WILLIAM PENN INTEREST INCOME FUND
QUALITY INCOME PORTFOLIO
2650 WESTVIEW DRIVE
WYOMISSING, PA 19610
Dear Shareholders:
The Board of Trustees and management of William Penn Interest Income Fund:
Quality Income Portfolio (the "William Penn Portfolio") are pleased to submit
for your vote a proposal for the tax-free transfer of all of the assets of the
William Penn Portfolio to Federated Bond Fund (the "Federated Fund"), a
portfolio of Investment Series Funds, Inc. (the "Corporation") a mutual fund
advised by Federated Advisers. The Federated Fund has an investment objective
similar to that of the William Penn Portfolio in that it seeks to provide as
high a level of current income as is consistent with preservation of capital. As
part of the transaction, holders of shares in the William Penn Portfolio would
receive shares of the Federated Fund equal in value to their shares in the
William Penn Portfolio and the William Penn Portfolio would be liquidated.
Shareholders would not have to pay a sales load upon receiving such shares, nor
would they be subject to any contingent deferred sales charges in connection
with the exercise of exchange rights or redemptions of such shares. Further,
William Penn fund group shareholders who were invested as of November 30, 1988,
will not be charged a sales charge for future purchases made in any Federated
Fund, provided the account has remained open since that date.
You may be contacted by Shareholder Communications Corporation, a telephone
solicitation firm, requesting that you cast your vote by telephone. Also, you
may cast your vote by telephone by calling Shareholder Communication
Corporation, toll free at (800) 733-8481 extension 459, (telephone voting only).
If you have any questions regarding the proxy/prospectus, you may call the
William Penn Portfolio at (800) 523-8440, or the Federated Fund at (800)
245-4770.
The Board of Trustees of the William Penn Portfolio, as well as Penn Square
Management Corporation, the William Penn Portfolio's manager and distributor,
believe the proposed agreement and plan of reorganization is in the best
interests of William Penn Portfolio shareholders for the following reasons:
- The Federated Fund has an investment objective similar to that of the
William Penn Portfolio and offers an investment portfolio which invests
in fixed income securities to achieve current income.
- The Federated Fund offers competitive performance.
- As an investor in the Federated Fund, shareholders would have access to a
dramatically expanded array of investment alternatives in the Federated
retail family of funds.
- Federated Investors also has an excellent reputation for customer
servicing, having received a #1 rating for five surveys in a row by
DALBAR, Inc. The shareholder services for the Federated funds include
advanced technological systems that result in quick shareholder access to
a broad spectrum of information.
The Federated Fund is managed by Federated Advisers, a subsidiary of
Federated Investors. Federated Investors was founded in 1955 and is located in
Pittsburgh, Pennsylvania. Federated Advisers and other subsidiaries of Federated
Investors serve as investment advisers to a number of investment companies and
private accounts. With over $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, 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 family
management who founded the company in 1955. Federated funds are presently at
work in and through 4,500 financial institutions nationwide.
We believe the transfer of the William Penn Portfolio's assets in this
transaction presents an exciting investment opportunity for our shareholders.
Your vote on the transaction is critical to its
success. The transfer will be effected only if approved by a majority of the
votes cast at the Special Meeting of Shareholders. We hope you share our
enthusiasm and will participate by casting your vote in person, or by proxy if
you are unable to attend the meeting. Please read the enclosed prospectus/ proxy
statement carefully before you vote.
THE BOARD OF TRUSTEES BELIEVES THAT THE TRANSACTION IS IN THE BEST
INTERESTS OF THE WILLIAM PENN PORTFOLIO AND ITS SHAREHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR ITS APPROVAL.
Thank you for your prompt attention and participation.
Sincerely,
/s/ James E. Jordan
James E. Jordan
President
WILLIAM PENN INTEREST INCOME FUND
QUALITY INCOME PORTFOLIO
2650 WESTVIEW DRIVE
WYOMISSING, PA 19610
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO SHAREHOLDERS OF WILLIAM PENN INTEREST INCOME FUND,
QUALITY INCOME PORTFOLIO:
The Special Meeting of Shareholders of Quality Income Portfolio, a
portfolio of William Penn Interest Income Fund (the "William Penn Portfolio")
will be held 9:00 a.m. on May 29, 1997 at: Sheraton Berkshire Motor Inn, 1741
Paper Mill Road, Wyomissing, PA 19610, for the following purposes:
(1) To approve or disapprove a proposed Agreement and Plan of
Reorganization between the William Penn Portfolio and Federated Bond
Fund (the "Federated Fund"), a portfolio of Investment Series Funds,
Inc., whereby the Federated Fund would acquire all of the assets and
assume certain liabilities of the William Penn Portfolio in exchange
for the Federated Fund's Class A Shares and Class C Shares to be
distributed pro rata by the William Penn Portfolio to the holders of
its Class A Shares and Class C Shares respectively in complete
liquidation of the William Penn Portfolio; and
(2) To transact such other business as may properly come before the meeting
or any adjournment thereof.
By Order of the Board of Directors,
/s/ Sandra J. Houck
Sandra J. Houck
Secretary
Dated: April 25, 1997
Shareholders of record at the close of business on April 14, 1997, are
entitled to vote at the meeting. Whether or not you plan to attend the meeting,
please sign and return the enclosed proxy card. Your vote is important.
TO SECURE THE LARGEST POSSIBLE REPRESENTATION AND TO SAVE THE EXPENSE OF
FURTHER MAILINGS, PLEASE MARK YOUR PROXY CARD, SIGN IT, AND RETURN IT IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOU
MAY REVOKE YOUR PROXY AT ANY TIME AT OR BEFORE THE MEETING OR VOTE IN PERSON IF
YOU ATTEND THE MEETING.
PROSPECTUS/PROXY STATEMENT
APRIL 17, 1997
ACQUISITION OF THE ASSETS OF
QUALITY INCOME PORTFOLIO,
A PORTFOLIO OF WILLIAM PENN INTEREST INCOME FUND
2650 WESTVIEW DRIVE
WYOMISSING, PA 19610
TELEPHONE NUMBER: 1-800-523-8440
BY AND IN EXCHANGE FOR CLASS A SHARES AND CLASS C SHARES OF
FEDERATED BOND FUND,
A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
TELEPHONE NUMBER: 1-800-245-4770
This Prospectus/Proxy Statement describes the proposed Agreement and Plan of
Reorganization (the "Plan") whereby Federated Bond Fund (the "Federated Fund"),
a portfolio of Investment Series Funds, Inc. (the "Corporation"), a Maryland
corporation, would acquire all of the assets and assume certain liabilities of
Quality Income Portfolio (the "William Penn Portfolio"), a portfolio of William
Penn Interest Income Fund, a Pennsylvania common law trust (the "Trust"), in
exchange for the Federated Fund's Class A Shares and Class C Shares to be
distributed pro rata by the William Penn Portfolio to the holders of its Class A
Shares and Class C Shares, respectively, in complete liquidation of the William
Penn Portfolio. As a result of the Plan, each shareholder of the William Penn
Portfolio will become the owner of the corresponding Federated Fund's Class A
Shares and Class C Shares having a total net asset value equal to the total net
asset value of his or her holdings in the William Penn Portfolio's Class A
Shares and Class C Shares.
THE BOARD OF TRUSTEES OF THE WILLIAM PENN PORTFOLIO UNANIMOUSLY RECOMMENDS
APPROVAL OF THE PLAN.
The shares of each of the Federated Fund and the William Penn Portfolio
represent interests in separate open-end, diversified management investment
companies. The Federated Fund's investment objective is to provide as high a
level of current income as is consistent with the preservation of capital. The
William Penn Portfolio's investment objective is to provide the highest level of
current income consistent with preservation of capital from investment in high
grade bonds and other fixed income securities. For a comparison of the
investment policies of the Federated Fund and the William Penn Portfolio, see
"Summary--Investment Objectives, Policies and Limitations."
This Prospectus/Proxy Statement should be retained for future reference. It
sets forth concisely the information about the Federated Fund that a prospective
investor should know before investing. This Prospectus/Proxy Statement is
accompanied by the Prospectus of the Federated Fund dated February 28, 1997,
which is incorporated herein by reference. Statements of Additional Information
for the Federated Fund dated February 28, 1997 (relating to the Federated Fund's
Prospectus of the same date) and April 17, 1997 (relating to this
Prospectus/Proxy Statement), and the Annual Report to Shareholders dated October
31, 1996, all containing additional information, have been filed with the
Securities and Exchange Commission and are incorporated herein by reference.
Copies of the Statements of Additional Information and the Annual Report may be
obtained without charge by writing or calling the Federated Fund at the address
and telephone number shown above.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Expenses.............................................................. 3
Summary.......................................................................... 7
About the Proposed Reorganization.............................................. 7
Investment Objectives, Policies and Limitations................................ 7
Advisory and Other Fees........................................................ 9
Distribution Arrangements...................................................... 10
Purchase, Exchange and Redemption Procedures................................... 12
Dividends...................................................................... 13
Tax Consequences............................................................... 13
Risk Factors..................................................................... 14
Information About the Reorganization............................................. 14
Background and Reasons for the Proposed Reorganization......................... 14
Agreement Between The William Penn Company and Federated....................... 16
Description of the Plan of Reorganization...................................... 16
Description of Federated Fund Shares........................................... 17
Federal Income Tax Consequences................................................ 17
Comparative Information on Shareholder Rights and Obligations.................. 17
Capitalization................................................................. 19
Information About the Federated Fund and the William Penn Portfolio.............. 20
Federated Bond Fund............................................................ 20
William Penn Interest Income Fund, Quality Income Portfolio.................... 20
Voting Information............................................................... 20
Outstanding Shares and Voting Requirements..................................... 21
Dissenter's Right of Appraisal................................................. 23
Other Matters and Discretion of Persons Named in the Proxy....................... 23
Agreement and Plan of Reorganization............................................. Exhibit A
</TABLE>
SUMMARY OF EXPENSES
(CLASS A SHARES)
<TABLE>
<CAPTION>
WILLIAM
FEDERATED PENN PRO FORMA
FUND PORTFOLIO COMBINED
---------- --------- ----------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price)..................... 4.50%(1) 4.75% 4.50%(1)
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)....................................... 0.00%(2) None 0.00%(2)
Redemption Fee (as a percentage of amount redeemed,
if applicable)(3)................................. None None None
Exchange Fee........................................ None None None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)....................... 0.55%(4) 0.31% 0.55%(4)
12b-1 Fee (after waiver)(5)......................... 0.00% 0.15% 0.00%
Total Other Expenses (after waivers)(6)............. 0.50% 0.29% 0.50%
Total Operating Expenses (after waivers)(7)....... 1.05% 0.75% 1.05%
</TABLE>
(1) This sales charge would not be applicable to Class A Shares of the Federated
Fund acquired through the proposed reorganization, or to William Penn
Shareholders invested as of November 30, 1988, for future purchases of any of
Federated Funds provided the account remains open.
(2) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales charge and
not distributed by Federated Securities Corp. would not be charged a sales
charge but may be charged a contingent deferred sales charge of 0.50% for
redemptions made within one full year of purchase. For a more complete
description, see "Summary--Distribution Arrangements." This contingent deferred
sales charge would not be applicable to Class A Shares of the Federated Fund
acquired through the proposed reorganization.
(3) Wire-transferred redemptions of Class A Shares of the Federated Fund of less
than $5,000 may be subject to additional fees. A $10.00 fee will be charged for
redemptions of William Penn Portfolio shares by wire transfer.
(4) 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 in its sole discretion. The maximum management fee is 0.75%.
(5) Class A Shares of the Federated Fund have no present intention of paying or
accruing the 12b-1 fee during the fiscal year ending October 31, 1997. If Class
A Shares of the Federated Fund were paying or accruing the 12b-1 fee, Class A
Shares would be able to pay up to 0.25% of its average daily net assets for the
12b-1 fee. The 12b-1 fee with respect to the William Penn Portfolio has been
reduced to reflect the voluntary waivers; the maximum 12b-1 fee for Class A
Shares is 0.50%.
(6) Total Other Expenses include a shareholder services fee of 0.20% for the
Federated Fund and the Pro Forma Combined Fund and a shareholder services fee of
0.00% for the William Penn Portfolio. 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% for
the Federated Fund and the Pro Forma Combined Fund and 0.50% for the William
Penn Portfolio.
(7) The total operating expenses for Class A Shares of the Federated Fund are
based on expenses incurred during its fiscal year ended October 31, 1996, and
would have been 1.30% absent the voluntary expense waiver. The total operating
expenses for the William Penn Portfolio are based upon expenses incurred by the
William Penn Portfolio during its fiscal year ended December 31, 1996, and would
have been 1.22% without expense waivers.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares of each of the
Federated Fund, the William Penn Portfolio and the Pro Forma Combined Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Summary--Advisory and Other Fees" and
"Summary--Distribution Arrangements."
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLES
The Examples below are intended to assist an investor in understanding the
various costs that an investor will bear directly or indirectly. The Examples
assume payment of operating expenses at the levels set forth in the table above.
(1) This Example does not include sales charges or contingent deferred sales
charges since such sales charges are not applicable to Federated Fund Class A
Shares received as a result of the proposed reorganization.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period. Expenses
would be the same if there were no redemptions at the
end of each time period.
Federated Fund..................................... $ 11 $33 $58 $128
William Penn Portfolio............................. $ 8 $24 $42 $ 93
Pro Forma Combined................................. $ 11 $33 $58 $128
</TABLE>
(2) This Example includes sales charges since Class A Shares purchased
subsequent to the reorganization may be subject to sales charges. For a more
complete description of sales charges, contingent deferred sales charges and
exemptions from such charges, reference is hereby made to the Prospectus of the
Federated Fund dated February 28, 1997, and the Prospectus of the William Penn
Portfolio dated March 15, 1996, each of which is incorporated herein by
reference thereto.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor 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. Expenses would be
the same if there were no redemption at the end of each
time period.
Federated Fund..................................... $ 55 $77 $ 100 $167
William Penn Portfolio............................. $ 55 $70 $ 87 $136
Pro Forma Combined................................. $ 55 $77 $ 100 $167
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
SUMMARY OF EXPENSES
(CLASS C SHARES)
<TABLE>
<CAPTION>
FEDERATED WILLIAM PENN PRO FORMA
FUND PORTFOLIO COMBINED
--------- ------------ ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).............. None 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)(1)...................... 1.00% 1.00% 1.00%
Redemption Fee (as a percentage of amount redeemed,
if applicable)(2)................................ None None None
Exchange Fee None None None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)...................... 0.55% (3) 0.31% 0.55% (3)
12b-1 Fee (after waiver)(4)........................ 0.75% 0.75% 0.75%
Total Other Expenses (after waivers)(5)............ 0.55% 0.43% 0.55%
Total Operating Expenses (after waivers)(6)... 1.85% 1.49% 1.85%
</TABLE>
(1) The Contingent Deferred Sales Charge assessed is 1.00% of the lesser of the
original purchase price or the Net Asset Value of Shares redeemed within one
year of their purchase date. For a more complete description, see
"Summary--Distribution Arrangements."
(2) Wire-transferred redemptions of Class A Shares of the Federated Fund of less
than $5,000 may be subject to additional fees. A $10.00 fee is charged for
certain redemptions of William Penn Portfolio shares by wire transfer.
(3) 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 in its sole discretion. The maximum management fee is 0.75%.
(4) The maximum 12b-1 fee for Class C Shares of the Federated Fund and the
William Penn Portfolio is 0.75%.
(5) Total Other Expenses include a shareholder services fee of 0.25% for the
Federated Fund and the Pro Forma Combined Fund and a shareholder services fee of
0.15% for the William Penn Portfolio. 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%.
(6) The Total Operating Expenses for Class C Shares of the Federated Fund are
based on expenses incurred during its fiscal year ending October 31, 1996, and
would have been 2.05% absent the voluntary waivers of portions of the management
fee and the shareholder services fee. The total operating expenses for the
William Penn Portfolio are based upon expenses incurred by the William Penn
Portfolio during its fiscal year ended December 31, 1996, and would have been
1.96% without expense waivers.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C of each of the
Federated Fund, the William Penn Portfolio and the Pro Forma Combined Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Summary--Advisory and Other Fees" and
"Summary--Distribution Arrangements."
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.
EXAMPLES
The Examples below are intended to assist an investor in understanding the
various costs that an investor will bear directly or indirectly. The Examples
assume payment of operating expenses at the levels set forth in the table above.
(1) This Example does not include sales charges or contingent deferred sales
charges since such sales charges are not applicable to Federated Fund Class C
Shares received as a result of the proposed reorganization.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period. Expenses
would be the same if there were no redemptions at the
end of each time period.
Federated Fund..................................... $ 19 $58 $ 100 $217
William Penn Portfolio............................. $ 15 $47 $ 81 $178
Pro Forma Combined................................. $ 19 $58 $ 100 $217
</TABLE>
(2) This Example includes contingent deferred sales charges since Class C Shares
purchased subsequent to the reorganization may be subject to such a sales
charge. For a more complete description of contingent deferred sales charges and
exemptions from such charges, reference is hereby made to the Prospectus of the
Federated Fund dated February 28, 1997, and the Prospectus of the William Penn
Portfolio dated March 15, 1996, each of which is incorporated herein by
reference thereto.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period.
Federated Fund..................................... $ 29 $58 $ 100 $217
William Penn Portfolio............................. $ 26 $47 $ 81 $178
Pro Forma Combined................................. $ 29 $58 $ 100 $217
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Statement of Additional Information dated April 17, 1997, related to this
Prospectus/Proxy Statement, the Prospectus of the Federated Fund dated February
28, 1997, the Statement of Additional Information of the Federated Fund dated
February 28, 1997, the Prospectus of the William Penn Portfolio dated March 15,
1996, the Statement of Additional Information of the William Penn Portfolio
dated March 15, 1996, and the Plan, a copy of which is attached to this
Prospectus/Proxy Statement as Exhibit A, all of which are incorporated herein by
reference thereto.
About the Proposed Reorganization
The Board of Trustees of the William Penn Portfolio has voted unanimously
to recommend to holders of the Class A Shares and Class C Shares of the William
Penn Portfolio the approval of the Plan whereby the Federated Fund would acquire
all of the assets and assume certain liabilities of the William Penn Portfolio
in exchange for the Federated Fund's Class A Shares and Class C Shares to be
distributed pro rata by the William Penn Portfolio to holders of its Class A
Shares and Class C Shares, respectively, in complete liquidation and dissolution
of the William Penn Portfolio (the "Reorganization"). As a result of the
Reorganization, each shareholder of the William Penn Portfolio Class A Shares
and Class C Shares will become the owner of the Federated Fund's Class A Shares
or Class C Shares, respectively, having a total net asset value equal to the
total net asset value of his or her holdings in the William Penn Portfolio on
the date of the Reorganization, i.e., the Closing Date (as hereinafter defined).
As a condition to the Reorganization transactions, the Federated Fund and
the William Penn Portfolio will receive an opinion of counsel that the
Reorganization will be considered a tax-free "reorganization" under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), so
that no gain or loss will be recognized by either the Federated Fund or the
William Penn Portfolio or the shareholders of the William Penn Portfolio. The
tax basis of the Federated Fund's corresponding Class A Shares and Class C
Shares received by William Penn Portfolio's Class A Shares and Class C Shares
shareholders will be the same as the tax basis of their shares in the William
Penn Portfolio. After the acquisition is completed, the William Penn Portfolio
will be dissolved.
Investment Objectives, Policies and Limitations
The investment objective of the Federated Fund is to provide as high a
level of current income as is consistent with preservation of capital. This
investment objective may not be changed without the affirmative vote of a
majority of the outstanding voting securities of the Federated Fund, as defined
in the Investment Company Act of 1940, as amended (the "1940 Act").
The investment objective of the William Penn Portfolio is to provide the
highest level of current income consistent with preservation of capital from
investment in high grade bonds and other fixed income securities. This
investment objective may not be changed without the affirmative vote of a
majority of the outstanding voting securities of the William Penn Portfolio, as
defined in the 1940 Act.
The Federated Fund invests primarily in a professionally managed,
diversified portfolio of bonds. Under normal circumstances, at least 65% of the
Federated Fund's net assets will be invested in such bonds. Additionally, at
least 65% of the Federated 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 Federated Fund's investment adviser to be of comparable quality. The
Federated 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. 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
Federated Fund will invest will be rated BBB or better by an NRSRO, or which are
of comparable quality in the judgment of the Federated 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 Federated Fund
cannot exceed 0.25% of the 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 Federated Fund's investment adviser, to be consistent
with the Federated Fund's investment objective; and repurchase agreements
collateralized by acceptable instruments. Under normal circumstances, the
Federated Fund will not invest more than 10% of its total assets in equity
securities. The Federated Fund will limit investments in illiquid securities to
15% of its net assets. The Federated Fund may invest in futures for hedging
purposes only. Unless otherwise stated in the prospectus, the investment
policies of the Federated Fund may not be changed by the Board of Directors
without shareholder approval.
The William Penn Portfolio invests in investment grade bonds and other
fixed-income securities issued by corporations, municipalities, and the U.S.
Government. Investment grade bonds are generally considered to be those having
one of the four highest grades assigned by S&P (AAA, AA, A or BBB) or Moody's
(Aaa, Aa, A, or Baa). Pursuant to the investment policies of the William Penn
Portfolio, at least 70% of the William Penn Portfolio will be invested in the
following kinds of fixed-income securities: (1) debt securities which at the
time of purchase are rated in the top three grades (i.e., A or better) by
Moody's Investment Service, Inc. ("Moody's") or Standard & Poor's Corp. ("S&P");
(2) securities of or guaranteed by the U.S. Government, its agencies or
instrumentalities; (3) commercial paper of companies having, at the time of
purchase, an issue of outstanding debt securities rated A or better by either
Moody's or S&P, or commercial paper rated A-1 or A-2 by S&P, or Prime 1 or Prime
2 by Moody's. The remaining 30% of the William Penn Portfolio may be invested in
the following kinds of assets: (1) debt securities not included in the three
highest grades referred to above; (2) convertible securities and preferred
stocks; (3) foreign bonds and other fixed-income securities denominated in
foreign currencies where, in the opinion of the Adviser and/or Sub-Adviser, the
combination of current yield, currency value, and appreciation potential offers
attractive expected returns. The value of such foreign denominated securities
may not exceed 15% of the portfolio at the time of purchase; (4) futures
contracts, options on futures contracts, and options on fixed-income securities,
provided that the securities underlying such transactions do not exceed 20% of
the assets at the time of purchase. The portfolio will engage in futures and/or
options transactions only for hedging purposes and only if such transactions are
consistent with its investment objectives and policies; (5) interest rate and/or
currency swaps, provided that the securities underlying such transactions do not
exceed 20% of the portfolio's assets at the time of purchase. The William Penn
Portfolio will not invest in securities rated below B by S&P or Moody's. For
defensive purposes under certain market conditions, the William Penn Portfolio
may temporarily invest in short-term money market instruments eligible for
purchase by the William
Penn Portfolio. Unless otherwise designated in the prospectus, the investment
policies of the William Penn Portfolio may be changed by the Board of Trustees
without shareholder approval.
Both the Federated Fund and the William Penn Portfolio are subject to
certain investment limitations. The Federated Fund may not: borrow money
directly or through reverse repurchase agreements or pledge securities except,
under certain circumstances, the Federated 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 (e.g., for temporary or emergency purposes); 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; or with respect to 75% of
the value of its total assets, invest more than 5% in securities of any one
issuer other than cash, cash items or securities issued or guaranteed by the
government of the United States, its agencies, or instrumentalities and
repurchase agreements collateralized by such securities. The above investment
limitations cannot be changed without shareholder approval.
The William Penn Portfolio may not: (1) invest more than 5% of the value of
its assets in the securities of any single issuer (except of the U.S.
Government, its agencies or instrumentalities), (2) purchase more than 10% of
the voting securities of any issuer; (3) invest more than 5% of its assets in
companies with a continuous operating history (including predecessors) of less
than 3 years; (4) invest more than 25% of its assets in any one industry, with
the exceptions of (i) obligations of the U.S. Government or its agencies or
instrumentalities, and (ii) certificates of deposit or bankers' acceptances; (5)
borrow money, except from a bank and only for temporary or emergency purposes.
Any such borrowings may not exceed 5% of the lower of the value or cost of the
portfolio's total assets; (6) pledge, mortgage, or otherwise hypothecate its
assets to an extent greater than 5% of the value of its total assets; (7) invest
more than 10% of the value of its assets in illiquid securities, including
restricted securities, and repurchase agreements maturing in more than seven
days. The above investment limitations of the William Penn Portfolio cannot be
changed without shareholder approval.
In addition to the policies and limitations set forth above, both the
Federated Fund and the William Penn Portfolio are subject to certain additional
investment policies and limitations, described in the Federated Fund's Statement
of Additional Information dated February 28, 1997, and the William Penn
Portfolio's Statement of Additional Information dated March 15, 1996. Reference
is hereby made to the Federated Fund's Prospectus and Statement of Additional
Information, each dated February 28, 1997, and to the William Penn Portfolio's
Prospectus and Statement of Additional Information, each dated March 15, 1996,
which set forth in full the investment objective, policies and investment
limitations of each of the Federated Fund and the William Penn Portfolio, all of
which are incorporated herein by reference thereto.
Advisory and Other Fees
The annual investment advisory fee for the Federated Fund is 0.75% of the
Federated Fund's average daily net assets. The investment adviser to the
Federated Fund, Federated Advisers ("Federated Advisers"), a subsidiary of
Federated Investors, may voluntarily choose to waive a portion of its advisory
fee or reimburse the Federated Fund for certain operating expenses. This
voluntary reimbursement of expenses may be terminated by Federated Advisers at
any time in its sole discretion. The maximum annual management fee for the
William Penn Portfolio is 0.65% of average daily net assets of the William Penn
Portfolio. The investment adviser of the William Penn Portfolio is Penn Square
Management Corporation. The adviser is a wholly owned subsidiary of The William
Penn Company, New York, New York. Miller, Anderson & Sherrerd LLP (the
Sub-Adviser) serves as an investment adviser for the William Penn Portfolio
pursuant to a sub-advisory agreement with the adviser. The Sub-Adviser, a wholly
owned subsidiary of Morgan Stanley Group Inc., was organized in 1969 and is
located in West Conshohocken, Pennsylvania. The Sub-Adviser provides management
services to employee benefit plans, endowment funds, foundations, and other
institutional investors, and currently manages assets in excess of $30 billion.
Under an agreement entered into with the adviser, the Sub-Adviser provides
investment advisory services for the William Penn Portfolio and is compensated
solely by the adviser. The adviser pays the Sub-Adviser a fee based on the
aggregate net asset value of the all the portfolios comprising the William Penn
Interest Income Fund, as follows: 0.375% on the first $50,000,000, 0.25% on the
next $50,000,000 and 0.20% over $100,000,000.
Federated Services Company, an affiliate of Federated Advisers, provides
certain administrative personnel and services necessary to operate the Federated
Fund at an annual rate based upon the average aggregate daily net assets of all
funds advised by Federated Advisers and its affiliates. The rate charged is
0.15% on the first $250 million of all such funds' average aggregate daily net
assets, 0.125% on the next $250 million, 0.10% on the next $250 million and
0.075% of all such funds' average aggregate daily net assets in excess of $750
million, with a minimum annual fee per portfolio of $125,000 plus $30,000 for
each additional class of shares of any such portfolio. Federated Services
Company may choose voluntarily to waive a portion of its fee. The administrative
fee expense for the Federated Fund's fiscal year ended October 31, 1996 was
$267,242, representing an effective rate of 0.08%. Administrative personnel and
services necessary to operate the William Penn Portfolio are currently provided
by Penn Square Management Corporation and are included in the annual transfer
agent fee for the William Penn Portfolio.
The Federated Fund has entered into a Shareholder Services Agreement under
which it may make payments of up to 0.25% of the average daily net asset value
of each of the Class A Shares and Class C Shares to obtain certain personal
services for shareholders and the maintenance of shareholder accounts. The
Shareholder Services Agreement provides that Federated Shareholder Services
("FSS"), an affiliate of Federated Advisers, either will perform shareholder
services directly or will select financial institutions to perform such
services. Financial institutions will receive fees based upon shares owned by
their clients or customers. The schedule of such fees and the basis upon which
such fees will be paid is determined from time to time by the Federated Fund and
FSS.
The total annual operating expenses for Class A Shares and Class C Shares
of the Federated Fund were 1.05% and 1.85% respectively of average daily net
assets (after waivers) for its most recent fiscal year. The total annual
operating expenses for Class A Shares and Class C Shares of the William Penn
Portfolio were 0.75% and 1.49% respectively of average daily net assets (after
expense waivers) for its most recent fiscal year. Without such waivers, the
expense ratios of the Federated Fund would have been 1.30% (Class A Shares),
2.05% (Class C Shares) and for the William Penn Portfolio, 1.22% (Class A
Shares) and 1.96% (Class C Shares).
Distribution Arrangements
Federated Securities Corp. ("FSC"), an affiliate of Federated Advisers, is
the principal distributor for shares of the Federated Fund. The Federated Fund
has adopted a Rule 12b-1 Distribution Plan (the "Distribution Plan") pursuant to
which the Federated Fund will pay a fee to the distributor in an amount computed
at an annual rate of up to 0.75% of the average daily net assets of the Class C
Shares and up to 0.25% for Class A Shares to finance any activity which is
principally intended to result in the sale of Class C Shares subject to the
Distribution Plan. All or a portion of the Rule 12b-1 fee may be paid to
financial institutions for their efforts in selling Class A Shares and Class C
Shares. FSC may offer to pay financial institutions, at the time of purchase, an
amount equal to 1% of the net asset value of Class C Shares purchased by their
clients. These payments will be made directly by the distributor from its
assets, and will not be made from the assets of the Fund. The Federated 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 Federated Fund intends to charge a fee under the Distribution
Plan. In addition, FSC and FSS, from their own assets, may pay financial
institutions supplemental fees as financial assistance for providing substantial
sales services, distribution-related support services or shareholder services
with respect to the Class A Shares and Class C Shares of the Federated 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
FSC may be reimbursed by Federated Advisers or its affiliates. If a financial
institution elects to waive receipt of this payment, the Federated
fund will waive any applicable contingent deferred sales charge (such contingent
deferred sales charges are discussed below).
Penn Square Management Corporation is the principal distributor for shares
of the William Penn Portfolio. The William Penn Portfolio has adopted a Rule
12b-1 Distribution Plan (the "Rule 12b-1 Plan") pursuant to which the William
Penn Portfolio reimburses Penn Square Management Corporation for certain of its
expenses incurred in connection with its services as distributor at an annual
rate not to exceed 0.50% of the average daily net assets of the William Penn
Portfolio's Class A Shares. After the reorganization, the Federated Fund will
not assume any liabilities related to the William Penn Portfolio's Rule 12b-1
Plan. The fee may be used by Penn Square Management Corporation for its expenses
incurred in connection with (a) advertising and marketing Class A Shares; (b)
printing and distributing the Prospectus; (c) implementing and operating the
Rule 12b-1 Plan; and (d) payments made by the distributor for servicing fees to
broker/dealers, financial institutions, or other industry professionals
("Service Organizations") for distribution and/or shareholder administrative
services provided to their customers who own Class A Shares. Pursuant to a
Servicing Agreement with Penn Square Management Corporation, a Service
Organization may receive, on an annual basis, up to 0.50% of the average daily
net asset value of the Class A Shares owned by shareholders with whom the
Service Organization has a servicing relationship. The services provided by a
Service Organization pursuant to a Servicing Agreement may include distribution
or shareholder administrative services, including establishing and maintaining
shareholder accounts, sending confirmations of transactions, forwarding
financial reports and other communications to shareholders, and responding to
shareholder inquiries regarding the William Penn Portfolio. The William Penn
Portfolio has adopted a Distribution Plan for Class C Shares to compensate the
distributor for its services and costs in distributing Class C Shares. Under the
Rule 12b-1 Plan, the William Penn Portfolio pays Penn Square Management
Corporation an annual 12b-1 Distribution Fee of 0.75% per year on Class C
Shares. Penn Square Management Corporation also receives a Service Fee of 0.25%
per year. Both fees are computed on the average annual net assets of Class C
Shares, determined as of the close of each regular business day. The
distribution fee allows investors to buy Class C Shares without a front end
sales charge while permitting the distributor to compensate dealers who sell
Class C Shares. The distribution and service fee may increase Class C expenses
by 1.00% of average net assets per year. Penn Square Management Corporation pays
sales commissions of 1.00% of the purchase price to dealers from its own
resources at the time of sale. Penn Square Management Corporation retains the
distribution fee during the first year shares are outstanding to recoup the
sales commission it pays, the advances of service fee payments it makes, and its
financing costs. Penn Square Management Corporation plans to pay the
distribution fee as an ongoing commission to the dealer on Class C Shares that
have been outstanding for a year or more. Penn Square Management Corporation
receives no other compensation for its services as distributor, except that the
sales charge will be paid to the distributor. Penn Square Management Corporation
may, in turn, pay such sales charge to broker/dealers as a commission for
generating sales of Class C Shares.
Certain costs exist with respect to the purchase and sale of Federated Fund
and William Penn Portfolio shares. Shares of the Federated Fund and shares of
the William Penn Portfolio are sold at their net asset value next determined
after an order is received, plus any applicable sales charge. The Federated Fund
Class A Shares and William Penn Portfolio Class A Shares have a maximum sales
charge of 4.50% and 4.75%, respectively. No sales charge will be imposed in
connection with the issuance of Federated Fund Class A Shares to Class A
Shareholders of the William Penn Portfolio as a result of the Reorganization.
Further, William Penn fund group shareholders who were invested as of November
30, 1988, will not be charged a sales charge for future purchases made in any
Federated fund structured as a retail product, provided the account has remained
open. Class A Shares of the Federated Fund purchased with the proceeds of a
redemption of shares of an unaffiliated investment company purchased or redeemed
with a sales charge and not distributed by FSC may be charged a contingent
deferred sales charge of 0.50% for redemptions made within one full year of
purchase. Any such charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or redemption. The contingent
deferred sales charges are not imposed in connection with the exercise of
exchange rights, nor will they be imposed on redemptions of Federated Fund Class
A Shares received
by shareholders of the William Penn Portfolio as a result of the Reorganization.
Sales of Class C Shares are subject to a 1.00% contingent deferred sales charge
on assets redeemed within the first twelve months following purchase. For a
complete description of sales charges, contingent deferred sales charges and
exemptions from such charges, reference is hereby made to the Prospectus of the
Federated Fund dated February 28, 1997 and the Prospectus of the William Penn
Portfolio dated March 15, 1996, each of which is incorporated herein by
reference thereto.
Purchase, Exchange and Redemption Procedures
The transfer agent and dividend disbursing agent for the Federated Fund is
Federated Shareholder Services Company. The transfer agent and dividend
disbursing agent for the William Penn Portfolio is Penn Square Management
Corporation. Procedures for the purchase, exchange and redemption of the
Federated Fund's Class A Shares and Class C Shares differ slightly from
procedures applicable to the purchase, exchange and redemption of the William
Penn Portfolio's Class A Shares and Class C Shares. Any questions about such
procedures may be directed to, and assistance in effecting purchases, exchanges
or redemptions of the Federated Fund's Class A Shares and Class C Shares or the
William Penn Portfolio's Class A Shares and Class C Shares may be obtained from
FSC, principal distributor for the Federated Fund, at 1-800-245-4770, or from
Penn Square Management Corporation, principal distributor for the William Penn
Portfolio, at 1-800-523-8440.
Reference is made to the Prospectus of the Federated Fund dated February
28, 1997, and the Prospectus of the William Penn Portfolio dated March 15, 1996,
for a complete description of the purchase, exchange and redemption procedures
applicable to purchases, exchanges and redemptions of Federated Fund and William
Penn Portfolio shares, respectively, each of which is incorporated herein by
reference thereto. Set forth below is a brief listing of the significant
purchase, exchange and redemption procedures applicable to the Federated Fund's
Class A Shares and Class C Shares and the William Penn Portfolio's Class A
Shares and Class C Shares.
Purchases of Class A Shares and Class C Shares of the Federated Fund may be
made through a financial institution that has an agreement with FSC or, once an
account has been established, by wire or check. Purchases of shares of the
William Penn Portfolio may be made through Penn Square Management Corporation
and through broker-dealers under contract with Penn Square Management
Corporation or directly by wire or check once an account has been established.
The minimum initial investment in the Federated Fund is $500 for Class A Shares
and $1,500 for Class C Shares, except for retirement accounts for which the
minimum is $50. Subsequent investments must be in amounts of at least $100,
except for retirement accounts for which the minimum is $50. The minimum initial
investment in the William Penn Portfolio is $500 for either Class of Shares,
except for retirement accounts for which the minimum is $250. Subsequent
investments must be in amounts of at least $100. The Federated Fund and the
William Penn Portfolio each reserves the right to reject any purchase request.
The purchase price of the Federated Fund's Class A Shares and the William
Penn Portfolio's Class A Shares is based on net asset value plus a sales charge.
The net asset value per share for each class of the Federated Fund and the
William Penn Portfolio is calculated as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Inc. (the "NYSE") on each
day on which the Federated Fund and the William Penn Portfolio compute their net
asset value. Purchase and redemption orders for the Federated Fund received from
broker/dealers before 5:00 p.m. (Eastern time) and from financial institutions
before 4:00 p.m. (Eastern time) may be entered at that day's price. Purchase
orders for the William Penn Portfolio are executed based on the net asset value
calculated at the close of business on the day such purchase orders are
received. Purchase orders received after the close of the NYSE will be executed
based on the net asset value calculated on the next business day. Redemption
orders for shares of the William Penn Portfolio presented prior to the close of
the NYSE on any business day are redeemed at the net asset value calculated at
the close of the exchange that day, except that some Class C Shares may be
subject to a 1.00% contingent deferred sales charge. Federated Fund purchase
orders by wire are considered received upon receipt of payment by wire.
Federated Fund purchase orders received by check are considered received after
the check is converted into
federal funds, which normally occurs the business day after receipt. The William
Penn Portfolio does not have a similar procedure.
Holders of Class A Shares and Class C Shares of the Federated Fund have
exchange privileges with respect to corresponding Class A Shares and Class C
Shares in certain of the funds for which affiliates of Federated Investors serve
as investment adviser or principal underwriter (collectively, the "Federated
Funds"), each of which has different investment objectives and policies. Class A
Shares and Class C Shares of the Federated Fund may be exchanged for
corresponding Class A Shares and Class C Shares of certain Federated Funds at
net asset value without a contingent deferred sales charge. To the extent a
shareholder exchanges Class A Shares or Class C Shares of the Federated Fund for
Class A Shares or Class C 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 applicable
holding period for purposes of determining the contingent deferred sales charge.
Class A Shares to be exchanged must have a net asset value which meets the
minimum investment requirement for the fund into which the exchange is being
made. Holders of shares of the William Penn Portfolio have exchange privileges
with respect to shares in certain of the other funds for which Penn Square
Management Corporation serves as investment manager (collectively, the "William
Penn fund group"), each of which has different investment objectives and
policies. Any exchange for shares of other funds in the William Penn fund group
will generally be at the respective net asset values next determined after
receipt of the request for exchange, provided the amount exchanged previously
incurred a sales charge. Exercise of the exchange privilege is treated as a sale
for federal income tax purposes and, accordingly, may have tax consequences for
the shareholder. Information on share exchanges may be obtained from the
Federated Fund or the William Penn Portfolio, as appropriate.
Redemptions of Federated Fund Class A Shares and Class C Shares may be made
through a financial institution, by telephone, by mailing a written request or
through the Federated Fund's systematic withdrawal program. Redemptions of
William Penn Portfolio shares may be made by presenting share certificates, by
letter form, by telephone, or through the William Penn Portfolio's systematic
withdrawal plan. Class C Shares of the Federated Fund are redeemed at their net
asset value, less any applicable contingent deferred sales charge, next
determined after the redemption request is received. The William Penn Portfolio
imposes no charges for redemptions of Class A Shares. For Class C shares,
redemptions within the first year of purchase will bear a contingent deferred
sales charge. William Penn Portfolio Class C shareholders will have their
current holding period tacked into the period of time they hold their
corresponding Federated Class C Shares for purposes of determining any
applicable redemption charges. Redemptions may also be made through a
broker/dealer, and that broker/dealer may charge a transaction fee. Checks for
redemption proceeds will be mailed within three business days. However,
redemption checks will not be mailed until all checks in payment for the shares
redeemed have cleared (not more than seven days).
Dividends
Both the Federated Fund and the William Penn Portfolio pay dividends
monthly from net investment income and make annual distributions of net realized
capital gains, if any. With respect to both the Federated Fund and the William
Penn Portfolio, unless a shareholder otherwise instructs, dividends and capital
gain distributions will be reinvested automatically in additional shares at net
asset value, subject to no sales charge.
Tax Consequences
As a condition to the Reorganization, the Federated Fund and the Trust, on
behalf of the William Penn Portfolio, will receive an opinion of counsel that
the Reorganization will be considered a tax-free "reorganization" under
applicable provisions of the Code so that no gain or loss will be recognized by
either the Federated Fund or the William Penn Portfolio or the shareholders of
the William Penn Portfolio. The tax basis of the Federated Fund shares received
by William Penn Portfolio shareholders will be the same as the tax basis of
their shares in the William Penn Portfolio.
RISK FACTORS
As with other mutual funds that invest in investment grade bonds and other
fixed income securities, the Federated Fund is subject to market risks. The
prices of investment grade bonds and fixed-income securities generally fluctuate
inversely in relation to the direction of interest rates. The prices of longer
term securities fluctuate more widely in response to market interest rate
changes. Although some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government, such as GNMA participation
certificates, are backed by the full faith and credit of the U.S. Treasury, no
assurances can be given that the U.S. Government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
Furthermore, there is no fixed maturity to which the portfolio must adhere.
Generally, the values of the securities in which the Federated Fund will invest,
and accordingly the value of the Federated Fund's shares, will fall as interest
rates rise and rise as interest rates fall. Since the William Penn Portfolio
also invests primarily in investment grade bonds and other fixed income
securities, these risk factors are generally also present in an investment in
the William Penn Portfolio. A full discussion of the risks inherent in
investment in the Federated Fund and the William Penn Portfolio is set forth in
the Federated Fund's Prospectus and Statement of Additional Information, each
dated February 28, 1997, and the William Penn Portfolio's Prospectus and
Statement of Additional Information, each dated March 15, 1996, each of which is
incorporated herein by reference thereto.
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.
INFORMATION ABOUT THE REORGANIZATION
Background and Reasons for the Proposed Reorganization
CONSIDERATIONS OF THE BOARD OF TRUSTEES OF THE WILLIAM PENN PORTFOLIO.
During 1996, Penn Square Management Corporation advised the Board of Trustees
of the William Penn Portfolio that The William Penn Company was considering
redirecting its corporate strategy away from the management and distribution of
retail mutual funds and that it was seeking a buyer for its core businesses.
Moreover, The William Penn Company engaged an investment banker to locate
potential buyers for the Penn Square Management Corporation. The potential buyer
would provide value-added shareholder services, technological advancements,
comprehensive distribution networks, and diversified mutual fund product choices
that many larger mutual fund complexes offer. After conducting a screening
process, Penn Square Management Corporation determined that in its judgment, the
proposed Reorganization was the most desirable alternative involving the William
Penn Portfolio that was reasonably available and presented it to the William
Penn Portfolio's Board of Trustees for its consideration at its February 12,
1997 Meeting.
The independent Trustees formed a four-person due diligence team. The due
diligence team visited the Federated Investors offices in Pittsburgh,
Pennsylvania, and reviewed with the portfolio manager of the Federated Fund the
investment style and philosophy used to manage the assets of the Federated Fund.
In addition, the due diligence team inspected the Federated customer services
area and the William Penn Portfolio's independent counsel inspected the legal
records of the Federated Fund.
A meeting of the entire Board of Trustees was held on March 5, 1997, at
which Federated Investors presented to the Board information relating to the
overall reputation, financial strength and stability of Federated Investors, the
parent company of Federated Advisers (together with its affiliates,
"Federated"). Federated, founded in 1955, is among the seven largest mutual fund
sponsors, with over $110 billion invested across more than 300 funds under
management and/or administration by its
subsidiaries, and over 2,000 employees. Federated's management discussed the
Federated Fund's investment performance history and explained to the Board that
the majority of this growth came from within Federated through its multiple
distribution channels. The Board was also informed of the variety of investment
products available through Federated, including international funds and an array
of domestic funds broader than currently offered in the William Penn fund group
as well as, the exchange privileges that would be available to former William
Penn Portfolio shareholders if the Reorganization is consummated, and the
multiple sales charge (or "load") structures available to prospective
shareholders. The Board took into account that if the Reorganization takes
place, shareholders of the William Penn Portfolio would receive shares of the
Federated Fund without the imposition of any sales charge and without incurring
any tax consequences.
Federated's management advised the Board of its reputation for customer
servicing, noting that it has received a #1 rating for five years in a row by
DALBAR, Inc. Federated's management stated that its shareholder services include
advanced technological systems that result in quick shareholder access to a
broad spectrum of information, including: telephonic automated yield and
performance information; consolidated monthly shareholder statements; no-fee
IRAs; quarterly newsletters; year-end tax reporting information; direct deposit;
and telephonic redemption and exchange.
Federated's management also discussed comparative sales loads with the
Board. In particular, it was noted that the maximum front-end sales load of the
Class A Shares of the Federated Fund is lower than that of the Class A Shares of
the William Penn Portfolio. Federated's management also reviewed with the Board
relative asset size and expense ratios, including relative advisory fees. The
Board discussed the fact that the Federated Fund is larger in asset size than
the William Penn Portfolio.
The Board determined that the investment objectives and policies of the
William Penn Portfolio were substantially similar to those of the Federated
Fund. The Board was also presented with and discussed materials comparing the
performance, and relative risks of the William Penn Portfolio and the Federated
Fund. Federated's management also presented biographical information about each
of the Directors of the Federated Fund and reviewed with the Board the structure
of its compliance and internal audit departments and the scope of its training
programs.
THE BOARD NOTED THAT THE WILLIAM PENN PORTFOLIO WOULD NOT BEAR ANY OF THE
COSTS INVOLVED IN THE REORGANIZATION, WHICH WOULD BE BORNE ENTIRELY BY THE
WILLIAM PENN COMPANY AND/OR FEDERATED. In addition, the Board discussed the
anticipated tax-free nature of the Reorganization to the William Penn Portfolio
and its shareholders.
In connection with their consideration of the Reorganization, the Board
also reviewed their fiduciary obligations under state and federal law. They
considered the requirements of Section 15(f) of the 1940 Act, which provides
that an investment manager to an investment company, and the affiliates of such
manager (such as Penn Square Management Corporation), may receive an amount or
benefit in connection with a sale of any interest in such investment manager
which results in an assignment of an investment management contract if (1) for a
period of three years after such assignment, at least 75% of the Board of
Trustees of the investment company are not "interested persons" (as defined in
the 1940 Act) of the new investment manager or its predecessor; and (2) no
"unfair burden" (as defined in the 1940 Act) is imposed on the investment
company as a result of the assignment or any express or implied terms,
conditions or understandings applicable thereto.
With respect to the first condition of Section 15(f) relating to Board
composition, the Board was advised that the Federated Fund's Board of Directors
presently consists of thirteen (13) Directors, only three (3) of whom are
"interested persons." With respect to the second condition of Section 15(f),
while there is no specific definition of "unfair burden," it includes any
arrangement, for two years after the transaction, pursuant to which the
predecessor or successor adviser is entitled to receive compensation from any
person in connection with the mutual fund's purchase or sale of securities,
other than bona fide ordinary compensation as principal underwriter. The
definition of unfair burden also includes any payments from the fund for other
than bona fide investment advisory or other services. The Board considered the
fact that representations were made by Federated and Penn Square Management
Corporation that the agreement between Federated and The William Penn Company
would contain
representations and covenants that the Reorganization would not impose an unfair
burden on the Penn Square Group.
After reviewing and considering all of the information provided by
Federated and Penn Square Management Corporation, including the terms of the
Reorganization, the Board, including all of the Trustees who are not interested
persons of the William Penn Portfolio or Penn Square Management Corporation,
voted unanimously in person at the meeting held on March 5, 1997, to approve the
Reorganization and to recommend it to the shareholders of the William Penn
Portfolio for their approval.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
REORGANIZATION.
CONSIDERATIONS OF THE BOARD OF DIRECTORS OF THE FEDERATED FUND. The Board
of Directors of the Federated Fund, including the independent Directors, have
unanimously concluded that consummation of the Reorganization is in the best
interests of the Federated Fund and the shareholders of the Federated Fund and
that the interests of Federated Fund shareholders would not be diluted as a
result of effecting the Reorganization and have unanimously voted to approve the
Plan.
Agreement Between The William Penn Company and Federated
The Reorganization is being proposed as part of an agreement between
Federated and The William Penn Company, pursuant to which the shareholders of
The William Penn Company would be compensated for selling to Federated their
capital stock and cooperating in facilitating the transaction contemplated by
the agreement.
Description of the Plan of Reorganization
The Plan provides that the Federated Fund will acquire all of the assets of
the William Penn Portfolio in exchange for the Federated Fund's Class A Shares
and Class C Shares to be distributed pro rata by the William Penn Portfolio to
its Class A and Class C shareholders respectively in complete liquidation of the
William Penn Portfolio on May 30, 1997 or such later date as the parties may
mutually agree (the "Closing Date"). Shareholders of the William Penn Portfolio
will become shareholders of the Federated Fund as of the close of business on
the Closing Date, and will be entitled to the Federated Fund's next dividend
distribution.
As of or prior to the Closing Date, the William Penn Portfolio will declare
and pay a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to its shareholders all taxable
income for the period ending on the Closing Date. In addition, the William Penn
Portfolio's dividend will include its net capital gains realized in the period
ending on the Closing Date.
Consummation of the Reorganization is subject to the conditions set forth
in the Plan, including receipt of an opinion in form and substance satisfactory
to the William Penn Portfolio and the Federated Fund, as described under the
caption "Federal Income Tax Consequences" below. The Plan may be terminated and
the Reorganization may be abandoned at any time before or after approval by
shareholders of the William Penn Portfolio prior to the Closing Date if a
majority of the independent board members of either board reasonably believes
that continuing the transaction would have a material adverse impact on
shareholders of that fund.
Federated Advisers is responsible for the payment of substantially all of
the expenses of the Reorganization incurred by either party, whether or not the
Reorganization is consummated. Such expenses include, but are not limited to,
registration fees, transfer taxes (if any), and the costs of preparing,
printing, copying and mailing proxy solicitation materials to the William Penn
Portfolio shareholders. Penn Square Management Corporation is responsible for
the payment of the legal and accounting fees of the William Penn Portfolio.
The foregoing description of the Plan entered into between the Federated
Fund and the William Penn Portfolio is qualified in its entirety by the terms
and provisions of the Plan, a copy of which is attached hereto as Exhibit A and
incorporated herein by reference thereto.
Description of Federated Fund Shares
Full and fractional Class A Shares and Class C Shares of the Federated Fund
will be issued without the imposition of a sales charge or other fee to the
corresponding shareholders of the William Penn Portfolio in accordance with the
procedures described above. Class A Shares and Class C Shares of the Federated
Fund to be issued to shareholders of the William Penn Portfolio under the Plan
will be fully paid and nonassessable when issued and transferable without
restriction and will have no preemptive or conversion rights. Reference is
hereby made to the Prospectus of the Federated Fund dated February 28, 1997,
provided herewith for additional information about Class A Shares and Class C
Shares of the Federated Fund.
Federal Income Tax Consequences
As a condition to the Reorganization, the Corporation, on behalf of the
Federated Fund, and the Trust, on behalf of the William Penn Portfolio, will
receive an opinion from Dickstein Shapiro Morin & Oshinsky LLP, counsel to the
Federated Fund, to the effect that, on the basis of the existing provisions of
the Code, current administrative rules and court decisions, for federal income
tax purposes: (1) the Reorganization as set forth in the Plan will constitute a
tax-free reorganization under Section 368(a)(1)(C) of the Code; (2) no gain or
loss will be recognized by the Federated Fund upon its receipt of the William
Penn Portfolio's assets solely in exchange for Federated Fund Class A Shares and
Class C Shares and the assumption of certain stated liabilities; (3) no gain or
loss will be recognized by the William Penn Portfolio upon the transfer of its
assets to the Federated Fund in exchange for Federated Fund Class A Shares and
Class C Shares and the assumption of certain stated liabilities or upon the
distribution (whether actual or constructive) of the Federated Fund Class A
Shares and Class C Shares to the William Penn Portfolio shareholders in exchange
for their respective shares of the William Penn Portfolio; (4) no gain or loss
will be recognized by shareholders of the William Penn Portfolio upon the
exchange of their William Penn Portfolio shares for Federated Fund Class A
Shares and Class C Shares; (5) the tax basis of the William Penn Portfolio's
assets acquired by the Federated Fund will be the same as the tax basis of such
assets to the William Penn Portfolio immediately prior to the Reorganization;
(6) the tax basis of Federated Fund Class A Shares and Class C Shares received
by each shareholder of the William Penn Portfolio pursuant to the Plan will be
the same as the tax basis of William Penn Portfolio shares held by such
shareholder immediately prior to the Reorganization; (7) the holding period of
the assets of the William Penn Portfolio in the hands of the Federated Fund will
include the period during which those assets were held by the William Penn
Portfolio; and (8) the holding period of Federated Fund Class A Shares and Class
C Shares received by each shareholder of the William Penn Portfolio will include
the period during which the William Penn Portfolio shares exchanged therefor
were held by such shareholder, provided the William Penn Portfolio shares were
held as capital assets on the date of the Reorganization.
Shareholders should recognize that an opinion of counsel is not binding on
the Internal Revenue Service ("IRS") or any court. The William Penn Portfolio
does not expect to obtain a ruling from the IRS regarding the consequences of
the Reorganization. Accordingly, if the IRS sought to challenge the tax
treatment of the Reorganization and was successful, neither of which is
anticipated, the Reorganization would be treated as a taxable sale of assets of
the William Penn Portfolio, followed by the taxable liquidation of the William
Penn Portfolio. Shareholders should also be aware that following the
reorganization, the Federated adviser may decide to sell certain portfolio
securities which may result in the realization of capital gains.
Comparative Information on Shareholder Rights and Obligations
GENERAL. Both the Federated Fund and the William Penn Interest Income Fund
are open-end, diversified management investment companies registered under the
1940 Act, which continuously offer to sell shares at their current net asset
value. The Federated Fund is organized as a corporation under the laws of the
State of Maryland and is governed by its Articles of Incorporation, By-Laws and
Board of Directors, in addition to applicable state and federal law. The William
Penn Portfolio is organized as a separate series of William Penn Interest Income
Fund as a common law trust under the laws of the Commonwealth of Pennsylvania
and is governed by its Declaration of Trust and Board of Trustees, in
addition to applicable state and federal law. Set forth below is a brief summary
of the significant rights of shareholders of the Federated Fund and the William
Penn Portfolio.
SHARES OF THE FEDERATED FUND AND THE WILLIAM PENN PORTFOLIO. The Federated
Fund is authorized to issue 2,000,000,000 shares of common stock, par value
$0.0001 per share. The Board of Directors has established Class A Shares, Class
B Shares, Class C Shares, and Class F Shares of the Federated Fund. The William
Penn Portfolio is authorized to issue an unlimited number of shares of
beneficial interest which have no par value. The William Penn Portfolio is
currently one of five investment portfolios of William Penn Interest Income Fund
and has Class A Shares and Class C Shares outstanding. Issued and outstanding
shares of both the Federated Fund and William Penn Portfolio are fully paid and
nonassessable, and freely transferable.
VOTING RIGHTS. Neither the Federated Fund nor the William Penn Portfolio is
required to hold annual meetings of shareholders, except as required under the
1940 Act. Shareholder approval is necessary only for certain changes in
operations or the election of directors under certain circumstances. The
Federated Fund requires that a special meeting of shareholders be called for any
permissible purpose upon the written request of the holders of at least 10% of
the outstanding shares of the series of the Federated Fund entitled to vote. A
special meeting of the shareholders of the William Penn Portfolio is required to
be called upon the written request of shareholders representing not less than
30% of the issued and outstanding shares entitled to vote. Each share of the
Federated Fund and the William Penn Portfolio gives the shareholder one vote in
director elections and other matters submitted to shareholders for vote. All
shares of each series or class in the Federated Fund and the William Penn
Portfolio have equal voting rights except that in matters affecting only a
particular series or class, only shares of that series or class are entitled to
vote.
DIRECTORS. The By- Laws of the Federated Fund provide that the term of
office of each Director shall be until his or her resignation or removal or
until the special meeting next held after his or her election or until election
and qualification of his or her successor. A Director of the Federated Fund may
be removed by a vote of a majority of all shares outstanding and entitled to
vote at any special meeting of shareholders, and such shareholders may elect a
Director to replace the Director so removed to serve for the remainder of the
term and until the election and qualification of his or her successor. A vacancy
on the Board may be filled by the action of a majority of the Directors
remaining in office, and such elected Director shall hold office until the next
special meeting of shareholders or until his or her successor is duly elected
and qualifies. The Declaration of Trust of the William Penn Interest Income Fund
provides that each Trustee appointed or elected in accordance with the
Declaration of Trust serves until their successors have been elected and
qualified, unless they resign or are removed. Regarding the William Penn
Interest Income Fund, a majority of the Trustees may accept the written
resignation of another Trustee or may remove him or her from office by written
notice to him and to the custodian. In addition, the holders of record of not
less than two-thirds of the outstanding shares of the William Penn Interest
Income Fund may have a Trustee removed by filing a declaration with the
custodian or by a vote at a meeting called for such purpose. The Trustees shall
promptly call a meeting of shareholders for the purpose of voting upon removal
of such Trustee(s) when requested in writing by holders of at least 10% of the
William Penn Interest Income Fund's outstanding shares. Pending the filling of
any vacancy or vacancies caused by death, resignation, or removal, the remaining
Trustee or Trustees shall have all the powers and duties of the whole number of
Trustees. If a vacancy occurs in the office of a Trustee for any reason,
including an increase in the number of Trustees, the other Trustees shall by
written notice delivered to the custodian appoint a Trustee to fill the vacancy
and will promptly notify the shareholders that they have done so, subject to the
provisions of Section 16(a) of the 1940 Act. The agreement to be entered into
with the custodian will provide that, if at any time the custodian decides that
there is no Trustee available or able to serve, it will call a meeting of the
shareholders to elect at least three (3) Trustees. With respect to the Federated
Fund, a meeting of shareholders will be required for the purpose of electing
additional Directors whenever fewer than a majority of the Directors then in
office were elected by shareholders.
LIABILITY OF DIRECTORS AND OFFICERS. Under the Articles of Incorporation of
the Federated Fund, a Director or officer will be personally liable only for his
or her own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. The Articles of Incorporation further provide that Directors and
officers will be indemnified by the Federated Fund against reasonable costs and
expenses incurred in connection with any claim or litigation unless the person's
conduct is determined to constitute willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
person's office. The Declaration of Trust for the William Penn Interest Income
Fund contains a provision eliminating personal liability of the Trustees.
Claimants must look only to the assets of the portfolio for payment or
satisfaction of claims. Trustees of the William Penn Interest Income Fund are
not protected from liability by reason of willful misconduct, bad faith,
recklessness, or gross negligence in the performance of their duties as
Trustees. Further, the Trustees have the power to indemnify the officers and
employees of the William Penn Interest Income Fund against reasonable
liabilities and expenses unless incurred in bad faith or reckless disregard of
his duties, or with willful misconduct or gross negligence. In addition, due to
the provisions of the 1940 Act, shareholders would still have the right to
pursue monetary claims against directors or officers for acts involving willful
malfeasance, bad faith, gross negligence or reckless disregard of their duties
as directors or officers.
TERMINATION OR LIQUIDATION. In the event of the termination or liquidation
of the Federated Fund or any series or class of the Federated Fund or of the
termination or liquidation of the William Penn Portfolio, the shareholders of
the respective fund or class are entitled to receive, when and as declared by
its Directors or Trustees, the excess of the assets belonging to the respective
fund or class over the liabilities belonging to the respective fund or class. In
either case, the assets belonging to the fund or class will be distributed among
the shareholders in proportion to the number of shares of the respective fund or
class held by them.
Capitalization
The following table sets forth the unaudited capitalization of the Class A
Shares and Class C Shares of the Federated Fund and the shares of the William
Penn Portfolio as of February 28, 1997, and on a pro forma combined basis as of
that date:
<TABLE>
<CAPTION>
CLASS A SHARES
FEDERATED WILLIAM PENN PRO FORMA
FUND PORTFOLIO COMBINED
----------- ------------- -----------
<S> <C> <C> <C>
Net Assets................................... $47,631,805 $29,722,680 $77,354,575
Net Asset Value Per Share.................... $ 9.72 $ 10.45 $ 9.72
Shares Outstanding........................... 4,898,561 2,842,988 7,955,302
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES
FEDERATED WILLIAM PENN PRO FORMA
FUND PORTFOLIO COMBINED
----------- ------------- -----------
<S> <C> <C> <C>
Net Assets................................... $26,965,314 $ 705,989 $27,671,303
Net Asset Value Per Share.................... $ 9.72 $ 10.44 $ 9.72
Shares Outstanding........................... 2,773,131 67,649 2,845,735
</TABLE>
NOTE: The above table does not include the Federated Fund's Class B Shares
having Net Assets of $147,022,715, Net Asset Value Per Share of $9.72, and
Shares Outstanding of 15,120,161; or its Class F Shares having Net Assets of
$291,944,515, Net Asset Value Per Share of $9.72, and Shares Outstanding of
30,024,902. As the above information indicates, the William Penn Portfolio's net
assets are less than 10% of the amount of the Federal Fund's net assets.
Accordingly, no pro forma financial statements have been filed with this
proxy/prospectus.
INFORMATION ABOUT THE FEDERATED FUND
AND THE WILLIAM PENN PORTFOLIO
Federated Bond Fund
Information about the Federated Fund is contained in the Federated Fund's
current Prospectus dated February 28, 1997, a copy of which is included herewith
and incorporated herein by reference. Additional information about the Federated
Fund is included in the Federated Fund's Annual Report to Shareholders dated
October 31, 1996, the Statement of Additional Information dated February 28,
1997, and the Statement of Additional Information dated April 17, 1997 (relating
to this Prospectus/Proxy Statement), each of which is incorporated herein by
reference. Copies of the Annual Report and Statements of Additional Information,
which have been filed with the Securities and Exchange Commission (the "SEC"),
may be obtained upon request and without charge by contacting the Federated Fund
at 1-800-245-4770, or by writing the Federated Fund at Federated Investors
Tower, Pittsburgh, PA 15222-3779. The Federated Fund is subject to the
informational requirements of the Securities Act of 1933, as amended (the "1933
Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
1940 Act and in accordance therewith files reports and other information with
the SEC. Reports, proxy and information statements, charter documents and other
information filed by the Federated Fund can be obtained by calling or writing
the Federated Fund and can also be inspected and copied by the public at the
public reference facilities maintained by the SEC in Washington, DC located at
Room 1024, 450 Fifth Street, N.W., Washington, DC 20549 and at certain of its
regional offices located at Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, IL 60661 and 13th Floor, Seven World Trade Center, New
York, NY 10048. Copies of such material can be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services, SEC, 450
Fifth Street, N.W., Washington, DC 20549 at prescribed rates or electronically
at Internet Web Site (www.sec.gov).
This Prospectus/Proxy Statement, which constitutes part of a Registration
Statement filed by the Federated Fund with the SEC under the 1933 Act, omits
certain of the information contained in the Registration Statement. Reference is
hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Federated Fund and the shares offered
hereby. Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
SEC.
William Penn Interest Income Fund, Quality Income Portfolio
Information about the William Penn Interest Income Fund, Quality Income
Portfolio is contained in the William Penn Portfolio's current Prospectus dated
March 15, 1996, the Annual Report to Shareholders dated December 31, 1996, the
Statement of Additional Information dated March 15, 1996, and the Statement of
Additional Information dated April 17, 1997 (relating to this Prospectus/Proxy
Statement), each of which is incorporated herein by reference. Copies of such
Prospectus, Annual Report, and Statements of Additional Information, which have
been filed with the SEC, may be obtained upon request and without charge from
the William Penn Portfolio by calling 1-800-523-8440 or by writing to the
William Penn Portfolio at 2650 Westview Drive, Wyomissing, PA 19610. The William
Penn Portfolio is subject to the informational requirements of the 1933 Act, the
1934 Act and the 1940 Act and in accordance therewith files reports and other
information with the SEC. Reports, proxy and information statements, charter
documents and other information filed by William Penn Interest Income Fund or
its portfolio, the William Penn Portfolio, can be obtained by calling or writing
the William Penn Portfolio and can also be inspected at the public reference
facilities maintained by the SEC or obtained at prescribed rates at the
addresses listed in the previous section.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with the
solicitation by the Board of Trustees of the William Penn Portfolio of proxies
for use at the Special Meeting of Shareholders (the
"Special Meeting") to be held at 9:00 a.m. (local time) on May 29, 1997 at:
Sheraton Berkshire Motor Inn, 1741 Paper Mill Road, Wyomissing, PA 19610, and at
any adjournments thereof. The proxy confers discretionary authority on the
persons designated therein to vote on other business not currently contemplated
which may properly come before the Special Meeting. A proxy, if properly
executed, duly returned and not revoked, will be voted in accordance with the
specifications thereon; if no instructions are given, such proxy will be voted
in favor of the Plan. A shareholder may revoke a proxy at any time prior to use
by filing with the Secretary of the William Penn Portfolio an instrument
revoking the proxy, by submitting a proxy bearing a later date or by attending
and voting at the Special Meeting. Proxies, instruments revoking a proxy, or
proxies bearing a later date may be communicated by telephone, by electronic
means including facsimile, or by mail.
The cost of the solicitation, including the printing and mailing of proxy
materials, will be borne by Federated Advisers. In addition to solicitations
through the mails, proxies may be solicited by officers, employees and agents,
including third party solicitors, of the William Penn Portfolio, Federated
Advisers and their respective affiliates at no additional cost to the William
Penn Portfolio. Such solicitations may be by telephone, telegraph, or personal
contact. Any telephonic solicitations will follow procedures designed to insure
accuracy and prevent fraud including requiring identifying shareholder
information, recording the shareholder's instructions, and confirming to the
shareholder after the fact that the vote was in accordance with the shareholders
instructions. Shareholders who communicate proxies by telephone or by other
electronic means have the same power and authority to issue, revoke, or
otherwise change their voting instructions as currently exists for instructions
communicated in written form. Federated Advisers will reimburse custodians,
nominees and fiduciaries for the reasonable costs incurred by them in connection
with forwarding solicitation materials to the beneficial owners of shares held
of record by such persons.
Outstanding Shares and Voting Requirements
The Board of Trustees of the William Penn Portfolio has fixed the close of
business on April 14, 1997, as the record date for the determination of
shareholders entitled to notice of and to vote at the Special Meeting and any
adjournments thereof. As of the record date, there were 2,725,887.601 Class A
Shares and 64,513.879 Class C Shares of the William Penn Portfolio outstanding.
Each of the William Penn Portfolio's shares is entitled to one vote and
fractional shares have proportionate voting rights. On the record date, the
Trustees and officers of the William Penn Portfolio as a group owned less than
1% of the outstanding Class A Shares and Class C Shares of the William Penn
Portfolio. To the best knowledge of Penn Square Management Corporation, as of
the record date, no person, except as set forth in the table below, owned
beneficially or of record 5% or more of the outstanding Class A or Class C
Shares of the William Penn Portfolio.
CLASS A SHARES
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES OWNED OUTSTANDING SHARES
- ------------------------------------------------------ ------------- --------------------
<S> <C> <C>
NABOB Co.............................................. 253,141.912 9.29%
Wyomissing, PA
Strafe & Co. for the account of ASR................... 686,219.557 25.17%
Stauton Employee Retirement Plan
Columbus, OH
Strafe & Co. for the account of ASR................... 300,880.572 11.04%
Salaried Employee Retirement Plan
Columbus, OH
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES OWNED OUTSTANDING SHARES
- ------------------------------------------------------ ------------- --------------------
<S> <C> <C>
Elizabeth H. Pentz.................................... 4,186.092 6.49%
Aldan, PA
Morris A. Fishman, Trustee for........................ 5,754.333 8.92%
Morris A Fishman Profit Sharing Plan
Wynnewood, PA
Wilda S. Chase........................................ 6,490.11 10.06%
Mount Gretna, PA
Hilda C. Schneider c/o Philip G. Snyder............... 8,024.990 12.44%
Quakertown, PA
Kristin J. Jacobs..................................... 7,055.674 10.94%
Cherry Tree, PA
</TABLE>
As of the record date, there were 5,410,853.329 Class A Shares,
15,682,092.386 Class B Shares, 2,937,756.351 Class C Shares and 30,431,408.736
Class F Shares of the Federated Fund outstanding. On the record date, the
Directors and officers of the Federated Fund as a group owned less than 1% of
the outstanding Class A Shares, Class B Shares, Class C Shares and Class F
Shares of the Federated Fund. To the best knowledge of Federated Advisers, as of
the record date, no person, except as set forth in the table below, owned
beneficially or of record 5% or more of the Federated Fund's outstanding Class
A, Class B, Class C or Class F Shares.
CLASS A SHARES
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES OWNED OUTSTANDING SHARES
- ------------------------------------------------------ ------------- --------------------
<S> <C> <C>
BHC Securities, Inc................................... 581,850.383 10.75%
Philadelphia, PA
Youth Services International, Inc..................... 547,152.737 10.11%
Ownings Mills, MD
TRUCOJO............................................... 327,351.379 6.05%
Trust Company of St. Joseph
St. Joseph, MO
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES OWNED OUTSTANDING SHARES
- ------------------------------------------------------ ------------- --------------------
<S> <C> <C>
Merrill Lynch Pierce Fenner & Smith................... 1,013,420.284 6.46%
acting in various capacities for numerous
accounts on behalf of its customers
Jacksonville, FL
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES OWNED OUTSTANDING SHARES
- ------------------------------------------------------ ------------- --------------------
<S> <C> <C>
Merrill Lynch Pierce Fenner & Smith................... 1,123,148.422 38.23%
for the sole benefit of its customers
Jacksonville, FL
</TABLE>
CLASS F SHARES
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS SHARES OWNED OUTSTANDING SHARES
- ------------------------------------------------------ ------------- --------------------
<S> <C> <C>
Merrill Lynch Pierce Fenner & Smith................... 5,840,368.348 19.19%
for the sole benefit of its customers
Jacksonville, FL
Hawaiian Trust Company, LTD........................... 1,789,331.382 5.88%
Honolulu, HI
</TABLE>
Approval of the Plan requires the affirmative vote of a majority of the
votes cast at the Special Meeting. Shares represented by abstentions and "broker
non-votes" will be counted as present at the Special Meeting, but not as votes
cast, which means they will have the effect of reducing the number of votes cast
required to approve the Plan. The votes of shareholders of the Federated Fund
are not being solicited since their approval is not required in order to effect
the Reorganization.
Dissenter's Right of Appraisal
Shareholders of the William Penn Portfolio objecting to the Reorganization
have no appraisal rights under the William Penn Portfolio's Declaration of Trust
or Pennsylvania law. Under the Plan, if approved by William Penn Portfolio
shareholders, each shareholder will become the owner of Class A Shares and Class
C Shares of the Federated Fund having a total net asset value equal to the total
net asset value of his or her holdings in the William Penn Portfolio's Class A
or Class C Shares, respectively, at the Closing Date.
OTHER MATTERS AND DISCRETION OF PERSONS NAMED IN THE PROXY
Management of the William Penn Portfolio knows of no other matters that may
properly be, or which are likely to be, brought before the Special Meeting.
However, if any other business shall properly come before the Special Meeting,
the persons named in the proxy intend to vote thereon in accordance with their
best judgment.
If at the time any session of the Special Meeting is called to order, a
quorum is not present in person or by proxy, the persons named as proxies may
vote those proxies which have been received to adjourn the Special Meeting to a
later date. In the event that a quorum is present but sufficient votes in favor
of one or more of the proposals have not been received, the persons named as
proxies may propose one or more adjournments of the Special Meeting to permit
further solicitation of proxies with respect to any such proposal. All such
adjournments will require the affirmative vote of a majority of the shares
present in person or by proxy at the session of the Special Meeting to be
adjourned. The persons named as proxies will vote those proxies which they are
entitled to vote in favor of the proposal, in favor of such an adjournment, and
will vote those proxies required to be voted against the proposal, against any
such adjournment.
Whether or not shareholders expect to attend the Special Meeting, all
shareholders are urged to sign, fill in and return the enclosed proxy form
promptly.
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION dated March 24, 1997 (the
"Agreement"), between INVESTMENT SERIES FUNDS, INC., a Maryland Corporation (the
"Corporation") on behalf of its portfolio FEDERATED BOND FUND (hereinafter
called the "Acquiring Fund"), and WILLIAM PENN INTEREST INCOME FUND, a
Pennsylvania Common Law Trust (hereinafter called the "Trust") on behalf of its
portfolio QUALITY INCOME PORTFOLIO (hereinafter called the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)(C) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all the assets and the
assumption of certain liabilities of the Acquired Fund in exchange solely for
Class A Shares and Class C Shares of the Acquiring Fund (the "Acquiring Fund
Shares") and the distribution, after the Closing Date (as hereinafter defined),
of the Acquiring Fund Shares to the shareholders of the Acquired Fund in
liquidation of the Acquired Fund as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement.
WHEREAS, the Trust and the Corporation are registered open-end management
investment companies and the Acquired Fund owns securities in which the
Acquiring Fund is permitted to invest;
WHEREAS, both the Acquired Fund and the Acquiring Fund are authorized to
issue shares of common stock or shares of beneficial interest, as the case may
be;
WHEREAS, the Board of Directors, including a majority of the directors who
are not "interested persons" (as defined under the Investment Company Act of
1940, as amended (the "1940 Act")), of the Acquiring Fund has determined that
the transfer of all of the assets and the assumption of certain liabilities of
the Acquired Fund for Acquiring Fund Shares is in the best interests of the
Acquiring Fund shareholders and that the interests of the existing shareholders
of the Acquiring Fund would not be diluted as a result of this transaction; and
WHEREAS, the Board of Trustees, including a majority of the trustees who
are not "interested persons" (as defined under the 1940 Act), of the Trust has
determined that the transfer of all of the assets and the assumption of certain
liabilities of the Acquired Fund for Acquiring Fund Shares is in the best
interests of the Acquired Fund shareholders;
NOW THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR THE ACQUIRING
FUND SHARES AND LIQUIDATION OF THE ACQUIRED FUND.
1.1 Subject to the terms and conditions contained herein, the Acquired Fund
agrees to assign, transfer and convey to the Acquiring Fund all of the assets of
the Acquired Fund, including all securities and cash, other than cash in an
amount necessary to pay any unpaid dividends and distributions as provided in
paragraph 1.5, beneficially owned by the Acquired Fund, and the Acquiring Fund
agrees in exchange therefor to deliver to the Acquired Fund the number of
Acquiring Fund Shares, including fractional Acquiring Fund Shares, determined as
set forth in paragraph 2.3. Such transaction shall take place at the closing
(the "Closing") on the closing date (the "Closing Date") provided for in
paragraph 3.1. In lieu of delivering certificates for the Acquiring Fund Shares,
the Acquiring Fund shall credit the Acquiring Fund Shares to the Acquired Fund's
account, for the benefit of its shareholders, on the stock record books of the
Acquiring Fund and shall deliver a confirmation thereof to the shareholders of
the Acquired Fund.
1.2 The Acquiring Fund will assume only those certain liabilities which are
set forth in a certificate to be provided by the Acquired Fund at Closing and
accepted by the Acquiring Fund.
1.3 Delivery of the assets of the Acquired Fund to be transferred shall be
made on the Closing Date and shall be delivered to State Street Bank and Trust
Company (hereinafter called "State Street"), Boston, Massachusetts, the
Acquiring Fund's custodian (the "Custodian"), for the account of the Acquiring
Fund, together with proper instructions and all necessary documents to transfer
to the account of the Acquiring Fund, free and clear of all liens, encumbrances,
rights, restrictions and claims created by the Acquired Fund. All cash delivered
shall be in the form of immediately available funds payable to the order of the
Custodian for the account of the Acquiring Fund.
1.4 The Acquired Fund will pay or cause to be paid to the Acquiring Fund
any dividends or interest received on or after the Closing Date with respect to
assets transferred to the Acquiring Fund thereunder. The Acquired Fund will
transfer to the Acquiring Fund any distributions, rights or other assets
received by the Acquired Fund after the Closing Date as distributions on or with
respect to the securities transferred. Such assets shall be deemed included in
assets transferred to the Acquiring Fund on the Closing Date and shall not be
separately valued.
1.5 As soon after the Closing Date as is conveniently practicable, the
Acquired Fund will liquidate and distribute pro rata to the Acquired Fund's
shareholders of record, determined as of the close of business on the Closing
Date (the "Acquired Fund Shareholders"), the Acquiring Fund Shares received by
the Acquired Fund pursuant to paragraph 1.1. In addition, each Acquired Fund
Shareholder shall have the right to receive any unpaid dividends or other
distributions which were declared before the Valuation Date (as hereinafter
defined) with respect to the shares of the Acquired Fund that are held by the
shareholder on the Valuation Date. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Acquired Fund on the books of the Acquiring Fund to open accounts
on the share record books of the Acquiring Fund in the names of the Acquired
Fund Shareholders, and representing the respective pro rata number of the
Acquiring Fund Shares due such shareholders, based on their ownership of shares
of the Acquired Fund on the Closing Date. All issued and outstanding Shares of
the Acquired Fund will simultaneously be canceled on the books of the Acquired
Fund. Share certificates representing interests in the Acquired Fund will
represent a number of Acquiring Fund Shares, after the Closing Date as
determined in accordance with paragraph 2.3. The Acquiring Fund shall not issue
certificates representing the Acquiring Fund Shares in connection with such
exchange.
1.6 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent. Shares of the Acquiring Fund will be issued in
the manner described in the Acquiring Fund's current prospectus and statement of
additional information.
1.7 Any transfer taxes payable upon issuance of the Acquiring Fund Shares
in a name other than the registered holder of the Acquired Fund shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund Shares
are to be issued and transferred.
1.8 Any reporting responsibility of the Acquired Fund is and shall remain
the responsibility of the Trust up to and including the Closing Date and such
later dates, with respect to dissolution and deregistration of the Trust, on
which the Trust is dissolved and deregistered.
1.9 The Trust shall be deregistered as an investment company under the 1940
Act and dissolved as a Pennsylvania common law trust as promptly as practicable
following the Closing Date and the making of all distributions pursuant to
paragraph 1.5.
2. VALUATION.
2.1 The value of the Acquired Fund's net assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of the New York Stock Exchange (normally 4:00 p.m. Eastern time) on the
Closing Date (such time and date being herein called the "Valuation Date"),
using the valuation procedures set forth in the Acquiring Fund's then-current
prospectus or statement of additional information.
2.2 The net asset value of each Acquiring Fund Share shall be the net asset
value per share computed as of the close of the New York Stock Exchange
(normally 4:00 p.m. Eastern time) on the Valuation Date, using the valuation
procedures set forth in the Acquiring Fund's then-current prospectus or
statement of additional information.
2.3 The number of the Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Acquired Fund's net assets shall
be determined by dividing the value of the net assets of the Acquired Fund
determined using the same valuation procedures referred to in paragraph 2.1, by
the net asset value of one Acquiring Fund Share determined in accordance with
paragraph 2.2.
2.4 All computations of value shall be made in accordance with the regular
practices of the Acquiring Fund, which practices have been reviewed by the
Acquired Fund's Board of Trustees.
3. CLOSING AND CLOSING DATE.
3.1 The Closing Date shall be May 30, 1997 or such later date as the
parties may mutually agree. All acts taking place at the Closing shall be deemed
to take place simultaneously as of the close of business on the Closing Date
unless otherwise provided. The Closing shall be held at 4:00 p.m. (Eastern time)
at the offices of the Acquiring Fund, Federated Investors Tower, Pittsburgh, PA
15222-3779, or such other time and/or place as the parties may mutually agree.
3.2 If on the Valuation Date (a) the primary trading market for portfolio
securities of the Acquiring Fund or the Acquired Fund shall be closed to trading
or trading thereon shall be restricted; or (b) trading or the reporting of
trading shall be disrupted so that accurate appraisal of the value of the net
assets of the Acquiring Fund or the Acquired Fund is impracticable, the Closing
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.3 Penn Square Management Corporation, as transfer agent for the Acquired
Fund, shall deliver at the Closing a certificate of an authorized officer
stating that its records contain the names and addresses of the Acquired Fund
Shareholders and the number and percentage ownership of outstanding shares owned
by each such shareholder immediately prior to the Closing. The Acquiring Fund
shall issue and deliver a confirmation evidencing the Acquiring Fund Shares to
be credited on the Closing Date to the Secretary of the Acquired Fund, or
provide evidence satisfactory to the Acquired Fund that such Acquiring Fund
Shares have been credited to the Acquired Fund's account on the books of the
Acquiring Fund. At the Closing, each party shall deliver to the other such bills
of sale, checks, assignments, assumption agreements, share certificates, if any,
receipts or other documents as such other party or its counsel may reasonably
request.
4. REPRESENTATIONS AND WARRANTIES.
4.1 The Trust represents and warrants to the Acquiring Fund as follows:
(a) The Trust is a Common Law Trust duly organized, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and has
power to own all of its properties and assets and to carry out this Agreement.
(b) The Trust is registered under the 1940 Act, as an open-end,
management investment company, and such registration has not been revoked or
rescinded and is in full force and effect.
(c) The Trust is not, and the execution, delivery and performance of
this Agreement will not result, in material violation of the Trust's Declaration
of Trust or of any agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquired Fund is a party or by which it is bound.
(d) The Acquired Fund has no material contracts or other commitments
outstanding (other than this Agreement) which will result in liability to it
after the Closing Date.
(e) No litigation or administrative proceeding or investigation of or
before any court or governmental body is currently pending or to its knowledge
threatened against the Acquired Fund or
any of its properties or assets which, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its business. The
Acquired Fund knows of no facts which might form the basis for the institution
of such proceedings, and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(f) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act and the rules and regulations of the Securities and Exchange Commission
(the "Commission") thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(g) The Statement of Assets and Liabilities of the Acquired Fund at
December 31, 1995 and at December 31, 1996 has been audited by Ernst & Young
LLP, independent auditors, and have been prepared in accordance with generally
accepted accounting principles, consistently applied, and such statements
(copies of which have been furnished to the Acquiring Fund) fairly reflect the
financial condition of the Acquired Fund as of such dates, and there are no
known contingent liabilities of the Acquired Fund as of such dates not disclosed
therein.
(h) Since December 31, 1996, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business.
(i) At the Closing Date, all federal and other tax returns and reports
of the Acquired Fund required by law to have been filed by such date shall have
been filed or an appropriate extension obtained, and all federal and other taxes
shall have been paid so far as due, or provision shall have been made for the
payment thereof or contest in good faith, and to the best of the Acquired Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to such returns.
(j) For each fiscal year of its operation, the Acquired Fund has met the
requirements of Subchapter M of the Code for qualification and treatment as a
regulated investment company.
(k) All issued and outstanding shares of the Acquired Fund are, and at
the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. All of the issued and outstanding shares of the Acquired
Fund will, at the time of the Closing, be held by the persons and in the amounts
set forth in the records of the transfer agent as provided in paragraph 3.3. The
Acquired Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquired Fund shares, nor is there
outstanding any security convertible into any of the Acquired Fund shares.
(l) On the Closing Date, the Acquired Fund will have full right, power
and authority to sell, assign, transfer and deliver the assets to be transferred
by it hereunder.
(m) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Trust and, subject to the approval of the Acquired Fund
Shareholders, this Agreement constitutes the valid and legally binding
obligation of the Acquired Fund enforceable in accordance with its terms,
subject to the effect of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar laws relating to or affecting creditors'
rights generally and court decisions with respect thereto, and to general
principles of equity and the discretion of the court (regardless of whether the
enforceability is considered in a proceeding in equity or at law).
(n) The prospectus/proxy statement of the Acquired Fund (the
"Prospectus/Proxy Statement") to be included in the Registration Statement
referred to in paragraph 5.5 (only insofar as it relates to the Acquired Fund)
will, on the effective date of the Registration Statement and on the Closing
Date, not contain any untrue statement of a material fact or omit to state a
material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading.
4.2 The Corporation represents and warrants to the Trust as follows:
(a) The Corporation is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland and has the power
to carry on its business as it is now being conducted and to carry out this
Agreement.
(b) The Corporation is registered under the 1940 Act as an open-end,
diversified, management investment company, and such registration has not been
revoked or rescinded and is in full force and effect.
(c) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in material violation of the
Corporation's Articles of Incorporation or Bylaws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which the
Acquiring Fund is a party or by which it is bound.
(d) No litigation or administrative proceeding or investigation of or
before any court or governmental body is currently pending or to its knowledge
threatened against the Acquiring Fund or any of its properties or assets which,
if adversely determined, would materially and adversely affect its financial
condition or the conduct of its business. The Acquiring Fund knows of no facts
which might form the basis for the institution of such proceedings, and is not a
party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its business
or its ability to consummate the transactions contemplated herein.
(e) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(f) The Statements of Assets and Liabilities of the Acquiring Fund at
October 31, 1995 and 1996, have been audited by Ernst & Young LLP, independent
auditors, and have been prepared in accordance with generally accepted
accounting principles, and such statements (copies of which have been furnished
to the Acquired Fund) fairly reflect the financial condition of the Acquiring
Fund as of such dates, and there are no known contingent liabilities of the
Acquiring Fund as of such dates not disclosed therein.
(g) Since October 31, 1996, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business.
(h) At the Closing Date, all federal and other tax returns and reports
of the Acquiring Fund required by law to have been filed or an appropriate
extension obtained, by such date shall have been filed, and all federal and
other taxes shall have been paid so far as due, or provision shall have been
made for the payment thereof or contest in good faith, and to the best of the
Acquiring Fund's knowledge no such return is currently under audit and no
assessment has been asserted with respect to such returns.
(i) For each fiscal year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company.
(j) All issued and outstanding Acquiring Fund Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable. The Acquiring Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares, except for Class B Shares which are convertible to Class A Shares
eight years after purchase.
(k) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action on the part of the Corporation, and this
Agreement constitutes the valid and legally binding obligation of the Acquiring
Fund enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto, and to general principles of equity and
the discretion of the court (regardless of whether the enforceability is
considered in a proceeding in equity or at law).
(l) The Prospectus/Proxy Statement to be included in the Registration
Statement (only insofar as it relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND.
5.1 The Acquiring Fund and the Acquired Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include customary
dividends and distributions.
5.2 The Trust will call a meeting of the Acquired Fund Shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
5.3 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.
5.4 As promptly as practicable, but in any case within sixty days after the
Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in such form
as is reasonably satisfactory to the Acquiring Fund, a statement of the earnings
and profits of the Acquired Fund for federal income tax purposes which will be
carried over to the Acquiring Fund as a result of Section 381 of the Code and
which will be certified by the Trust's President and its Treasurer.
5.5 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of the Prospectus/Proxy Statement,
referred to in paragraph 4.1(o), all to be included in a Registration Statement
on Form N-14 of the Acquiring Fund (the "Registration Statement"), in compliance
with the 1933 Act, the Securities Exchange Act of 1934, as amended, and the 1940
Act in connection with the meeting of the Acquired Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.6 The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act as it may
deem appropriate in order to continue its operations after the Closing Date.
5.7 Prior to the Valuation Date, the Acquired Fund shall have declared a
dividend or dividends, with a record date and ex-dividend date prior to the
Valuation Date, which, together with all previous dividends, shall have the
effect of distributing to its shareholders all of its investment company taxable
income, if any, plus the excess of its interest income, if any, excludable from
gross income under Section 103(a) of the Code over its deductions disallowed
under Sections 265 and 171(a)(2) of the Code for the taxable periods or years
ended on or before December 31, 1996 and for the period from said date to and
including the Closing Date (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized in taxable
periods or years ended on or before December 31, 1996 and in the period from
said date to and including the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of the Trust contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 The Trust shall have delivered to the Acquiring Fund a statement of the
Acquired Fund's assets, together with a list of the Acquired Fund's portfolio
securities showing the tax costs of such securities by lot and the holding
periods of such securities, as of the Closing Date, certified by the Treasurer
of the Trust.
6.3 The Trust shall have delivered to the Acquiring Fund on the Closing
Date a certificate executed in its name by its President or Vice President and
its Treasurer, in form and substance satisfactory to the Acquiring Fund, to the
effect that the representations and warranties of the Trust made in this
Agreement are true and correct in all material respects at and as of the Closing
Date, except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Acquiring Fund shall reasonably
request.
6.4 The Acquired Fund shall have delivered to the Acquiring Fund a
certificate specifying the liabilities which are to be assumed by the Acquiring
Fund, all of which shall be reflected in the net asset value of the Acquired
Fund on the Closing Date, which liabilities shall be acceptable to the Acquiring
Fund in its sole discretion.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund to consummate the transactions
provided herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Corporation contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 The Corporation shall have delivered to the Acquired Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer, in form and substance satisfactory to the Acquired
Fund, to the effect that the representations and warranties of the Corporation
made in this Agreement are true and correct in all material respects at and as
of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Acquired
Fund shall reasonably request.
7.3 There shall not have been any material adverse change in the Acquiring
Fund's financial condition, assets, liabilities or business since the date
hereof other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of any indebtedness, except as otherwise
disclosed to and accepted by the Acquired Fund.
8. FURTHER CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE ACQUIRING FUND
AND THE ACQUIRED FUND.
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, either
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement.
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with applicable law.
8.2 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities) deemed
necessary by the Acquiring Fund or the Acquired Fund to permit consummation, in
all material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or permit would
not involve a risk of a material adverse effect on the assets or properties of
the Acquiring Fund or the Acquired Fund, provided that either party hereto may
for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
8.5 The Corporation and the Trust shall have received an opinion of
Dickstein Shapiro Morin & Oshinsky LLP substantially to the effect that for
federal income tax purposes:
(a) The transfer of all of the Acquired Fund assets and the assumption of
certain liabilities in exchange for the Acquiring Fund Shares and the
distribution of the Acquiring Fund Shares to the Acquired Fund Shareholders in
liquidation of the Acquired Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code; (b) No gain or loss will be
recognized by the Acquiring Fund upon the receipt of the assets of the Acquired
Fund solely in exchange for the Acquiring Fund Shares and the assumption of
certain liabilities; (c) No gain or loss will be recognized by the Acquired Fund
upon the transfer of the Acquired Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption of certain liabilities or upon
the distribution (whether actual or constructive) of the Acquiring Fund Shares
to Acquired Fund Shareholders in exchange for their shares of the Acquired Fund;
(d) No gain or loss will be recognized by the Acquired Fund Shareholders upon
the exchange of their Acquired Fund shares for the Acquiring Fund Shares; (e)
The tax basis of the Acquired Fund assets acquired by the Acquiring Fund will be
the same as the tax basis of such assets to the Acquired Fund immediately prior
to the Reorganization; (f) The tax basis of the Acquiring Fund Shares received
by each of the Acquired Fund Shareholders pursuant to the Reorganization will be
the same as the tax basis of the Acquired Fund shares held by such shareholder
immediately prior to the Reorganization; (g) The holding period of the assets of
the Acquired Fund in the hands of the Acquiring Fund will include the period
during which those assets were held by the Acquired Fund; and (h) The holding
period of the Acquiring Fund Shares to be received by each Acquired Fund
Shareholder will include the period during which the Acquired Fund shares
exchanged therefor were held by such shareholder (provided the Acquired Fund
shares were held as capital assets on the date of the Reorganization).
9. TERMINATION OF AGREEMENT.
9.1 This Agreement and the transactions contemplated hereby may be
terminated and abandoned by resolution of the Board of Trustees of the Trust or
the Board of Directors of the Corporation at any time prior to the Closing Date
(and notwithstanding any vote of the Acquired Fund Shareholders) if a majority
of the independent board members of either board reasonably believes that
continuing the transaction would have a material adverse impact on shareholders
of that fund.
9.2 If this Agreement is terminated and the exchange contemplated hereby is
abandoned pursuant to the provisions of this Section 9, this Agreement shall
become void and have no effect, without any liability on the part of any party
hereto or the directors or officers of the Trust or the Corporation or the
shareholders of the Acquiring Fund or of the Acquired Fund, in respect of this
Agreement.
10. WAIVER.
At any time prior to the Closing Date, any of the foregoing conditions may
be waived by the Board of Directors of the Corporation or the Board of Trustees
of the Trust, if, in the judgment of either, such waiver will not have a
material adverse effect on the benefits intended under this Agreement to the
shareholders of the Acquiring Fund or of the Acquired Fund, as the case may be.
11. MISCELLANEOUS.
11.1 None of the representations and warranties included or provided for
herein shall survive consummation of the transactions contemplated hereby.
11.2 This Agreement contains the entire agreement and understanding between
the parties hereto with respect to the subject matter hereof, and merges and
supersedes all prior discussions, agreements and understandings of every kind
and nature between them relating to the subject matter hereof. Neither party
shall be bound by any condition, definition, warranty or representation, other
than as set forth or provided in this Agreement or as may be set forth in a
later writing signed by the party to be bound thereby.
11.3 This Agreement shall be governed and construed in accordance with the
internal laws of the Commonwealth of Pennsylvania, without giving effect to
principles of conflicts of laws.
11.4 This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original.
11.5 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
11.6 An agreement has been entered into under which Federated Advisers will
assume substantially all of the expenses of the Reorganization including
registration fees, transfer taxes (if any), the fees of banks and transfer
agents and the costs of preparing, printing, copying and mailing proxy
solicitation materials to the Acquired Fund Shareholders and the costs of
holding the Special Meeting of shareholders. Penn Square Management Corporation
will assume the legal and accounting fees of the Acquired Fund.
IN WITNESS WHEREOF, the Acquired Fund and the Acquiring Fund have each
caused this Agreement and Plan of Reorganization to be executed and attested on
its behalf by its duly authorized representatives as of the date first above
written.
<TABLE>
<S> <C>
Acquired Fund:
WILLIAM PENN INTEREST INCOME FUND,
on behalf of its portfolio,
Attest: QUALITY INCOME PORTFOLIO
/s/ SANDRA J. HOUCK By: /s/ JAMES E. JORDAN
- -----------------------------------------
---------------------------------------
Name: Sandra J. Houck Name: James E. Jordan
Title: Secretary Title: President
Acquiring Fund:
INVESTMENT SERIES FUNDS, INC.
on behalf of its portfolio,
Attest: FEDERATED BOND FUND
/s/ S. ELLIOTT COHAN By: /s/ J. CHRISTOPHER DONAHUE
- -----------------------------------------
---------------------------------------
Name: S. Elliott Cohan Name: J. Christopher Donahue
Title: Assistant Secretary Title: President
</TABLE>
Cusip: 461444507
Cusip: 461444705
G02062-11 4/97
STATEMENT OF ADDITIONAL INFORMATION
APRIL 17, 1997
Acquisition of the Assets of
QUALITY INCOME PORTFOLIO,
a Portfolio of
WILLIAM PENN INTEREST INCOME FUND
2650 Westview Drive
Wyomissing, Pennsylvania 19610
Telephone Number: 1-800-523-8440
By and in exchange for Class A and Class C Shares respectively of
FEDERATED BOND FUND,
a portfolio of
INVESTMENT SERIES FUNDS, INC.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Telephone Number: 1-800-341-7400
This Statement of Additional Information dated April 17, 1997 is
not a prospectus. A Prospectus/Proxy Statement dated April 17, 1997
related to the above-referenced matter may be obtained from Federated Bond
Fund, a Portfolio of Investment Series Funds, Inc., Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779. This Statement of Additional
Information should be read in conjunction with such Prospectus/Proxy
Statement.
TABLE OF CONTENTS
1. Statement of Additional Information of Federated Bond Fund, dated
February 28, 1997.
2. Statement of Additional Information of Quality Income Portfolio, a
portfolio of William Penn Interest Income Fund, dated March 15, 1996.
3. Audited Financial Statements of Federated Bond Fund, dated October 31,
1996.
4. Audited Financial Statements of Quality Income Portfolio, a portfolio
of William Penn Interest Income Fund, dated December 31, 1996.
The Statement of Additional Information of Federated Bond Fund (the
"Federated Fund"), a portfolio of Investment Series funds, Inc. (the
`Corporation'') dated February 28, 1997, is incorporated herein by
reference to Post-Effective Amendment No.12 to the Corporation's
Registration Statement on Form N-1A (File Nos. 33-48847 and 811-07021)
which was filed with the Securities and Exchange Commission on or about
February 28, 1997. A copy may be obtained, upon request and without
charge, from the Federated Fund at Federated Investors Tower, Pittsburgh,
PA 15222-3279; telephone number: 1-800-341-7400.
The Statement of Additional Information of Quality Income Portfolio
(the "William Penn Portfolio"), a portfolio of William Penn Interest Income
Fund (the "Trust"), dated March 15, 1996, is incorporated herein by
reference to Post-Effective Amendment No. 16 to the Trust's Registration
Statement on Form N-1A (File Nos. 33-14609 and 811-5177) which was filed
with the Securities and Exchange Commission on or about March 21, 1996. A
copy may be obtained, upon request and without charge, from the William
Penn Portfolio at 2650 Westview Drive, Wyomissing, Pennsylvania 19610;
telephone number: 1-800-523-8440.
The audited financial statements of the Federated Fund, dated
October 31, 1996, are incorporated herein by reference to the Federated
Fund's Annual Report to Shareholders dated October 31, 1996, which was
filed with the Securities and Exchange Commission. A copy may be obtained,
upon request and without charge, from the Federated Fund at Federated
Investors Tower, Pittsburgh, PA 15222-3279; telephone number: 1-800-341-
7400.
The audited financial statements of the William Penn Portfolio,
dated December 31, 1996, are incorporated herein by reference to the
William Penn Portfolio's Annual Report to Shareholders dated December 31,
1996, which was filed with the Securities and Exchange Commission. A copy
may be obtained, upon request and without charge, from the State Bond Fund
at 2650 Westview Drive, Wyomissing, Pennsylvania 19610; telephone number 1-
800-523-8440.
Cusip: 461444507
Cusip: 461444705
G02062-12
THE WILLIAM PENN FUNDS
Penn Square Management Corporation
PROXY SERVICES
P.O. BOX 9156
FARMINGDALE, NY 11735
QUALITY INCOME PORTFOLIO
a Portfolio of
WILLIAM PENN INTEREST INCOME FUND,
QUALITY INCOME PORTFOLIO
a Portfolio of
WILLIAM PENN INTEREST INCOME FUND
The undersigned shareholder(s) of Quality Income Portfolio, a portfolio of
William Penn Interest Income Fund (the `William Penn Portfolio''), hereby
appoint(s) James E. Jordan, Sandra Houck, and Dennis Westley, or any of
them true and lawful proxies, with power of substitution of each, to vote
all shares of the William Penn Portfolio which the undersigned is entitled
to vote, at the Special Meeting of Shareholders to be held on May 29, 1997,
at Sheraton Berkshire Motor Inn, 1741 Paper Mill Road, Wyomissing, PA
19610, at 9:00 a.m. (local time) and at any adjournment thereof.
Discretionary authority is hereby conferred as to all other matters as may
properly come before the Special Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES. The proxies
named will vote the shares represented by this proxy in accordance with the
choice made on this ballot. IF NO CHOICE IS INDICATED, THIS PROXY WILL BE
VOTED AFFIRMATIVELY ON THAT MATTER.
The Board of Trustees unanimously recommends a vote FOR the proposal below.
Please sign EXACTLY as your name(s)
appear(s) above. When signing as
attorney, executor, administrator,
guardian, trustee, custodian, etc.,
please give your full title as
such. If a corporation or
partnership, please sign the full
name by an authorized officer or
partner. If stock is owned
jointly, all owners should sign.
PLEASE RETURN BOTTOM PORTION WITH YOUR VOTE IN THE ENCLOSED ENVELOPE AND
RETAIN THE TOP PORTION.
You may also cast your vote by telephone by calling Shareholder
Communications corporation toll free at (800) 733-8481 extension 459.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: X
KEEP THIS PORTION FOR YOUR RECORDS.
DETACH AND RETURN THIS PORTION ONLY.
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
QUALITY INCOME PORTFOLIO
RECORD DATE SHARES:
-----------------
Vote on Proposal
TO APPROVE OR DISAPPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
WILLIAM PENN INTEREST INCOME FUND: QUALITY INCOME PORTFOLIO AND FEDERATED
BOND FUND, A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.
FOR AGAINST ABSTAIN
Signature [PLEASE SIGN WITHIN BOX]
Signature (Joint Owners)
Date:
