedule A)
By: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary` Title: Executive Vice President
ATTEST: FEDERATED SECURITIES CORP.
By: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
Schedule A
Date: 10/24/97 DISTRIBUTOR'S CONTRACT
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B shares
Exhibit 9 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
PRINCIPAL SHAREHOLDER SERVICER'S AGREEMENT
THIS AGREEMENT, is made as of the 24th day of October, 1997, by and between
those Investment Companies on behalf of the Portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") and Classes of Shares
("Classes") listed on Schedule A to Exhibit 1, as may be amended from time to
time, having their principal office and place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779, and who have approved this form of
Agreement and Federated Securities Corp. as the principal shareholder servicer
(the "Principal Servicer"). Each of the Exhibits hereto is incorporated herein
in its entirety and made a part hereof. In the event of any inconsistency
between the terms of this Agreement and the terms of any applicable Exhibit, the
terms of the applicable Exhibit shall govern.
In consideration of the mutual covenants hereinafter contained it is hereby
agreed by and between the parties hereto as follows.
1. The Investment Companies hereby appoint the Principal Servicer as their
agent to select, negotiate and contract for the performance of and arrange
for the rendition of personal services to shareholders and/or the
maintenance of accounts of shareholders of each Class of the Funds as to
which this Agreement is made applicable (The Principal Servicer's duties
hereunder are referred to as "Services"). The Principal Servicer hereby
accepts such appointment and agrees to perform or cause to be performed the
Services in respect of the Classes of the Funds to which this Agreement has
been made applicable by an Exhibit. The Principal Servicer agrees to cause
to be provided shareholder services which, in its best judgment (subject to
supervision and control of the Investment Companies' Boards of Trustees or
Directors, as applicable), are necessary or desirable for shareholders of
the Funds. The Principal Servicer further agrees to provide the Investment
Companies, upon request, a written description of the shareholder services
for which the Principal Servicer is arranging hereunder.
2. During the term of this Agreement, each Investment Company will pay the
Principal Servicer and the Principal Servicer agrees to accept as full
compensation for its services rendered hereunder a fee as set forth on the
Exhibit applicable to the Class of each Fund subject to this Agreement.
For the payment period in which this Agreement becomes effective or
terminates with respect to any Class of a Fund, there shall be an
appropriate proration of the monthly fee on the basis of the number of
days that this Agreement is in effect with respect to such Class of the
Fund during the month.
3. This Agreement is effective with respect to each Class of a Fund as of the
date of execution of the applicable Exhibit and shall continue in effect
for one year from the date of its execution, and thereafter for successive
periods of one year only if the form of this Agreement is approved at
least annually by the Board of each Investment Company, including a
majority of the members of the Board of the Investment Company who are not
interested persons of the Investment Company ("Independent Board Members")
cast in person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated with regard to
a particular Class of a Fund as follows:
(a) at any time, without the payment of any penalty, by the vote of a
majority of the Independent Board Members of any Investment Company
or by a vote of a majority of the outstanding voting securities of
any Fund as defined in the Investment Company Act of 1940 on sixty
(60) days' written notice to the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
5. The Principal Servicer agrees to arrange to obtain any taxpayer
identification number certification from each shareholder of the Funds to
which it provides Services that is required under Section 3406 of the
Internal Revenue Code, and any applicable Treasury regulations, and to
provide each Fund or its designee with timely written notice of any
failure to obtain such taxpayer identification number certification in
order to enable the implementation of any required backup withholding.
6. The Principal Servicer shall not be liable for any error of judgment or
mistake of law or for any loss suffered by any Investment Company in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. the Principal Servicer
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for such Investment Company) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such
advice. Any person, even though also an officer, trustee, partner, employee
or agent of the Principal Servicer, who may be or become a member of such
Investment Company's Board, officer, employee or agent of any Fund, shall
be deemed, when rendering services to such Fund or acting on any business
of such Fund (other than services or business in connection with the duties
of the Principal Servicer hereunder) to be rendering such services to or
acting solely for such Fund and not as an officer, trustee, partner,
employee or agent or one under the control or direction of the Principal
Servicer even though paid by the Principal Servicer.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. The Principal Servicer is expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust of each Investment
Company that is a Massachusetts business trust and agrees that the
obligations assumed by each such Investment Company pursuant to this
Agreement shall be limited in any case to such Investment Company and its
assets and that the Principal Servicer shall not seek satisfaction of any
such obligations from the shareholders of such Investment Company, the
Trustees, Officers, Employees or Agents of such Investment Company, or any
of them.
9. The execution and delivery of this Agreement have been authorized by the
Directors of the Principal Servicer and signed by an authorized officer of
the Principal Servicer, acting as such, and neither such authorization by
such Directors nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, and the obligations of this Agreement
are not binding upon any of the Directors or shareholders of the Principal
Servicer, but bind only the property of the Principal Servicer as provided
in the Articles of Incorporation of the Principal Servicer.
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any
Investment Company at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to the
Principal Servicer at Federated Investors Tower, Pittsburgh, PA
15222-3779, Attention: President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of the Principal Servicer in the case of assignment by any
Investment Company, or of the Investment Companies in the case of
assignment by the Principal Servicer, except that any party may assign to
a successor all of or a substantial portion of its business to a party
controlling, controlled by, or under common control with such party.
Nothing in this Section 13 shall prevent the Principal Servicer from
delegating its responsibilities to another entity to the extent provided
herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Investment Companies (listed on Schedule
A)
Attest: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
Federated Securities Corp.
Attest: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
Exhibit 1
to the
Principal Shareholder Servicer's Agreement
Related to Class B Shares of
the Funds
The following provisions are hereby incorporated and made part of the
Principal Shareholder Servicer's Agreement (the "Principal Shareholder
Servicer's Agreement") as of the 24th day of October, 1997, by and between those
Investment Companies on behalf of the Portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") and Classes of Shares
("Classes") listed on Schedule A to Exhibit 1, as may be amended from time to
time, having their principal office and place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779, and who have approved this form of
Agreement and Federated Securities Corp. as the principal shareholder servicer
(the "Principal Servicer"). Each of the Exhibits hereto is incorporated herein
in its entirety and made a part hereof. In the event of any inconsistency
between the terms of this Exhibit and the terms of the Principal Shareholder
Servicer's Agreement, the terms of this Exhibit shall govern.
1. Each Investment Company hereby appoints the Principal Servicer to arrange
for the rendition of the shareholder services in respect of Class B Shares
("Class B Shares") of each Fund. Pursuant to this appointment, the
Principal Servicer is authorized to select various companies including but
not limited to Federated Shareholder Services ("Companies or a Company ")
to provide such services.
2. (a) In consideration of the Principal Servicer's Services under this
Agreement in respect of the Class B Shares each Fund agrees to pay the
Principal Servicer or at its direction its "Allocable Portion" (as
hereinafter defined) of a fee (the "Servicing Fee") equal to 0.25 of 1%
per annum of the average daily net asset value of the Class B Shares of
the Fund outstanding from time to time, provided however, that in the
event the Fund operates as a fund of funds (a "FOF Fund") by investing
the proceeds of the issuance of its Class B Shares in Class A Shares of
another fund (the "Other Fund") and the Principal Shareholder Servicer
receives a servicing fee in respect of the Class A Shares of the Other
Fund so acquired by the FOF Fund, the Servicing Fee payable in respect
of such Class B Shares of the FOF Fund will be reduced by the amount of
the servicing fee actually received by the Principal Shareholder
Servicer or its assign from the Other Fund in respect of the Class A
Shares of the Other Fund acquired with the proceeds of such Class B
Shares of the FOF Fund.
(b)(i) The Principal Servicer will be deemed to have fully earned its
Allocable Portion (computed as of any date) of the Servicing Fee
payable in respect of the Class B Shares of a Fund (and to have
satisfied its obligation to arrange for shareholder services in respect
of such Class B Shares) on the date it has arranged for shareholder
services to be performed by Federated Shareholder Services by payment
of the lump sum contemplated by Alternative A to Exhibit 1 to the
Shareholder Services Agreement among the Principal Servicer, Federated
Shareholder Services and the Fund dated as of the date hereof (the
"Shareholder Services Agreement") to Federated Shareholder Services
(whose obligations are fully supported by its parent company) in
respect of each "Commission Share" (as defined in the Allocation
Schedule attached hereto in Schedule B) of the Fund, taken into account
in determining such Principal Servicer's Allocable Portion of such
Servicing Fees as of such date. The Principal Servicer shall not be
deemed to have any other duties in respect of the Shares and its
Allocable Portion of the Servicing Fees to which the preceding sentence
applies and such arrangements shall be deemed a separate and distinct
contractual arrangement from that described in clause (ii).
(ii) The Principal Servicer will be deemed to have fully earned any
Servicing Fees not included in its Allocable Portion (i.e., those
attributable to Shares in respect of which Alternative A under Exhibit
1 to the Shareholder Services Agreement is not applicable) as such
services are performed in respect of such Shares.
(c)Notwithstanding anything to the contrary set forth in this Exhibit,
the Principal Shareholder Agreement, or (to the extent waiver thereof
is permitted thereby) applicable law, each Investment Company's
obligation to pay the Principal Servicer's Allocable Portion of the
Servicing Fees payable in respect of the Class B Shares of a Fund shall
not be terminated or modified for any reason (including a termination
of this Principal Shareholder Servicer's Agreement as it relates to the
Fund) except to the extent required by a change in the Investment
Company Act of 1940 (the "Act") or the Conduct Rules of the National
Association of Securities Dealers, Inc., in either case enacted or
promulgated after May 1, 1997, or in connection with a "Complete
Termination" (as hereinafter defined) in respect of the Class B Shares
of such Fund.
(d)Notwithstanding anything to the contrary in this Exhibit, the
Principal Shareholder Agreement, or (to the extent waiver thereof is
permitted thereby) applicable law, the Principal Servicer may assign,
sell or pledge (collectively, "Transfer") its rights to its Allocable
Portion of the Servicing Fees (but not its obligations to the
Investment Companies under this Principal Shareholder Servicer's
Agreement) in respect of the Class B Shares of a Fund to raise funds to
make the expenditures related to the Services and in connection
therewith upon receipt of notice of such Transfer, the Investment
Company shall pay to the assignee, purchaser or pledgee (collectively
with their subsequent transferees, "Transferees") such portion of the
Principal Servicer's Allocable Portion of the Servicing Fees in respect
of the Class B Shares of the Fund so Transferred. Except as provided in
(c) above and notwithstanding anything to the contrary set forth
elsewhere in this Exhibit, the Principal Shareholder Agreement, or (to
the extent waiver thereof is permitted thereby) applicable law, to the
extent the Principal Servicer has Transferred its rights thereto to
raise funds as aforesaid, the Investment Companies' obligation to pay
to the Principal Servicer's Transferees the Principal Servicer's
Allocable Portion of the Servicing Fees payable in respect of the Class
B Shares of each Fund shall be absolute and unconditional and shall not
be subject to dispute, offset, counterclaim or any defense whatsoever,
including without limitation, any of the foregoing based on the
insolvency or bankruptcy of the Principal Servicer, Federated
Shareholder Services (or its parent) or the failure of Federated
Shareholder Services (or its parent) to perform its Irrevocable Service
Commitment (it being understood that such provision is not a waiver of
the Investment Companies' right to pursue such Principal Servicer and
enforce such claims against the assets of such Principal Servicer other
than the Principal Servicer's right to the Distribution Fees, Servicing
Fees and CDSCs in respect of the Class B Shares of the Fund which have
been so transferred in connection with such Transfer). The Fund agrees
that each such Transferee is a third party beneficiary of the
provisions of this clause (d) but only insofar as those provisions
relate to Servicing Fees transferred to such Transferee.
(e)For purposes of this Principal Shareholder Servicer's Agreement, the
term Allocable Portion of Servicing Fees payable in respect of the
Class B Shares of any Fund shall mean the portion of such Servicing
Fees allocated to such Principal Servicer in accordance with the
Allocation Schedule attached hereto as Schedule B.
(f)For purposes of this Principal Shareholder Servicer's Contract, the
term "Complete Termination" of shareholder servicing arrangements in
respect of Class B Shares of a Fund means a termination of shareholder
servicing arrangements involving the complete cessation of payments of
Servicing Fees in respect of all Class B Shares, and the complete
cessation of payments of servicing fees for every existing and future
class of shares of the Fund and any successor Fund or any Fund
acquiring a substantial portion of the assets of the Fund ,which has
substantially similar characteristics to the Class B Shares taking into
account the manner and amount of sales charge, servicing fee,
contingent deferred sales charge or other similar charge borne directly
or indirectly by the holders of such shares.
3. The Principal Servicer may enter into separate written agreements with
Companies to provide the services set forth in Paragraph 1 herein. The
schedules of fees to be paid such Companies and the basis upon which such
fees will be paid shall be determined from time to time by the Principal
Servicer in its sole discretion.
4. The Principal Servicer will prepare reports to the Board of
Trustees/Directors of the Investment Companies on a quarterly basis
showing amounts expended hereunder including amounts paid to Companies and
the purpose for such expenditures.
In consideration of the mutual covenants set forth in the Principal
Shareholder Servicer's Contract, the Principal Servicer and the Investment
Companies hereby execute and deliver this Exhibit with respect to the Class B
Shares of each Fund.
<PAGE>
Witness the due execution hereof this 24th day of October, 1997.
ATTEST: INVESTMENT COMPANIES (listed on Schedule A)
By: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
ATTEST: FEDERATED SECURITIES CORP.
By: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
Schedule A
Date: 10/24/97 PRINCIPAL SHAREHOLDER SERVICER'S AGREEMENT
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B Shares
Exhibit 9 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT, is made as of the 24th day of October, 1997, by and between
those Investment Companies on behalf of the Portfolios (individually referred to
herein as a "Fund" and collectively as "Funds") and Classes of Shares
("Classes") listed on Schedule A to Exhibit 1, as it may be amended from time to
time, having their principal office and place of business at Federated Investors
Tower, Pittsburgh, PA 15222-3779 and who have approved this form of Agreement
and Federated Securities Corp.("FSC"), a Pennsylvania Corporation, having its
principal office and place of business at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779 and Federated Shareholder Services, a Delaware business
trust, having its principal office and place of business at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779 ("FSS"). Each of the Exhibits hereto
is incorporated herein in its entirety and made a part hereof. In the event of
any inconsistency between the terms of this Agreement and the terms of any
applicable Exhibit, the terms of the applicable Exhibit shall govern.
1. FSC as Principal Servicer (Principal Servicer") hereby contracts with FSS
to render or cause to be rendered personal services to shareholders and/or
the maintenance of accounts of shareholders of each Class of the Funds to
which this Agreement is made applicable by an Exhibit hereto ("Services").
In addition to providing Services directly to shareholders of the Funds,
FSS is hereby appointed the Investment Companies' agent to select,
negotiate and subcontract for the performance of Services. FSS hereby
accepts such appointment. FSS agrees to provide or cause to be provided
Services which, in its best judgment (subject to supervision and control of
the Investment Companies' Boards of Trustees or Directors, as applicable),
are necessary or desirable for shareholders of the Funds. FSS further
agrees to provide the Investment Companies, upon request, a written
description of the Services which FSS is providing hereunder. The
Investment Companies, on behalf of the Funds and each Class subject hereto
consents to the appointment of FSS to act in its capacity as described
herein and agrees to look solely to FSS for performance of the Services.
2. The term of the undertaking of FSS to render services hereunder in respect
of any Class of any Fund and the manner and amount of compensation to be
paid in respect thereof shall be specified in respect of each Class of the
Funds to which this Agreement is made applicable by an Exhibit hereto. FSS
agrees to look solely to the Principal Servicer for its compensation
hereunder.
3. This Agreement shall become effective in respect of any Class of Shares of
a Fund upon execution of an Exhibit relating to such Class of the Fund.
Once effective in respect of any Class of shares, this Agreement shall
continue in effect for one year from the date of its execution, and
thereafter for successive periods of one year only if the form of this
Agreement is approved at least annually by the Board of each Investment
Company, including a majority of the members of the Board of the
Investment Company who are not interested persons of the Investment
Company ("Independent Board Members") cast in person at a meeting called
for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated as follows:
(a) By any Investment Company as to any Fund at any time, without the
payment of any penalty, by the vote of a majority of the Independent
Board Members of any Investment Company or by a vote of a majority of
the outstanding voting securities of any Fund as defined in the
Investment Company Act of 1940 on sixty (60) days' written notice to
the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
5. FSS agrees to obtain any taxpayer identification number certification from
each shareholder of the Funds to which it provides Services that is
required under Section 3406 of the Internal Revenue Code, and any
applicable Treasury regulations, and to provide each Investment Company or
its designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake of law or for
any loss suffered by any Investment Company in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance
of its duties or from reckless disregard by it of its obligations and
duties under this Agreement. FSS shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for such Investment Company) on
all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice. Any person, even though also an
officer, trustee, partner, employee or agent of FSS, who may be or become a
member of such Investment Company's Board, officer, employee or agent of
any Investment Company, shall be deemed, when rendering services to such
Investment Company or acting on any business of such Investment Company
(other than services or business in connection with the duties of FSS
hereunder) to be rendering such services to or acting solely for such
Investment Company and not as an officer, trustee, partner, employee or
agent or one under the control or direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. FSS is expressly put on notice of the limitation of liability as set forth
in the Declaration of Trust of each Investment Company that is a
Massachusetts business trust and agrees that the obligations assumed by
each such Investment Company pursuant to this Agreement shall be limited
in any case to such Investment Company and its assets and that FSS shall
not seek satisfaction of any such obligations from the shareholders of
such Investment Company, the Trustees, Officers, Employees or Agents of
such Investment Company, or any of them.
9. The execution and delivery of this Agreement have been authorized by the
Trustees of FSS and signed by an authorized officer of FSS, acting as
such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of FSS, but bind only the trust property of FSS
as provided in the Declaration of Trust of FSS.
<PAGE>
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any
Investment Company at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to FSS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of the parties hereto. Nothing in this Section 13 shall
prevent FSS from delegating its responsibilities to another entity to the
extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Investment Companies (listed on Schedule
A)
Attest: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
Federated Shareholder Services
Attest:/s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
Federated Securities Corp.
Attest: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
<PAGE>
EXHIBIT 1
TO SHAREHOLDER SERVICES AGREEMENT
FOR CLASS B SHARES OF
THE INVESTMENT COMPANIES
1. The Shareholder Services Agreement for Shares of the Investment
Companies on behalf of the portfolios (individually referred to as a "Fund" and
collectively as "Funds") and the classes of shares ("Classes") listed on the
attached Schedule A dated October 24, 1997 among Federated Securities Corp.
("Principal Servicer"), Federated Shareholder Services ("Class Servicer") and
the Investment Companies is hereby made applicable on the terms set forth herein
to the Class B Shares of the above-referenced Funds. In the event of any
inconsistency between the terms of this Exhibit and the Shareholder Services
Agreement, the terms of this Exhibit shall govern.
2. In connection with the Services to be rendered to holders of Class B
Shares of each Fund, the Principal Servicer and Class Servicer agree that the
Principal Servicer shall retain and compensate the Class Servicer for its
Services in respect of the Class B Shares of the Fund on one of the following
alternative basis as the Principal Servicer shall elect:
ALTERNATIVE A3: The Principal Servicer shall pay the Class Servicer
a dollar amount as set forth on Schedule A per Class B Commission Share
(as defined in the Principal Shareholder Servicer's Agreement) of the
Fund. Class Servicer agrees that upon receipt of such payment (which shall
be deemed to be full and adequate consideration for an irrevocable service
commitment (the "Irrevocable Service Commitment") of Class Servicer
hereunder), Class Servicer shall be unconditionally bound and obligated to
either: (1) provide the Services in respect of such Commission Share and
all other Shares derived therefrom via reinvestment of dividends, free
exchanges or otherwise for so long as the same is outstanding or (2) in
the event the Class Servicer for the Class B Shares is terminated by the
Investment Company, to arrange for a replacement Class Servicer
satisfactory to the Investment Company to perform such services, at no
additional cost to the Fund.
ALTERNATIVE B4: If Alternative A is not elected, the Principal
Servicer shall pay the Class Servicer twenty five basis points (0.25%) per
annum on the average daily net asset value of each Class B Share of the
Fund monthly in arrears. The Class Servicer agrees that such payment is
full and adequate consideration for the Services to be rendered by it to
the holder of such Class B Share.
3. In the event pursuant to paragraph 2 above, Alternative A has been
elected and the Class Servicer is terminated as Class Servicer for the Class B
Shares of the Fund, the Class Servicer agrees to pay to any successor Class
Servicer for the Class B Shares of the Fund any portion of the excess, if any,
of (A) the Servicing Fees received by it hereunder in respect of Class B Shares
of the Fund plus interest thereon at the percent as set forth on Schedule A per
annum minus (B) the costs it incurred hereunder in respect of the Class B Shares
of the Fund prior to such termination.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
Attest: FEDERATED SECURITIES CORP.
By: /s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
Attest: FEDERATED SHAREHOLDER SERVICES
By:/s/ Leslie K. Platt By: /s/ Byron F. Bowman
Title: Assistant Secretary Title: Vice President
Attest: INVESTMENT COMPANIES
(listed on Schedule A)
By: /s/ S. Elliott Cohan By: /s/ John W. McGonigle
Title: Assistant Secretary Title: Executive Vice President
<PAGE>
Schedule A
Date: 10/24/97 SHAREHOLDER SERVICES AGREEMENT
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B Shares
Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and to the use of our report dated December 12, 1997, Post-Effective
Amendment Number 15 to the Registration Statement (Form N-1A No. 33-48847) and
the related Annual Report and Prospectuses of Federated Bond Fund (a portfolio
of Investment Series Funds, Inc.) dated December 31, 1997.
By: ERNST & YOUNG LLP
Ernst & Young LLP
Pittsburgh, Pennsylvania
December 23, 1997
(R/3-6-96)
Exhibit 15 under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
Exhibit 1
Amendment to the
Distribution Plan for
the Investment Companies
Class B Shares
1. This amendment to the Distribution Plan, ("Plan") is adopted by the
Board of Trustees/Directors of the Investment Companies with respect to the
Class of Shares of the portfolios ("Funds") of the Investment Companies set
forth on the attached Schedule A as to which the Plan has been adopted. This
Exhibit is hereby incorporated into the Plan in its entirety and made a part
thereof. In the event of any inconsistency between the terms of this Exhibit and
the terms of the Plan, the terms of this Exhibit shall govern. References herein
to the Plan shall mean the Plan as amended by this Exhibit. The terms of the
Plan as amended when effective in respect of the Class of Shares set forth above
shall apply to all amounts payable to the Principal Distributor in respect of
such Class of Shares whether arising out of sales of such Class of Shares before
or after such effective date.
2. In compensation for the services provided pursuant to this Plan, the
Investment Companies on behalf of the Fund shall pay the Principal Distributor
its "Allocable Portion" (as defined in its Distributor's Contract as it relates
to the Class B Shares of the Fund) of a fee (the "Distribution Fee") computed at
the annual rate of 0.75 of 1% per annum on the average daily aggregate net asset
value of the Class B Shares of those Funds listed on Schedule A outstanding,
which fee shall be paid monthly in arrears.
3. The Distributor's Contract in respect of the Class B Shares of each
Fund set forth above shall provide that: (I) the Principal Distributor in
respect of such Distributor's Contract will be deemed to have performed all
services required to be performed in order to be entitled to receive its
Allocable Portion of the Distribution Fees payable in respect of the Class B
Shares of such Fund upon the settlement date of each sale of a "Commission
Share" (as defined below) of such Fund taken into account in determining such
Principal Distributor's Allocable Portion of such Distribution Fees; (II) the
Investment Companies' obligation to pay such Principal Distributor its Allocable
Portion of the Distribution Fees payable in respect of the Class B Shares of
such Fund shall not be terminated or modified for any reason (including a
termination of the Distributor's Contract between such Principal Distributor and
such Fund) except to the extent required by a change in the Act or the Conduct
Rules of the National Association of Securities Dealers, Inc., in each case
enacted or promulgated after May 1, 1997, or in connection with a "Complete
Termination" (as hereinafter defined) of this Plan in respect of the Class B
Shares of such Fund; (III) the Investment Companies will not take any action to
waive or change any CDSC in respect of the Class B Shares of such Fund, except
as provided in the Funds' prospectus or statement of additional information
without the consent of the Principal Distributor and its assigns; (IV) neither
the termination of such Principal Distributor's role as Principal Distributor of
the Class B Shares of such Fund, nor the termination of such Distributor's
Contract nor the termination of this Plan will terminate such Principal
Distributor's right to its Allocable Portion of the CDSCs; and (V) such
Principal Distributor may assign, sell or pledge (collectively, "Transfer") its
rights to its Allocable Portion of the Distribution Fees and CDSCs (but not such
Principal Distributor's obligations to the Investment Companies under the
Distributor's Contract) to raise funds to make the expenditures related to the
distribution of Class B Shares of such Fund and in connection therewith, upon
receipt of notice of such Transfer, the Investment Companies shall pay to the
assignee, purchaser or pledgee (collectively with their subsequent transferees,
"Transferees") or third party beneficiaries such portion of the Principal
Distributor's Allocable Portion of the Distribution Fees or CDSCs in respect of
the Class B Shares of such Fund so sold or pledged and except as provided in
(II) above and notwithstanding anything of the contrary set forth in this
Exhibit or the Plan or in the Distributor's Contract, to the extent the
Principal Distributor has Transferred its right thereto as aforesaid, the
Investment Companies' obligation to pay to the Principal Distributor's
Transferee such Principal Distributor's Allocable Portion of the Distribution
Fees and CDSCs payable in respect of the Class B Shares of such Fund shall be
absolute and unconditional and shall not be subject to dispute, offset,
counterclaim or any defense whatsoever, including without limitation, any of the
foregoing based on the insolvency or bankruptcy of the Principal Distributor (it
being understood that such provision is not a waiver of the Investment
Companies' right to pursue such Principal Distributor and enforce such claims
against the assets of such Principal Distributor other than its right to the
Distribution Fees, CDSCs and servicing fees, in respect of the Class B Shares of
any Fund transferred in connection with such Transfer. For purposes of this
Plan, the term Allocable Portion of Distribution Fees or CDSCs payable in
respect of the Class B Shares of any Fund as applied to any Principal
Distributor shall mean the portion of such Distribution Fees or CDSCs payable in
respect of such Fund allocated to such Principal Underwriter in accordance with
the Allocation Schedule (as defined in the Distributor's Contract as it relates
to the Class B Shares of the Fund)). For purposes of this Plan, the term
"Complete Termination" of this Plan in respect of any Fund means a termination
of this Plan involving the complete cessation of the payment of Distribution
Fees in respect of all Class B Shares of such Fund, and the termination of the
distribution plans and the complete cessation of the payment of distribution
fees pursuant to every other Distribution Plan pursuant to rule 12b-1 of the
Investment Companies in respect of such Fund and any successor Fund or any Fund
acquiring a substantial portion of the assets of such Fund and for every future
class of shares which has substantially similar characteristics to the Class B
Shares of such Fund taking into account the manner of payment and amount of
sales charge, contingent deferred sales charge or other similar charges borne
directly or indirectly by the holders of such shares.
Witness the due execution hereof this execution date.
Investment Companies (listed on Schedule A)
By: /s/ John W. McGonigle
Title: Executive Vice President
Date: October 24,1997
<PAGE>
Schedule A
Date: 10/24/97 DISTRIBUTION PLAN
Federated American Leaders Fund, Inc.
Class B Shares
Federated Equity Funds
Federated Aggressive Growth Fund
Class B Shares
Federated Growth Strategies Fund
Class B Shares
Federated Small Cap Strategies Fund
Class B Shares
Federated Capital Appreciation Fund
Class B Shares
Federated Equity Income Fund, Inc.
Class B Shares
Federated Fund for U.S. Government Securities, Inc.
Class B Shares
Federated Government Income Securities, Inc.
Class B Shares
Federated High Income Bond Fund, Inc.
Class B Shares
Federated Municipal Opportunities Fund, Inc.
Class B Shares
Federated Municipal Securities Fund, Inc.
Class B Shares
Federated Stock and Bond Fund, Inc.
Class B Shares
Federated Utility Fund, Inc.
Class B Shares
Fixed Income Securities, Inc.
Federated Strategic Income Fund
Class B Shares
International Series, Inc.
Federated International Equity Fund
Class B Shares
Federated International Income Fund
Class B Shares
<PAGE>
Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
Liberty U.S. Government Money Market Trust
Class B Shares
Municipal Securities Income Trust
Federated Pennsylvania Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated World Utility Fund
Class B Shares
Federated Asia Pacific Growth Fund
Class B Shares
Federated Emerging Markets Fund
Class B Shares
Federated European Growth Fund
Class B Shares
Federated International Small Company Fund
Class B Shares
Federated Latin American Growth Fund
Class B Shares
Federated International High Income Fund
Class B Shares
Federated International Growth Fund
Class B Shares
The following Funds were added as of December 1, 1997:
Municipal Securities Income Trust
Federated California Municipal Income Fund
Class B Shares
World Investment Series, Inc.
Federated Global Equity Income Fund
Class B Shares
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> Investment Series Funds, Inc.
Federated Bond Fund
Class A Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Oct-31-1997
<INVESTMENTS-AT-COST> 635,127,628
<INVESTMENTS-AT-VALUE> 658,306,713
<RECEIVABLES> 18,301,268
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 676,607,981
<PAYABLE-FOR-SECURITIES> 5,424,378
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,337,713
<TOTAL-LIABILITIES> 8,762,091
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 648,694,405
<SHARES-COMMON-STOCK> 11,120,243
<SHARES-COMMON-PRIOR> 3,811,668
<ACCUMULATED-NII-CURRENT> 241,487
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,269,087)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,179,085
<NET-ASSETS> 111,371,766
<DIVIDEND-INCOME> 930,716
<INTEREST-INCOME> 45,049,254
<OTHER-INCOME> 0
<EXPENSES-NET> 7,387,840
<NET-INVESTMENT-INCOME> 38,592,130
<REALIZED-GAINS-CURRENT> (682,884)
<APPREC-INCREASE-CURRENT> 18,491,945
<NET-CHANGE-FROM-OPS> 56,401,191
<EQUALIZATION> 438,191
<DISTRIBUTIONS-OF-INCOME> 4,848,032
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,865,488
<NUMBER-OF-SHARES-REDEEMED>5,504,316
<SHARES-REINVESTED> 352,776
<NET-CHANGE-IN-ASSETS> 214,564,410
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,586,203)
<OVERDISTRIB-NII-PRIOR> 279,124
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 4,127,217
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,322,976
<AVERAGE-NET-ASSETS> 550,117,661
<PER-SHARE-NAV-BEGIN> 9.720
<PER-SHARE-NII> 0.740
<PER-SHARE-GAIN-APPREC> 0.260
<PER-SHARE-DIVIDEND> 0.700
<PER-SHARE-DISTRIBUTIONS> 0.000
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<PER-SHARE-NAV-END> 10.020
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Investment Series Funds, Inc.
Federated Bond Fund
Class B Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Oct-31-1997
<INVESTMENTS-AT-COST> 635,127,628
<INVESTMENTS-AT-VALUE> 658,306,713
<RECEIVABLES> 18,301,268
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 676,607,981
<PAYABLE-FOR-SECURITIES> 5,424,378
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,337,713
<TOTAL-LIABILITIES> 8,762,091
<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 19,129,508
<SHARES-COMMON-PRIOR> 12,926,180
<ACCUMULATED-NII-CURRENT> 241,487
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,269,087)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,179,085
<NET-ASSETS> 191,583,963
<DIVIDEND-INCOME> 930,716
<INTEREST-INCOME> 45,049,254
<OTHER-INCOME> 0
<EXPENSES-NET> 7,387,840
<NET-INVESTMENT-INCOME> 38,592,130
<REALIZED-GAINS-CURRENT> (682,884)
<APPREC-INCREASE-CURRENT> 18,491,945
<NET-CHANGE-FROM-OPS> 56,401,191
<EQUALIZATION> 438,191
<DISTRIBUTIONS-OF-INCOME> 10,064,393
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<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,000,100
<NUMBER-OF-SHARES-REDEEMED>2,402,641
<SHARES-REINVESTED> 605,869
<NET-CHANGE-IN-ASSETS> 214,564,410
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 279,124
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 4,127,217
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,322,976
<AVERAGE-NET-ASSETS> 550,117,661
<PER-SHARE-NAV-BEGIN> 9.720
<PER-SHARE-NII> 0.640
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> Investment Series Funds, Inc.
Federated Bond Fund
Class C Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Oct-31-1997
<INVESTMENTS-AT-COST> 635,127,628
<INVESTMENTS-AT-VALUE> 658,306,713
<RECEIVABLES> 18,301,268
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 676,607,981
<PAYABLE-FOR-SECURITIES> 5,424,378
<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 8,762,091
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 648,694,405
<SHARES-COMMON-STOCK> 3,932,517
<SHARES-COMMON-PRIOR> 2,356,018
<ACCUMULATED-NII-CURRENT> 241,487
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,269,087)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,179,085
<NET-ASSETS> 39,394,740
<DIVIDEND-INCOME> 930,716
<INTEREST-INCOME> 45,049,254
<OTHER-INCOME> 0
<EXPENSES-NET> 7,387,840
<NET-INVESTMENT-INCOME> 38,592,130
<REALIZED-GAINS-CURRENT> (682,884)
<APPREC-INCREASE-CURRENT> 18,491,945
<NET-CHANGE-FROM-OPS> 56,401,191
<EQUALIZATION> 438,191
<DISTRIBUTIONS-OF-INCOME> 1,938,250
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,352,599
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<SHARES-REINVESTED> 141,632
<NET-CHANGE-IN-ASSETS> 214,564,410
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,586,203)
<OVERDISTRIB-NII-PRIOR> 279,124
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 4,127,217
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,322,976
<AVERAGE-NET-ASSETS> 550,117,661
<PER-SHARE-NAV-BEGIN> 9.720
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> 0.280
<PER-SHARE-DIVIDEND> 0.620
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.020
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 024
<NAME> Investment Series Funds, Inc.
Federated Bond Fund
Class F Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Oct-31-1997
<INVESTMENTS-AT-COST> 635,127,628
<INVESTMENTS-AT-VALUE> 658,306,713
<RECEIVABLES> 18,301,268
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 676,607,981
<PAYABLE-FOR-SECURITIES> 5,424,378
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,337,713
<TOTAL-LIABILITIES> 8,762,091
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 648,694,405
<SHARES-COMMON-STOCK> 32,502,832
<SHARES-COMMON-PRIOR> 27,549,123
<ACCUMULATED-NII-CURRENT> 241,487
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,269,087)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,179,085
<NET-ASSETS> 325,495,421
<DIVIDEND-INCOME> 930,716
<INTEREST-INCOME> 45,049,254
<OTHER-INCOME> 0
<EXPENSES-NET> 7,387,840
<NET-INVESTMENT-INCOME> 38,592,130
<REALIZED-GAINS-CURRENT> (682,884)
<APPREC-INCREASE-CURRENT> 18,491,945
<NET-CHANGE-FROM-OPS> 56,401,191
<EQUALIZATION> 438,191
<DISTRIBUTIONS-OF-INCOME> 21,220,844
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,316,055
<NUMBER-OF-SHARES-REDEEMED>7,327,458
<SHARES-REINVESTED> 901,508
<NET-CHANGE-IN-ASSETS> 214,564,410
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,586,203)
<OVERDISTRIB-NII-PRIOR> 279,124
<OVERDIST-NET-GAINS-PRIOR>0
<GROSS-ADVISORY-FEES> 4,127,217
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,322,976
<AVERAGE-NET-ASSETS> 550,117,661
<PER-SHARE-NAV-BEGIN> 9.720
<PER-SHARE-NII> 0.720
<PER-SHARE-GAIN-APPREC> 0.280
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<PER-SHARE-NAV-END> 10.020
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
