INTERNATIONAL
STOCK
FUND
SEMI-ANNUAL REPORT
AND SUPPLEMENT TO
PROSPECTUS DATED
APRIL 30, 1995
Insurance Management Series
June 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Cusip 458043601
G01083-03 (8/95)
A. Please insert the following "Financial Highlights" table as page 1 of the
prospectus. In addition, please add the heading "Financial Highlights" to
the Table of Contents page as the first entry.
INTERNATIONAL STOCK FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1995(A)
(UNAUDITED)
<S> <C>
- --------------------------------------------------------------------------------------------- -------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ---------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------
Net investment income 0.02
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.01
Total from investment operations 0.03
- ---------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------
Distributions from net investment income --
- --------------------------------------------------------------------------------------------- ------
NET ASSET VALUE, END OF PERIOD $ 10.03
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (B) 0.30%
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------
Expenses 0.00%(c)
- ---------------------------------------------------------------------------------------------
Net investment income 5.22%(c)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 297.10%(c)
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $302
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from May 5, 1995 (date of initial public
investment) to June 30, 1995.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
B. Please insert the following as the fourth paragraph of the section
entitled "Voting Rights" on page 13 of the prospectus.
"As of August 2, 1995, Aetna Life Insurance and Annuity Company, Hartford,
Connecticut, owned 43.59%, and Aetna Insurance Company of America, Hartford,
Connecticut, owned 56.37% of the voting securities of the Fund, and, therefore,
may for certain purposes be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders."
C. Please insert the following Financial Statements after the section
entitled "Performance Information" and before the address page. In
addition, please add the heading "Financial Statements" to the Table of
Contents page after the heading "Performance Information."
INTERNATIONAL STOCK FUND
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ----------- ----------------------------------------------------------------------------------------- ----------
(a)REPURCHASE AGREEMENTS--89.3%
- ------------------------------------------------------------------------------------------------------
$55,000 Bank of Tokyo, 6.25%, dated 6/30/1995, due 7/3/1995 $ 55,000
-----------------------------------------------------------------------------------------
55,000 Bear, Stearns & Co., Inc., 6.125%, dated 6/30/1995, due 7/3/1995 55,000
-----------------------------------------------------------------------------------------
55,000 Chemical Securities, Inc., 6.125%, dated 6/30/1995, due 7/3/1995 55,000
-----------------------------------------------------------------------------------------
50,000 J.P. Morgan Securities, Inc., 6.125%, dated 6/30/1995, due 7/3/1995 50,000
-----------------------------------------------------------------------------------------
55,000 NCNB of North Carolina--Charlotte, 6.30%, dated 6/30/1995, due 7/3/1995 55,000
----------------------------------------------------------------------------------------- ----------
TOTAL INVESTMENTS, AT AMORTIZED COST (B) $ 270,000
----------------------------------------------------------------------------------------- ----------
</TABLE>
(a) Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations, based on market prices as of the date of the portfolio.
The investments in repurchase agreements are through participation in joint
accounts with other Federated funds.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($302,303) at June 30, 1995.
(See Notes which are an integral part of the Financial Statements)
INTERNATIONAL STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------------
Investment in repurchase agreements, at amortized cost and value $ 270,000
- ----------------------------------------------------------------------------------------------------
Cash 4,991
- ----------------------------------------------------------------------------------------------------
Income receivable 47
- ----------------------------------------------------------------------------------------------------
Receivable for shares sold 27,265
- ---------------------------------------------------------------------------------------------------- ------------
Total assets 302,303
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSETS for 30,126 shares outstanding $ 302,303
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NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Paid-in capital $ 301,753
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Undistributed net investment income 550
- ---------------------------------------------------------------------------------------------------- ------------
Total Net Assets $ 302,303
- ---------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share:
Net Asset Value Per Share ($302,303 / 30,126 shares outstanding) $ 10.03
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
INTERNATIONAL STOCK FUND
STATEMENT OF OPERATIONS
PERIOD ENDED JUNE 30, 1995(A) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------------
Interest $ 550
- ----------------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------
Investment advisory fee $ 107
- -----------------------------------------------------------------------------------------------
Administrative personnel and services fees 18,151
- -----------------------------------------------------------------------------------------------
Custodian fees 3,900
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Transfer agent and dividend disbursing agent fees and expenses 450
- -----------------------------------------------------------------------------------------------
Legal fees 450
- -----------------------------------------------------------------------------------------------
Portfolio accounting fees 3,430
- -----------------------------------------------------------------------------------------------
Share registration costs 250
- -----------------------------------------------------------------------------------------------
Printing and postage 1,200
- -----------------------------------------------------------------------------------------------
Insurance premiums 2,000
- -----------------------------------------------------------------------------------------------
Miscellaneous 1,350
- ----------------------------------------------------------------------------------------------- ---------
Total expenses 31,288
- -----------------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 107
- ------------------------------------------------------------------------------------
Reimbursement of other operating expenses 31,181 31,288
- ------------------------------------------------------------------------------------ --------- ---------
Net expenses 0
- ---------------------------------------------------------------------------------------------------------- ---------
Net investment income 550
- ---------------------------------------------------------------------------------------------------------- ---------
Change in net assets resulting from operations $ 550
- ---------------------------------------------------------------------------------------------------------- ---------
</TABLE>
(a) For the period from May 5, 1995 (date of initial public investment) to June
30, 1995.
(See Notes which are an integral part of the Financial Statements)
INTERNATIONAL STOCK FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1995(A)
(UNAUDITED)
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------------------------
Net investment income $ 550
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
($0 net loss as computed for federal income tax purposes) --
- --------------------------------------------------------------------------------------------- -------------------
Change in net assets resulting from operations 550
- --------------------------------------------------------------------------------------------- -------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------------------------
Distributions from net investment income --
- ---------------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------------------------------------------
Proceeds from sale of Shares 302,283
- ---------------------------------------------------------------------------------------------
Net asset value of Shares issued to shareholders in payment of distributions declared --
- ---------------------------------------------------------------------------------------------
Cost of Shares redeemed (530)
- --------------------------------------------------------------------------------------------- -------------------
Change in net assets resulting from share transactions 301,753
- --------------------------------------------------------------------------------------------- -------------------
Change in net assets 302,303
- ---------------------------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------------------------
Beginning of period --
- --------------------------------------------------------------------------------------------- -------------------
End of period (including undistributed net investment income of $550) $ 302,303
- --------------------------------------------------------------------------------------------- -------------------
</TABLE>
(a) For the period from May 5, 1995 (date of initial public investment) to June
30, 1995.
(See Notes which are an integral part of the Financial Statements)
INTERNATIONAL STOCK FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Insurance Management Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end management
investment company. The Trust consists of six diversified portfolios. The
financial statements included herein present only those of International Stock
Fund (the "Fund"). The financial statements of the other portfolios are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary. However, federal taxes may be
imposed on the Fund upon the disposition of certain investments in passive
foreign investment companies. Withholding taxes on foreign dividends have
been provided for in accordance with the Fund's understanding of the
applicable country's tax rules and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred
and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
JUNE 30, 1995(A)
<S> <C>
Shares sold 30,179
- ---------------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared --
- ---------------------------------------------------------------------------------------------
Shares redeemed (53)
- --------------------------------------------------------------------------------------------- -------
Net change resulting from Fund share transactions 30,126
- --------------------------------------------------------------------------------------------- -------
</TABLE>
(a) For the period ended May 5, 1995 (date of initial public investment) to June
30, 1995.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
1.00% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive its fee and reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver and reimbursement at any
time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors for
the period. The administrative fee received during the period of the
Admnistrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The fee is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period plus, out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be
borne initially by the Adviser and are estimated at $30,000. The Fund has agreed
to reimburse the Adviser for the organizational expenses during the five year
period following April 4, 1995 (date the Fund became effective). For the six
months ended June 30, 1995, the Fund paid $0 pursuant to this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. J. Christopher Donahue
William J. Copeland President
J. Christopher Donahue Edward C. Gonzales
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward L. Flaherty, Jr. Executive Vice President and Secretary
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
John E. Murray, Jr. David M. Taylor
Wesley W. Posvar Treasurer
Marjorie P. Smuts G. Andrew Bonnewell
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves
investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the fund's prospectus which contains facts concerning its
objective and policies, management fees, expenses and other information.
INTERNATIONAL STOCK FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This Prospectus offers shares of International Stock Fund (the
"Fund"), which is
a diversified investment portfolio in Insurance Management Series
(the "Trust"),
an open-end management investment company. The Fund's investment
objective is to
obtain a total return on its assets. Shares of the Fund may be
sold only to
separate accounts of insurance companies to serve as the
investment medium for
variable life insurance policies and variable annuity contracts
issued by the
insurance companies.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus contains the information you should read and know
before you
invest in the Fund through the variable life insurance policies
and variable
annuity contracts offered by insurance companies which provide
for investment in
the Fund. Keep this Prospectus for future reference.
The Fund has also filed a Statement of Additional Information
dated April 30,
1995, with the Securities and Exchange Commission. The
information contained in
the Statement of Additional Information is incorporated by
reference into this
Prospectus. You may request a copy of the Statement of Additional
Information
free of charge by calling 1-800-235-4669. To obtain other
information or to make
inquiries about the Fund, contact the Fund at the address listed
in the back of
this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS A FUNDING VEHICLE FOR
LIFE INSURANCE
COMPANIES WRITING VARIABLE LIFE INSURANCE POLICIES AND VARIABLE
ANNUITY
CONTRACTS. THIS PROSPECTUS SHOULD BE ACCOMPANIED BY THE
PROSPECTUSES FOR SUCH
CONTRACTS.
Prospectus dated April 30, 1995
TABLE OF CONTENTS
- -----------------------------------------------------------------
- ---------------
GENERAL INFORMATION
1
- ------------------------------------------------------
INVESTMENT INFORMATION
1
- ------------------------------------------------------
Investment Objective
1
Investment Policies
1
Investment Limitations
8
NET ASSET VALUE
9
- ------------------------------------------------------
INVESTING IN THE FUND
10
- ------------------------------------------------------
Purchases and Redemptions
10
What Shares Cost
10
Dividends
10
FUND INFORMATION
11
- ------------------------------------------------------
Management of the Fund
11
Distribution of Fund Shares
12
Administration of the Fund
12
Brokerage Transactions
12
Expenses of the Fund
13
SHAREHOLDER INFORMATION
13
- ------------------------------------------------------
Voting Rights
13
TAX INFORMATION
13
- ------------------------------------------------------
Federal Income Tax
13
State and Local Taxes
14
PERFORMANCE INFORMATION
14
- ------------------------------------------------------
ADDRESSES
15
- ------------------------------------------------------
GENERAL INFORMATION
- -----------------------------------------------------------------
- ---------------
The Trust was established as a Massachusetts business trust under
a Declaration
of Trust dated September 15, 1993. The Declaration of Trust
permits the Trust to
offer separate series of shares of beneficial interest in
separate portfolios of
securities, including the Fund.
Shares of the Fund are sold only to insurance companies as
funding vehicles for
variable insurance policies and variable annuity contracts issued
by the
insurance companies. Shares of the Fund are sold at net asset
value as described
in the section entitled "What Shares Cost." Shares of the Fund
are redeemed at
net asset value.
INVESTMENT INFORMATION
- -----------------------------------------------------------------
- ---------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to obtain a total return on
its assets. The
investment objective cannot be changed without the approval of
the Fund's
shareholders. While there is no assurance that the Fund will
achieve its
investment objective, it attempts to do so by following the
investment policies
described in this Prospectus.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund will attempt to achieve its
objective by
investing at least 65% of its assets (and under normal market
conditions
substantially all of its assets) in equity securities of issuers
located in at
least three different countries outside of the United States. The
Fund's
investment approach is based on the premise that investing in
such non-U.S.
securities provides three potential benefits over investing
solely in U.S.
securities: (1) the opportunity to invest in foreign issuers
believed to have
superior growth potential; (2) the opportunity to invest in
foreign countries
with economic policies or business cycles different from those of
the U.S.; and
(3) the opportunity to reduce portfolio volatility to the extent
that securities
markets inside and outside the U.S. do not move in harmony. The
Fund may
purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), Global
Depositary Receipts ("GDRs"), and European Depositary Receipts
("EDRs");
corporate and government fixed income securities of issuers
outside of the U.S.;
convertible securities; and options and financial futures
contracts. In
addition, the Fund may enter into forward commitments, repurchase
agreements,
and foreign currency transactions; and maintain reserves in
foreign or U.S.
money market instruments.
Unless otherwise indicated, the investment policies may be
changed by the
Trustees without shareholder approval. Shareholders will be
notified before any
material change to these policies becomes effective.
DEPOSITARY RECEIPTS. The Fund may purchase sponsored or
unsponsored ADRs,
GDRs, and EDRs (collectively, "Depositary Receipts"). ADRs
are Depositary
Receipts typically issued by a U.S. bank or trust company
which evidence
ownership of underlying securities issued by a foreign
corporation. EDRs
and GDRs are typically issued by foreign banks or trust
companies, although
they also may be issued by U.S. banks or trust companies,
and evidence
ownership
of underlying securities issued by either a foreign or a
U.S. corporation.
Generally, Depositary Receipts in registered form are
designed for use in
the U.S. securities market and Depositary Receipts in bearer
form are
designed for use in securities markets outside the U.S.
Depositary Receipts
may not necessarily be denominated in the same currency as
the underlying
securities into which they may be converted. Ownership of
unsponsored
Depositary Receipts may not entitle the Fund to financial or
other reports
from the issuer of the underlying security, to which it
would be entitled
as the owner of sponsored Depositary Receipts.
FIXED INCOME SECURITIES. At the date of this Prospectus,
the Fund has
committed its assets primarily to dividend-paying equity
securities of
established companies that appear to have growth potential.
However, as a
temporary defensive position, the Fund may shift its
emphasis to fixed
income securities, warrants, or other obligations of foreign
companies or
governments, if they appear to offer potential higher
return. Fixed income
securities include preferred stock, bonds, notes, or other
debt securities
which are investment grade or higher, as described below.
The prices of
fixed income securities fluctuate inversely to the direction
of interest
rates.
The debt securities in which the Fund will invest will
possess a minimum
credit rating of BBB as assigned by Standard & Poor's
Ratings Group ("S&P")
or Baa by Moody's Investors Service, Inc. ("Moody's"), or,
if unrated, will
be judged by the Fund's adviser to be of comparable quality.
Because the
average quality of the Fund's portfolio investments should
remain
constantly between AAA and BBB, the Fund may avoid the
adverse consequences
that may arise for some debt securities in difficult
economic
circumstances. Downgraded securities will be evaluated on a
case by case
basis by the adviser. The adviser will determine whether or
not the
security continues to be an acceptable investment. If not,
the security
will be sold. A description of the ratings categories is
contained in the
Appendix to the Statement of Additional Information.
CONVERTIBLE SECURITIES. The Fund may invest in convertible
securities that
are rated, at the time of purchase, investment grade by a
nationally
recognized statistical rating organization ("NRSRO") or, if
unrated, of
comparable quality as determined by the adviser. Convertible
securities are
fixed income securities which may be exchanged or converted
into a
predetermined number of the issuer's underlying common stock
at the option
of the holder during a specified time period. Convertible
securities may
take the form of convertible bonds, convertible preferred
stock or
debentures, units consisting of "usable" bonds and warrants
or a
combination of the features of several of these securities.
The investment
characteristics of each convertible security vary widely,
which allows
convertible securities to be employed for different
investment objectives.
Convertible bonds and convertible preferred stocks are fixed
income
securities that generally retain the investment
characteristics of fixed
income securities until they have been converted but also
react to
movements in the underlying equity securities. The holder is
entitled to
receive the fixed income of a bond or the dividend
preference of a
preferred stock until the holder elects to exercise the
conversion
privilege. Usable bonds are corporate bonds that can be used
in whole or in
part, customarily at full face value, in lieu of cash to
purchase the
issuer's common stock. When owned as part of a unit along
with warrants,
which entitle the
holder to buy the common stock, they function as convertible
bonds, except
that the warrants generally will expire before the bonds'
maturity.
Convertible securities are senior to equity securities and,
therefore, have
a claim to assets of the corporation prior to the holders of
common stock
in the case of liquidation. However, convertible securities
are generally
subordinated to similar nonconvertible securities of the
same company. The
interest income and dividends from convertible bonds and
preferred stocks
provide a stable stream of income with generally higher
yields than common
stocks, but lower than nonconvertible securities of similar
quality. A Fund
will exchange or convert the convertible securities held in
its portfolio
into shares of the underlying common stocks when, in the
adviser's opinion,
the investment characteristics of the underlying common
shares will assist
the Fund in achieving its investment objective. Otherwise,
the Fund will
hold or trade the convertible securities. In selecting
convertible
securities for the Fund, the adviser evaluates the
investment
characteristics of the convertible security as a fixed
income instrument,
and the investment potential of the underlying equity
security for capital
appreciation. In evaluating these matters with respect to a
particular
convertible security, the adviser considers numerous
factors, including the
economic and political outlook, the value of the security
relative to other
investment alternatives, trends in the determinants of the
issuer's
profits, and the issuer's management capability and
practices.
OPTIONS AND FINANCIAL FUTURES CONTRACTS. The Fund may
purchase put and
call options, financial futures contracts, and options on
financial futures
contracts. In addition, the Fund may write (sell) put and
call options with
respect to securities in the Fund's portfolio.
FORWARD COMMITMENTS. Forward commitments are contracts to
purchase
securities for a fixed price at a date beyond customary
settlement time.
The Fund may enter into these contracts if liquid securities
in amounts
sufficient to meet the purchase price are segregated on the
Fund's records
at the trade date and maintained until the transaction has
been settled.
Risk is involved if the value of the security declines
before settlement.
Although the Fund enters into forward commitments with the
intention of
acquiring the security, it may dispose of the commitment
prior to
settlement and realize a short-term profit or loss.
REPURCHASE AGREEMENTS. Repurchase agreements are
arrangements in which
banks, broker/dealers, and other recognized financial
institutions sell
securities to the Fund and agree at the time of sale to
repurchase them at
a mutually agreed upon time and price. To the extent that
the original
seller does not repurchase the securities from the Fund, the
Fund could
receive less than the repurchase price on any sale of such
securities.
MONEY MARKET INSTRUMENTS. The Fund may invest in foreign
and U.S. money
market instruments, including interest-bearing call deposits
with banks,
government obligations, certificates of deposit, banker's
acceptances,
commercial paper, short-term corporate debt securities, and
repurchase
agreements. The commercial paper in which the Fund invests
will be rated
A-1 by S&P or P-1 by Moody's. These investments may be used
to temporarily
invest cash received from the sale of Fund shares, to
establish and
maintain reserves for temporary defensive purposes, or to
take advantage of
market opportunities. Investments in the World Bank, Asian
Development
Bank, or Inter-American Development Bank are not
anticipated.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase securities
on a when-issued or delayed delivery basis. These transactions
are arrangements
in which the Fund purchases securities with payment and delivery
scheduled for a
future time. The seller's failure to complete these transactions
may cause the
Fund to miss a price or yield considered to be advantageous.
Settlement dates
may be a month or more after entering into these transactions,
and the market
values of the securities purchased may vary from the purchase
prices.
Accordingly, the Fund may pay more or less than the market value
of the
securities on the settlement date. The Fund may dispose of a
commitment prior to
settlement if the adviser deems it appropriate to do so. In
addition, the Fund
may enter into transactions to sell its purchase commitments to
third parties at
current market values and simultaneously acquire other
commitments to purchase
similar securities at later dates. The Fund may realize short-
term profits or
losses upon the sale of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. As a matter of investment
practice, the Fund
may invest up to 15% of its total assets in restricted
securities. This
restriction is not applicable to commercial paper issued under
Section 4(2) of
the Securities Act of 1933. Restricted securities are any
securities in which
the Fund may otherwise invest pursuant to its investment
objective and policies
but which are subject to restriction on resale under federal
securities law. To
the extent restricted securities are deemed to be illiquid, the
Fund will limit
their purchase, including non-negotiable time deposits,
repurchase agreements
providing for settlement in more than seven days after notice,
over-the-counter
options, and certain restricted securities determined by the
Trustees not to be
liquid, to 15% of the net assets of the Fund.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, the
Fund may lend its portfolio securities on a short-term or long-
term basis, or
both, to broker/dealers, banks, or other institutional borrowers
of securities.
The Fund will only enter into loan arrangements with
broker/dealers, banks, or
other institutions which the adviser has determined are
creditworthy under
guidelines established by the Trustees and will receive
collateral at all times
equal to at least 100% of the value of the securities loaned.
There is the risk
that when lending portfolio securities, the securities may not be
available to
the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to
sell the securities at a desirable price. In addition, in the
event that a
borrower of securities would file for bankruptcy or become
insolvent,
disposition of the securities may be delayed pending court
action.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign
currency
transactions to obtain the necessary currencies to settle
securities
transactions. Currency transactions may be conducted either on a
spot or cash
basis at prevailing rates or through forward foreign currency
exchange
contracts.
The Fund may also enter into foreign currency transactions to
protect Fund
assets against adverse changes in foreign currency exchange rates
or exchange
control regulations. Such changes could unfavorably affect the
value of Fund
assets which are denominated in foreign currencies, such as
foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars.
Although
foreign currency exchanges may be used by the Fund to protect
against a decline
in the value of one or more currencies, such efforts may also
limit any
potential gain that might result from a relative increase in the
value of such
currencies and might, in certain cases, result in losses to the
Fund.
Further, the Fund may be affected either unfavorably or favorably
by
fluctuations in the relative rates of exchange between the
currencies of
different nations. Cross-hedging transactions by the Fund involve
the risk of
imperfect correlation between changes in the values of the
currencies to which
such transactions relate and changes in the value of the currency
or other asset
or liability that is the subject of the hedge.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON
FOREIGN CURRENCIES. A
forward foreign currency exchange contract ("forward contract")
is an obligation
to purchase or sell an amount of a particular currency at a
specific price and
on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the
time the Fund
enters into a forward contract, Fund assets with a value equal to
the Fund's
obligation under the forward contract are segregated on the
Fund's records and
are maintained until the contract has been settled. The Fund will
not enter into
a forward contract with a term of more than one year. The Fund
will generally
enter into a forward contract to provide the proper currency to
settle a
securities transaction at the time the transaction occurs ("trade
date"). The
period between the trade date and settlement date will vary
between 24 hours and
30 days, depending upon local custom.
The Fund may also protect against the decline of a particular
foreign currency
by entering into a forward contract to sell an amount of that
currency
approximating the value of all or a portion of the Fund's assets
denominated in
that currency ("hedging"). The success of this type of short-term
hedging
strategy is highly uncertain due to the difficulties of
predicting short-term
currency market movements and of precisely matching forward
contract amounts and
the constantly changing value of the securities involved.
Although the adviser
will consider the likelihood of changes in currency values when
making
investment decisions, the adviser believes that it is important
to be able to
enter into forward contracts when it believes the interests of
the Fund will be
served. The Fund will not enter into forward contracts for
hedging purposes in a
particular currency in an amount in excess of the Fund's assets
denominated in
that currency. No more than 30% of the Fund's assets will be
committed to
forward contracts for hedging purposes at any time. (This
restriction does not
include forward contracts entered into to settle securities
transactions.)
The Fund may purchase and write put and call options on foreign
currencies for
the purpose of protecting against declines in the U.S. dollar
value of foreign
currency-denominated portfolio securities and against increases
in the U.S.
dollar cost of such securities to be acquired. As in the case of
other kinds of
options, however, the writing of an option on a foreign currency
constitutes
only a partial hedge, up to the amount of the premium received,
and the Fund
could be required to purchase or sell foreign currencies at
disadvantageous
exchange rates, thereby incurring losses. The purchase of an
option on a foreign
currency may constitute an effective hedge against fluctuations
in exchange
rates although, in the event of rate movements adverse to the
Fund's position,
it may forfeit the entire amount of the premium plus related
transaction costs.
Options on foreign currencies to be written or purchased by the
Fund are traded
on U.S. and foreign exchanges or over-the-counter.
RISKS ASSOCIATED WITH FINANCIAL FUTURES CONTRACTS AND OPTIONS ON
FINANCIAL
FUTURES CONTRACTS. When the Fund uses futures and options on
futures as hedging
devices, there is a risk that the prices of the securities
subject to the
futures contracts may not correlate with the prices of the
securities in the Fund's portfolio. This may cause the futures
contract and any
related options to react differently than the portfolio
securities to market
changes. In addition, the Fund's adviser could be incorrect in
its expectations
about the direction or extent of market factors such as interest
or currency
exchange rate movements. In these events, the Fund may lose money
on the futures
contract or option. Also, it is not certain that a secondary
market for
positions in futures contracts or for options will exist at all
times. Although
the Fund's adviser will consider liquidity before entering into
such
transactions, there is no assurance that a liquid secondary
market on an
exchange or otherwise will exist for any particular futures
contract or option
at any particular time. The Fund's ability to establish and close
out futures
and options positions depends on this secondary market.
RISKS ASSOCIATED WITH NON-U.S. SECURITIES. Investing in non-U.S.
securities
carries substantial risks in addition to those associated with
domestic
investments. In an attempt to reduce some of these risks, the
Fund diversifies
its investments broadly among foreign countries, including both
developed and
developing countries. At least three different countries will
always be
represented.
The Fund occasionally takes advantage of the unusual
opportunities for higher
returns available from investing in developing countries. These
investments,
however, carry considerably more volatility and risk because they
are associated
with less mature economies and less stable political systems.
CURRENCY RISKS. Because the Fund may purchase securities
denominated in
currencies other than the U.S. dollar, changes in foreign
currency exchange
rates could affect the Fund's net asset value; the value of
interest
earned; gains and losses realized on the sale of securities;
and net
investment income and capital gain, if any, to be
distributed to
shareholders by the Fund. If the value of a foreign currency
rises against
the U.S. dollar, the value of the Fund assets denominated in
that currency
will increase; correspondingly, if the value of a foreign
currency declines
against the U.S. dollar, the value of Fund assets
denominated in that
currency will decrease.
The exchange rates between the U.S. dollar and foreign
currencies are a
function of such factors as supply and demand in the
currency exchange
markets, international balances of payments, governmental
interpretation,
speculation and other economic and political conditions.
Although the Fund
values its assets daily in U.S. dollars, the Fund will not
convert its
holdings of foreign currencies to U.S. dollars daily. When
the Fund
converts its holdings to another currency, it may incur
conversion costs.
Foreign exchange dealers may realize a profit on the
difference between the
price at which they buy and sell currencies.
FOREIGN COMPANIES. Other differences between investing in
non-U.S. and
U.S. securities include:
less publicly available information about foreign
companies;
the lack of uniform financial accounting standards
applicable to foreign
companies;
less readily available market quotations on foreign
companies;
differences in government regulation and supervision of
foreign stock
exchanges, brokers, listed companies, and banks;
differences in legal systems which may affect the ability
to enforce
contractual obligations or obtain court judgements;
generally lower foreign stock market volume;
the likelihood that foreign securities may be less liquid
or more
volatile;
foreign brokerage commissions may be higher;
unreliable mail service between countries; and
political or financial changes which adversely affect
investments in some
countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government
policies have
discouraged or restricted certain investments abroad by
investors such as
the Fund. Investors are advised that when such policies are
instituted, the
Fund will abide by them.
SHORT SALES. The Fund intends to sell securities short from
time to time,
subject to certain restrictions. A short sale occurs when a
borrowed
security is sold in anticipation of a decline in its price.
If the decline
occurs, shares equal in number to those sold short can be
purchased at the
lower price. If the price increases, the higher price must
be paid. The
purchased shares are then returned to the original lender.
Risk arises
because no loss limit can be placed on the transaction. When
the Fund
enters into a short sale, assets equal to the market price
of the
securities sold short or any lesser price at which the Fund
can obtain such
securities, are segregated on the Fund's records and
maintained until the
Fund meets its obligations under the short sale.
DEVELOPING/EMERGING MARKETS. The economies of individual
emerging
countries may differ favorably from the U.S. economy in such
respects as
growth of gross domestic product, rate of inflation,
currency depreciation,
capital reinvestment, resource self-sufficiency and balance
of payments
position. Further, the economies of developing countries
generally are
heavily dependent on international trade and, accordingly,
have been, and
may continue to be, adversely affected by trade barriers,
exchange
controls, managed adjustments in relative currency values
and other
protectionist measures imposed or negotiated by the
countries with which
they trade. These economies also have been, and may continue
to be,
adversely affected by economic conditions in the countries
with which they
trade.
Prior governmental approval for foreign investments may be
required under
certain circumstances in some emerging countries, and the
extent of foreign
investment in certain debt securities and domestic companies
may be subject
to limitation in other emerging countries. Foreign ownership
limitations
also may be imposed by the charters of individual companies
in emerging
countries to prevent, among other concerns, violation of
foreign investment
limitations.
Repatriation of investment income, capital and the proceeds
of sales by
foreign investors may require governmental registration
and/or approval in
some emerging countries. The Fund could be adversely
affected by delays in,
or a refusal to grant, any required governmental
registration or approval
for such repatriation. Any investment subject to such
repatriation controls
will be considered illiquid if it appears reasonably likely
that this
process will take more than seven days.
With respect to any emerging country, there is the
possibility of
nationalization, expropriation or confiscatory taxation,
political changes,
governmental regulation, social instability or diplomatic
developments
(including war) which could affect adversely the economies
of such
countries or the value of the Fund's investments in those
countries. In
addition, it may be difficult to obtain and enforce a
judgment in a court
outside of the U.S.
INVESTMENT LIMITATIONS
The Fund will not:
with respect to 75% of the value of its total assets,
invest more than 5%
of the value of its total assets in the securities (other
than securities
issued or guaranteed by the government of the U.S. or its
agencies or
instrumentalities) of any one issuer, or acquire more than
10% of the
outstanding voting securities of any one issuer;
sell securities short except under strict limitations;
borrow money or pledge securities except, under certain
circumstances,
the Fund may borrow up to one-third of the value of its
total assets and
pledge its assets to secure such borrowings; or
permit margin deposits for financial futures contracts
held by the Fund,
plus premiums paid by it for open options on financial
futures contracts,
to exceed 5% of the fair market value of the Fund's total
assets, after
taking into account the unrealized profits and losses on
the contracts.
The above investment limitations cannot be changed without
shareholder approval.
The following limitations, however, may be changed by the
Trustees without
shareholder approval. Shareholders will be notified before any
material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its assets in warrants;
own securities of other investment companies, except under
certain
circumstances and subject to certain limitations not
exceeding 10% of its
total assets (the Fund will indirectly bear its
proportionate share of
any fees and expenses paid by other investment companies,
in addition to
the fees and expenses payable directly by the Fund);
invest more than 5% of its total assets in securities of
issuers that
have records of less than three years of continuous
operations;
invest more than 15% of the value of its net assets in
illiquid
securities, including securities not determined by the
Trustees to be
liquid, repurchase agreements with maturities longer than
seven days
after notice, and certain over-the-counter options; or
purchase put options on securities unless the securities
or an offsetting
call option is held in the Fund's portfolio.
VARIABLE ASSET REGULATIONS. The Fund is also subject to variable
contract asset
regulations prescribed by the U.S. Treasury Department under
Section 817(h) of
the Internal Revenue Code. After a one year start-up period, the
regulations
generally require that, as of the end of each calendar quarter or
within 30 days
thereafter, no more than 55% of the total assets of the Fund may
be
represented by any one investment, no more than 70% of the total
assets of the
Fund may be represented by any two investments, no more than 80%
of the total
assets of the Fund may be represented by any three investments,
and no more than
90% of the total assets of the Fund may be represented by any
four investments.
In applying these diversification rules, all securities of the
same issuer, all
interests in the same real property project, and all interests in
the same
commodity are each treated as a single investment. In the case of
government
securities, each government agency or instrumentality shall be
treated as a
separate issuer. If the Fund fails to achieve the diversification
required by
the regulations, unless relief is obtained from the Internal
Revenue Service,
the contracts invested in the Fund will not be treated as
annuity, endowment, or
life insurance contracts.
The Fund will be operated at all times so as to comply with the
foregoing
diversification requirements.
STATE INSURANCE REGULATIONS. The Fund is intended to be a funding
vehicle for
variable annuity contracts and variable life insurance policies
offered by
certain insurance companies. The contracts will seek to be
offered in as many
jurisdictions as possible. Certain states have regulations
concerning, among
other things, the concentration of investments, sales and
purchases of futures
contracts, and short sales of securities. If applicable, the Fund
may be limited
in its ability to engage in such investments and to manage its
portfolio with
desired flexibility. The Fund will operate in material compliance
with the
applicable insurance laws and regulations of each jurisdiction in
which
contracts will be offered by the insurance companies which invest
in the Fund.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest
for the purpose
of seeking short-term profits, securities in its portfolio will
be sold whenever
the Fund's investment adviser believes it is appropriate to do so
in light of
the Fund's investment objective, without regard to the length of
time a
particular security may have been held. It is not anticipated
that the portfolio
trading engaged in by the Fund will result in its annual rate of
portfolio
turnover exceeding 200%. A portfolio turnover rate of 100% would
occur, for
example, if all the securities in the Fund's portfolio were
replaced once in a
period of one year. The Fund's rate of portfolio turnover may
exceed that of
certain other mutual funds with the same investment objective. A
higher rate of
portfolio turnover involves correspondingly greater brokerage
commissions and
other expenses which must be borne directly by the Fund and,
thus, indirectly by
its shareholders. In addition, a high rate of portfolio turnover
may result in
the realization of larger amounts of capital gains which, when
distributed to
the Fund's shareholders, are taxable to them. Nevertheless,
transactions for the
Fund's portfolio will be based only upon investment
considerations and will not
be limited by any other considerations when the Fund's investment
adviser deems
it appropriate to make changes in the Fund's portfolio.
NET ASSET VALUE
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The net asset value per share of the Fund fluctuates. It is
determined by
dividing the sum of the market value of all securities and other
assets of the
Fund, less liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
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PURCHASES AND REDEMPTIONS
Shares of the Fund are not sold directly to the general public.
The Fund's
shares are used solely as the investment vehicle for separate
accounts of
insurance companies offering variable life insurance policies and
variable
annuity contracts. The use of Fund shares as investments for both
variable life
insurance policies and variable annuity contracts is referred to
as "mixed
funding." The use of Fund shares as investments by separate
accounts of
unaffiliated life insurance companies is referred to as "shared
funding."
The Fund intends to engage in mixed funding and shared funding in
the future.
Although the Fund does not currently foresee any disadvantage to
contract owners
due to differences in redemption rates, tax treatment, or other
considerations
resulting from mixed funding or shared funding, the Trustees of
the Fund will
closely monitor the operation of mixed funding and shared funding
and will
consider appropriate action to avoid material conflicts and take
appropriate
action in response to any material conflicts which occur. Such
action could
result in one or more participating insurance companies
withdrawing their
investment in the Fund.
Shares of the Fund are purchased or redeemed on behalf of
participating
insurance companies at the next computed net asset value after an
order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Fund are sold and redeemed at the net asset value
calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Fund
reserves the right to
reject any purchase request.
Net asset value of shares of the Fund will not be calculated on:
(i) days on
which there are not sufficient changes in the value of the Fund's
portfolio
securities that its net asset value might be materially affected;
(ii) days on
which no shares are tendered for redemption and no orders to
purchase shares are
received; and (iii) the following holidays: New Year's Day,
Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and
Christmas Day.
Purchase orders from separate accounts investing in the Fund
which are received
by the insurance companies by 4:00 p.m. (Eastern time) will be
computed at the
net asset value of the Fund determined on that day, as long as
such purchase
orders are received by the Fund in proper form and in accordance
with applicable
procedures by 8:00 a.m. (Eastern time) on the next business day
and as long as
federal funds in the amount of such orders are received by the
Fund on the next
business day. It is the responsibility of each insurance company
which invests
in the Fund to properly transmit purchase orders and federal
funds in accordance
with the procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared and paid annually.
Shares of the
Fund will begin earning dividends if owned on the applicable
record date.
Dividends of the Fund are automatically reinvested in additional
shares of the
Fund on payment dates at the ex-dividend date net asset value.
FUND INFORMATION
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MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees.
The Trustees are
responsible for managing the business affairs of the Trust and
for exercising
all of the Trust's powers except those reserved for the
shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract
with the Trust,
investment decisions for the Fund are made by Federated Advisers,
the Fund's
investment adviser, subject to direction by the Trustees. The
adviser
continually conducts investment research and supervision for the
Fund and is
responsible for the purchase or sale of portfolio instruments,
for which it
receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual
investment advisory
fee equal to 1.00% of the Fund's average daily net assets.
The adviser may
voluntarily choose to waive a portion of its fee or
reimburse the Fund for
certain operating expenses. The adviser can terminate this
voluntary waiver
and reimbursement of expenses at any time at its sole
discretion.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware
business trust
organized on April 11, 1989, is a registered investment
adviser under the
Investment Advisers Act of 1940. It is a subsidiary of
Federated Investors.
All of the Class A (voting) shares of Federated Investors
are owned by a
trust, the trustees of which are John F. Donahue, Chairman
and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's
son, J.
Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Advisers and other subsidiaries of Federated
Investors serve as
investment advisers to a number of investment companies and
private
accounts. Certain other subsidiaries also provide
administrative services
to a number of investment companies. Total assets under
management or
administration by these and other subsidiaries of Federated
Investors is
approximately $70 billion. Federated Investors, which was
founded in 1956
as Federated Investors, Inc., develops and manages mutual
funds primarily
for the financial industry. Federated Investors' track
record of
competitive performance and its disciplined, risk averse
investment
philosophy serve approximately 3,500 client institutions
nationwide.
Through these same client institutions, individual
shareholders also have
access to this same level of investment expertise.
Randall S. Bauer has been the Fund's portfolio manager since
the Fund
commenced operations. Mr. Bauer joined Federated Investors
in 1989 as an
Assistant Vice President of the Fund's investment adviser.
Mr. Bauer was an
Assistant Vice President of the International Banking
Division at
Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is
a Chartered
Financial Analyst and received his M.B.A. in Finance from
Pennsylvania
State University.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for
shares of the Fund.
Federated Securities Corp. is located at Federated Investors
Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November
14, 1969, and is the principal distributor for a number of
investment companies.
Federated Securities Corp. is a subsidiary of Federated
Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a
subsidiary of
Federated Investors, provides administrative personnel and
services (including
certain legal and financial reporting services) necessary to
operate the Fund.
Federated Administrative Services provides these at an annual
rate which relates
to the average aggregate daily net assets of all funds advised by
subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be
at least
$125,000 per portfolio and $30,000 per each additional class of
shares.
Federated Administrative Services may choose voluntarily to waive
a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604,
Boston,
Massachusetts 02266-8604, is custodian for the securities and
cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services
Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is
the transfer
agent for shares of the Fund and dividend disbursing agent for
the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are
Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and
sale of portfolio
instruments, the adviser looks for prompt execution of the order
at a favorable
price. In working with dealers, the adviser will generally
utilize those who are
recognized dealers in specific portfolio instruments, except when
a better price
and execution of the order can be obtained elsewhere. In
selecting among firms
believed to meet these criteria, the adviser may give
consideration to those
firms which have sold or are selling shares of the other funds
distributed by
Federated Securities Corp. The adviser makes decisions on
portfolio transactions
and selects brokers and dealers subject to review by the
Trustees.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of
Trust expenses.
These expenses may include, but are not limited to, the cost of:
organizing the
Trust and continuing its existence; Trustees' fees; investment
advisory and
administrative services; printing prospectuses and other
documents for contract
holders; registering the Trust, the Fund, and shares of the Fund;
taxes and
commissions; issuing, purchasing, repurchasing, and redeeming
shares;
custodians, transfer agents, dividend disbursing agents, contract
holders
servicing agents, and registrars; printing, mailing, auditing,
accounting, and
legal expenses; reports to contract holders and governmental
agencies; meetings
of Trustees and contract holders and proxy solicitations
therefor; insurance;
association membership dues; and such nonrecurring and
extraordinary items as
may arise. However, the investment adviser may voluntarily
reimburse some
expenses.
SHAREHOLDER INFORMATION
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VOTING RIGHTS
The insurance company separate accounts, as shareholders of the
Fund, will vote
the Fund shares held in their separate accounts at meetings of
the shareholders.
Voting will be in accordance with instructions received from
contract owners of
the separate accounts, as more fully outlined in the prospectus
of the separate
account.
Each share of the Fund gives the shareholder one vote in Trustee
elections and
other matters submitted to shareholders for vote. All shares of
each portfolio
in the Trust have equal voting rights except that only shares of
the Fund are
entitled to vote on matters affecting only the Fund. As a
Massachusetts business
trust, the Trust is not required to hold annual shareholder
meetings.
Shareholder approval will be sought only for certain changes in
the Trust or the
Fund's operation and for the election of Trustees in certain
circumstances.
Trustees may be removed by the Trustees or by shareholders at a
special meeting.
A special meeting of shareholders shall be called by the Trustees
upon the
written request of shareholders owning at least 10% of the
outstanding shares of
all series of the Trust.
TAX INFORMATION
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FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects
to meet the
requirements of the Internal Revenue Code applicable to regulated
investment
companies and to receive the special tax treatment afforded to
such companies.
The Fund will be treated as a single, separate entity for federal
income tax
purposes so that income (including capital gains) and losses
realized by the
Trust's other portfolios will not be combined for tax purposes
with those
realized by the Fund.
The Fund intends to comply with the variable asset
diversification regulations
which are described earlier in this Prospectus. If the Fund fails
to comply with
these regulations, contracts invested in the Fund shall not be
treated as
annuity, endowment, or life insurance contracts under the
Internal Revenue Code.
Contract owners should review the applicable contract prospectus
for information
concerning the federal income tax treatment of their contracts
and distributions
from the Fund to the separate accounts.
STATE AND LOCAL TAXES
Contract owners are urged to consult their own tax advisers
regarding the status
of their contracts under state and local tax laws.
PERFORMANCE INFORMATION
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From time to time the Fund advertises total return and yield.
Total return
represents the change, over a specified period of time, in the
value of an
investment in the Fund after reinvesting all income and capital
gain
distributions. It is calculated by dividing that change by the
initial
investment and is expressed as a percentage. The yield of the
Fund is calculated
by dividing the net investment income per share (as defined by
the Securities
and Exchange Commission) earned by the Fund over a thirty-day
period by the
offering price per share of the Fund on the last day of the
period. This number
is then annualized using semi-annual compounding. The yield does
not necessarily
reflect income actually earned by the Fund and, therefore, may
not correlate to
the dividends or other distributions paid to shareholders.
Performance
information will not reflect the charges and expenses of a
variable annuity or
variable life insurance contract. Because shares of the Fund can
only be
purchased by a separate account of an insurance company offering
such a
contract, you should review the performance figures of the
contract in which you
are invested, which performance figures will accompany any
advertisement of the
Fund's performance.
From time to time, the Fund may advertise its performance using
certain
financial publications and/ or compare its performance to certain
indices.
ADDRESSES
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Insurance Management Series
International Stock Fund Federated Investors
Tower
Pittsburgh,
Pennsylvania 15222-3779
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- ---------------
Distributor
Federated Securities Corp. Federated Investors
Tower
Pittsburgh,
Pennsylvania 15222-3779
- -----------------------------------------------------------------
- ---------------
Investment Adviser
Federated Advisers Federated Investors
Tower
Pittsburgh,
Pennsylvania 15222-3779
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- ---------------
Custodian
State Street Bank P.O. Box 8604
and Trust Company Boston,
Massachusetts 02266-8604
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- ---------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors
Tower
Pittsburgh,
Pennsylvania 15222-3779
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- ---------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston,
Massachusetts 02110-1617
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- ---------------
INTERNATIONAL STOCK FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
DISTRIBUTOR
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
458043 60 1
G01078-01 (4/95)
INTERNATIONAL STOCK FUND
(A Portfolio of Insurance Management Series)
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30,
1995
A. Please insert the following as the second paragraph in the
section entitled "Fund Ownership" on page 12.
"As of August 2, 1995, the following shareholders of record
owned 5% or more of the outstanding shares of the Fund:
Aetna Life Insurance and Annuity Company owned approximately
37,152 shares (43.59%) and Aetna Insurance Company of
America owned approximately 48,039 shares (56.37%)."
B. Please insert the following as the second paragraph in the
section entitled "Advisory Fees" on page 14.
"For the period from May 5, 1995, (date of initial public
investment) to June 30, 1995, the adviser earned advisory
fees of $107, all of which was waived."
C. Please insert the following as the second sentence in the
section entitled "Administrative Services" on page 14.
"For the period from May 5, 1995, (date of initial public
investment) to June 30, 1995, the Fund incurred $18,151, in
costs for administrative services, all of which was
reimbursed by the Adviser."
D. Please insert the following as the final paragraph in the
section entitled "Brokerage Transactions" which starts on
page 15.
"For the period from May 5, 1995, (date of initial public
investment) to June 30, 1995, the Fund paid no brokerage
commissions."
E. Please insert the following as the first paragraph in the
section entitled "Total Return" on page 16.
"The Fund's cumulative total return from May 5, 1995, (date
of initial public investment) to June 30, 1995, was 0.30%.
Cumulative total return reflects the Fund's total
performance over a specific period of time. This total
return assumes and is reduced by the payment of the maximum
sales load. The Fund's total return is representative of
only two months of investment activity since the Fund's
effective date."
June 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Cusip 458043601
G01083-04 (8/95)
INTERNATIONAL STOCK FUND
A PORTFOLIO OF INSURANCE MANAGEMENT SERIES
Statement of Additional Information
This Statement of Additional Information should be read with
the prospectus for International Stock Fund (the "Fund"), a
portfolio of Insurance Management Series (the "Trust"),
dated April 30, 1995. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write or call
the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of
Federated Investors
INVESTMENT OBJECTIVE AND POLICIES1
TYPES OF INVESTMENTS 1
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS 1
REPURCHASE AGREEMENTS 1
REVERSE REPURCHASE AGREEMENTS 1
LENDING OF PORTFOLIO SECURITIES1
RESTRICTED AND ILLIQUID
SECURITIES 1
FUTURES AND OPTIONS
TRANSACTIONS 2
FOREIGN CURRENCY HEDGING
TRANSACTIONS 4
RISKS 5
WARRANTS 5
INVESTMENT LIMITATIONS 6
INSURANCE MANAGEMENT SERIES
MANAGEMENT 8
FUND OWNERSHIP 12
TRUSTEES COMPENSATION 13
INVESTMENT ADVISORY SERVICES 14
ADVISER TO THE FUND 14
ADVISORY FEES 14
OTHER RELATED SERVICES 14
ADMINISTRATIVE SERVICES 14
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 14
BROKERAGE TRANSACTIONS 14
PURCHASING SHARES 15
DETERMINING NET ASSET VALUE 15
DETERMINING MARKET VALUE OF
SECURITIES 15
TRADING IN FOREIGN SECURITIES 15
MASSACHUSETTS PARTNERSHIP LAW 16
TAX STATUS 16
THE FUND'S TAX STATUS 16
FOREIGN TAXES 16
SHAREHOLDERS' TAX STATUS 16
TOTAL RETURN 16
YIELD 17
PERFORMANCE COMPARISONS 17
APPENDIX 18
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain a total return on
its assets.
TYPES OF INVESTMENTS
The Fund invests in a diversified portfolio of equity securities
issued by non-U.S. issuers. The Fund will invest at least 65%,
and under normal market conditions, substantially all of its
total assets, in equity securities of issuers located in at least
three different countries outside of the United States. The Fund
may also purchase sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs"); purchase investment grade
corporate and government fixed income securities of issuers
outside the U.S.; enter into forward commitments, repurchase
agreements, and foreign currency transactions; and maintain
reserves in foreign or U.S. money market instruments.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other
expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market
daily and maintained until the transaction has been settled. The
Fund does not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities
subject to repurchase agreements, and these securities will be
marked to market daily. In the event that a defaulting seller
filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The
Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would
rule in favor of the Fund and allow retention or disposition of
such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the
Fund's adviser or sub-adviser to be creditworthy, pursuant to
guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a
portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of
the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date.
These securities are marked to market daily and maintained until
the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities
must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional
collateral to the Fund. During the time portfolio securities are
on loan, the borrower pays the Fund any dividends or interest
paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash
or equivalent collateral to the borrower or placing broker.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper in reliance on the
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is
generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by t he
investor must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional
investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The ability of the
Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange
Commission Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule
is a non-exclusive, safe-harbor for certain secondary market
transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was
expected to further enhance the liquidity of the secondary market
for securities eligible for resale under the Rule . The Fund
believes that the staff of the Securities and Exchange Commission
has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) to the
Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
- the frequency of trades and quotes for the security;
- the number of dealers willing to purchase or sell the
security and the number of other potential buyers;
- dealer undertakings to make a market in the security; and
- the nature of the security and the nature of the marketplace
trades.
When the Fund invests in certain restricted securities determined
by the Trustees to be liquid, such investments could have the
effect of increasing the level of Fund illiquidity to the extent
that the buyers in the secondary market for such securities
(whether in resales under the Rule or other exempt transactions)
become, for a time, uninterested in purchasing these securities.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of
shares of the Fund, the Fund may attempt to hedge all or a
portion of its portfolio by buying and selling futures contracts
and options on futures contracts, and buying put and call options
on portfolio securities and securities indices. The Fund may also
write covered put and call options on portfolio securities to
attempt to increase its current income or to hedge a portion of
its portfolio investments. The Fund will maintain its positions
in securities, option rights, and segregated cash subject to puts
and calls until the options are exercised, closed, or have
expired. An option position on a futures contract may be closed
out over-the-counter or on a nationally recognized exchange which
provides a secondary market for options of the same series. The
Fund will not engage in futures transactions for speculative
purposes.
Futures Contracts
The Fund may purchase and sell financial futures contracts
to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest
rates and market conditions without necessarily buying or
selling the securities. Although some financial futures
contracts call for making or taking delivery of the
underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a
contractual obligation is accomplished by purchasing or
selling an identical offsetting futures contract. Other
financial futures contracts by their terms call for cash
settlements.
The Fund also may purchase and sell stock index futures
contracts with respect to any stock index traded on a
recognized stock exchange or board of trade to hedge against
changes in prices. Stock index futures contracts are based
on indices that reflect the market value of common stock of
the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the
difference between the value of the index at the close of
the last trading day of the contract and the price at which
the index contract was originally written. No physical
delivery of the underlying securities in the index is made.
Instead, settlement in cash must occur upon the termination
of the contract, with the settlement being the difference
between the contract price and the actual level of the stock
index at the expiration of the contract.
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future. For example, in the
fixed income securities market, prices move inversely to
interest rates. A rise in rates means a drop in price.
Conversely, a drop in rates means a rise in price. In order
to hedge its holdings of fixed income securities against a
rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price
(i.e., "go short") to protect itself against the possibility
that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would
"go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market
interest rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount
of "initial margin" in cash, U.S. government securities or
highly-liquid debt securities with its custodian (or the
broker, if legally permitted). The nature of initial margin
in futures transactions is different from that of margin in
securities transactions in that initial margin in futures
transactions does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the
nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions. The Fund is also required to deposit and maintain
margin when it writes call options on futures contracts.
To the extent required to comply with Commodity Futures
Trading Commission ("CFTC") Regulation 4.5 and thereby avoid
status as a "commodity pool operator," the Fund will not
enter into a futures contract, or purchase an option
thereon, if immediately thereafter the initial margin
deposits for futures contracts held by it, plus premiums
paid by it for open options on futures contracts, would
exceed 5% of the market value of the Fund's total assets,
after taking into account the unrealized profits and losses
on those contracts it has entered into; and, provided
further, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be
excluded in computing such 5%. Second, the Fund will not
enter into these contracts for speculative purposes; rather,
these transactions are entered into only for bona fide
hedging purposes, or other permissible purposes pursuant to
regulations promulgated by the CFTC. Third, since the Fund
does not constitute a commodity pool, it will not market
itself as such, nor serve as a vehicle for trading in the
commodities futures or commodity options markets. Finally,
because the Fund will submit to the CFTC special calls for
information, the Fund will not register as a commodities
pool operator.
Put Options on Financial and Stock Index Futures Contracts
The Fund may purchase listed put options on financial and
stock index futures contracts to protect portfolio
securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates
or stock prices. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial
instrument on a set date at a specified price, the purchase
of a put option on a futures contracts entitles (but does
not obligate) its purchaser to decide on or before a future
date whether to assume a short position at the specified
price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option
plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter
into a futures contract of the type underlying the option
(for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures
contract in return for payment of the strike price. If the
Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
When the Fund sells a put on a futures contract, it receives
a cash premium in exchange for granting to the purchaser of
the put the right to receive from the Fund, at the strike
price, a short position in such futures contract, even
though the strike price upon exercise of the option is
greater than the value of the futures position received by
such holder. If the value of the underlying futures position
is not such that exercise of the option would be profitable
to the option holder, the option will generally expire
without being exercised. It will generally be the policy of
the Fund, in order to avoid the exercise of an option sold
by it, to cancel its obligation under the option by entering
into a closing purchase transaction, if available, unless it
is determined to be in the Fund's interest to deliver the
underlying futures position. A closing purchase transaction
consists of the purchase by the Fund of an option having the
same term as the option sold by the Fund, and has the effect
of canceling the Fund's position as a seller. The premium
which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the
option was sold, depending in large part upon the relative
price of the underlying futures position at the time of each
transaction.
Call Options on Financial and Stock Index Futures Contracts
In addition to purchasing put options on futures, the Fund
may write listed and over-the-counter call options on
financial and stock index futures contracts to hedge its
portfolio. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a
short futures position (selling a futures contract) at the
fixed strike price at any time during the life of the option
if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go
down, the Fund's obligation under a call option on a future
(to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price falls below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium
received for the option. This premium can substantially
offset the drop in value of the Fund's portfolio securities.
When the Fund purchases a call on a financial futures
contract, it receives in exchange for the payment of a cash
premium the right, but not the obligation, to enter into the
underlying futures contract at a strike price determined at
the time the call was purchased, regardless of the
comparative market value of such futures position at the
time the option is exercised. The holder of a call option
has the right to receive a long (or buyer's) position in the
underlying futures contract.
The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on
futures contracts if, in the aggregate, the value of the
open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted
for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its
open futures and options positions within this limitation.
Purchasing Put Options on Portfolio Securities and Stock
Indices
The Fund may purchase put options on portfolio securities
and stock indices to protect against price movements in the
Fund's portfolio securities. A put option gives the Fund, in
return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during
the term of the option.
Writing Covered Call Options on Portfolio Securities and Stock
Indices
The Fund may also write covered call options to generate
income and thereby protect against price movements in the
Fund's portfolio securities. As writer of a call option, the
Fund has the obligation upon exercise of the option during
the option period to deliver the underlying security upon
payment of the exercise price or, in the case of a
securities index, a cash payment equal to the difference
between the closing price of the index and the exercise
price of the option. The Fund may only sell call options
either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any
additional consideration).
FOREIGN CURRENCY HEDGING TRANSACTIONS
In order to hedge against foreign currency exchange rate risks,
the Fund may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as
purchase put or call options on foreign currencies, as described
below. The Fund may also conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk
to the Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. A forward contract is an
obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and
privately traded by currency traders and their customers. The
Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the
Fund believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward
contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's portfolio securities
denominated in such foreign currency, or when the Fund believes
that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a forward contract to buy
that foreign currency for a fixed dollar amount. This second
investment practice is generally refered to as "cross-hedging."
Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount
of the purchase will be held aside or segregated to be used to
pay for the commitment, the Fund will always have cash, cash
equivalents or high quality debt securities available sufficient
to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked to market
on a daily basis. While these contracts are not presently
regulated by the CFTC, the CFTC may in the future assert
authority to regulate forward contracts. In such event, the
Fund's ability to utilize forward contracts in the manner set
forth above may be restricted. Forward contracts may limit
potential gain from a positive change in the relationship between
the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for the
Fund than if it had not engaged in such contracts.
The Fund may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be
acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only
a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an
effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be
written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies
("foreign currency futures"). This investment technique will be
used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to purchase at a later date. The
successful use of foreign currency futures will usually depend on
the ability of the adviser to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
RISKS
When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities or
foreign currency subject to the futures contracts may not
correlate perfectly with the prices of the securities or currency
in the Fund's portfolio. This may cause the futures contract and
any related options to react differently to market changes than
the portfolio securities or foreign currency. In addition, the
adviser could be incorrect in its expectations about the
direction or extent of market factors such as stock price
movements or foreign currency exchange rate fluctuations. In
these events, the Fund may lose money on the futures contract or
option.
It is not certain that a secondary market for positions in
futures contracts or for options will exist at all times.
Although the adviser will consider liquidity before entering into
these transactions, there is no assurance that a liquid secondary
market on an exchange or otherwise will exist for any particular
futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions
depends on this secondary market. The inability to close out
these positions could have an adverse effect on the Fund's
ability to effectively hedge its portfolio.
To minimize risks, the Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum of
the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5%
of the value of the Fund's total assets after taking into account
the unrealized profits and losses on those contracts it has
entered into; and, provided further, that in the case of an
option that is in-the-money at the time of purchase, the in-the-
money amount may be excluded in computing such 5%. When the Fund
purchases futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the
futures contracts (less any related margin deposits), will be
deposited in a segregated account with the Fund's custodian (or
the broker, if legally permitted) to collateralize the position
and thereby insure that the use of such futures contract is
unleveraged. When the Fund sells futures contracts, it will
either own or have the right to receive the underlying future or
security, or will make deposits to collateralize the position as
discussed above.
WARRANTS
The Fund may invest in warrants. Warrants are basically options
to purchase common stock at a specific price (usually at a
premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have
a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after
which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during
the life of the warrant, the warrant will expire as worthless.
Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing
them. The percentage increase or decrease in the market price of
the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
INVESTMENT LIMITATIONS
Diversification of Investments
With respect to 75% of the value of its total assets, the
Fund will not purchase securities of any one issuer (other
than securities issued or guaranteed by the government of
the United States or its agencies or instrumentalities) if
as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer, or if it
would own more than 10% of the outstanding voting securities
of any one issuer.
Acquiring Securities
The Fund will not acquire more than 10% of the outstanding
voting securities of any one issuer.
Concentration of Investments
The Fund will not invest 25% or more of its total assets in
securities of issuers having their principal business
activities in the same industry.
Borrowing
The Fund will not borrow money except as a temporary measure
for extraordinary or emergency purposes and then only in
amounts up to one-third of the value of its total assets,
including the amount borrowed. This borrowing provision is
not for investment leverage but solely to facilitate
management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio
securities would be inconvenient or disadvantageous. The
Fund will not purchase securities while outstanding
borrowings exceed 5% of the value of its total assets.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate assets,
except when necessary for permissible borrowings. Neither
the deposit of underlying securities or other assets in
escrow in connection with the writing of put or call options
or the purchase of securities on a when-issued basis, nor
margin deposits for the purchase and sale of financial
futures contracts and related options are deemed to be a
pledge.
Buying on Margin
The Fund will not purchase any securities on margin, but may
obtain such short-term credits as are necessary for
clearance of transactions, except that the Fund may make
margin payments in connection with its use of financial
futures contracts or related options and transactions.
Issuing Senior Securities
The Fund will not issue senior securities except in
connection with borrowing money directly or through reverse
repurchase agreements or as required by forward commitments
to purchase securities or currencies.
Underwriting
The Fund will not underwrite or participate in the marketing
of securities of other issuers, except as it may be deemed
to be an underwriter under federal securities law in
connection with the disposition of its portfolio securities.
Investing in Real Estate
The Fund will not invest in real estate, although it may
invest in securities secured by real estate or interests in
real estate or issued by companies, including real estate
investment trusts, which invest in real estate or interests
therein.
Investing in Commodities
The Fund will not purchase or sell commodities or commodity
contracts, except that the Fund may purchase and sell
financial futures contracts and options on financial futures
contracts, provided that the sum of its initial margin
deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial
futures contracts, may not exceed 5% of the fair market
value of the Fund's total assets, after taking into account
the unrealized profits and losses on those contracts.
Further, the Fund may engage in foreign currency
transactions and purchase or sell forward contracts with
respect to foreign currencies and related options.
Lending Cash or Securities
The Fund will not lend any assets except portfolio
securities. This shall not prevent the purchase or holding
of bonds, debentures, notes, certificates of indebtedness,
or other debt securities of an issuer, repurchase agreements
or other transactions which are permitted by the Fund's
investment objective and policies or its Declaration of
Trust.
Selling Short
The Fund will not sell securities short unless (1) it owns,
or has a right to acquire, an equal amount of such
securities, or (2) it has segregated an amount of its other
assets equal to the lesser of the market value of the
securities sold short or the amount required to acquire such
securities. The segregated amount will not exceed 10% of the
Fund's net assets. While in a short position, the Fund will
retain the securities, rights, or segregated assets.
To comply with registration requirements in certain states,
the Fund (1) will limit short sales of securities of any
class of any one issuer to the lesser of 2% of the Fund's
net assets or 2% of the securities of that class, (2) will
make short sales only on securities listed on recognized
stock exchanges. The latter restrictions, however, do not
apply to short sales of securities the Fund holds or has a
right to acquire without the payment of any further
consideration, and (3) will not invest more than 5% of its
total assets in restricted securities. (If state
requirements change, these restrictions may be revised
without shareholder notification.)
Except as noted, the above investment limitations cannot be
changed without shareholder approval. The following limitations,
however, may be changed by the Trustees without shareholder
approval. Except as noted, shareholders will be notified before
any material change in these limitations becomes effective.
Purchasing Securities to Exercise Control
The Fund will not purchase securities of a company for the
purpose of exercising control or management.
Investing in Warrants
The Fund will not invest more than 5% of its assets in
warrants, including those acquired in units or attached to
other securities. To comply with certain state restrictions,
the Fund will limit its investment in such warrants not
listed on recognized stock exchanges to 2% of its total
assets. (If state restrictions change, this latter
restriction may be revised without notice to shareholders.)
For purposes of this investment restriction, warrants
acquired by the Fund in units or attached to securities may
be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies, except by purchase in the open market involving
only customary brokerage commissions and as a result of
which not more than 10% of the value of its total assets
would be invested in such securities, or except as part of a
merger, consolidation or other acquistion.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its
total assets in securities of issuers which have records of
less than three years of continuous operations, including
the operation of any predecessor.
Investing in Minerals
The Fund will not invest in interests in oil, gas, or other
mineral exploration or development programs, other than
debentures or equity stock interests.
Investing in Restricted Securities
The Fund will not invest more than 15% of its total assets
in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued
under Section 4(2) of the Securities Act of 1933 and certain
other restricted securities which meet the criteria for
liquidity as established by the Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including securities not
determined by the Trustees to be liquid, repurchase
agreements with maturities longer than seven days after
notice, and certain over-the-counter options.
Dealing in Puts and Calls
The Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or the Fund
is entitled to them in deliverable form without further
payment or the Fund has segregated cash in the amount of any
further payments. The Fund will not purchase put options on
securities unless the securities or an offsetting call
option is held in the Fund's portfolio. The Fund may also
purchase, hold or sell (i) contracts for future delivery of
securities or currencies and (ii) warrants granted by the
issuer of the underlying securities.
Investing in Issuers Whose Securities are Owned by Officers
and Trustees of the Trust
The Fund will not purchase or retain the securities of any
issuer if the officers and Trustees of the Trust or the
Fund's investment adviser or sub-adviser owning individually
more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Arbitrage Transactions
To comply with certain state restrictions, the Fund will not
enter into transactions for the purpose of engaging in
arbitrage. If state requirements change, this restriction
may be revised without shareholder notification.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change in
value or net assets will not result in a violation of such
restriction.
The Fund has no present intent to borrow money or pledge
securities in excess of 5% of the value of its total assets in
the coming fiscal year.
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and
Director, Federated Research Corp.; Chairman, Passport Research,
Ltd.; Director, AEtna Life and Casualty Company; Chief Executive
Officer and Director, Trustee, or Managing General Partner of the
Funds. Mr. Donahue is the father of J. Christopher Donahue,
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board,
Children's Hospital of Pittsburgh; Director, Trustee, or Managing
General Partner of the Funds; formerly, Senior Partner, Ernst &
Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates,
Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-
President, John R. Wood and Associates, Inc., Realtors;
President, Northgate Village Development Corporation; Partner or
Trustee in private real estate ventures in Southwest Florida;
Director, Trustee, or Managing General Partner of the Funds;
formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker,
Inc.; Director, Trustee, or Managing General Partner of the
Funds; formerly, Vice Chairman and Director, PNC Bank, N.A., and
PNC Bank Corp. and Director, Ryan Homes, Inc.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and
Director, Federated Research Corp.; President, Passport Research,
Ltd.; Trustee, Federated Administrative Services, Federated
Services Company, and Federated Shareholder Services; President
or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University
of Pittsburgh; Medical Director, University of Pittsburgh Medical
Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist,
and Internist, Presbyterian and Montefiore Hospitals; Director,
Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Koehuba, Meyer and
Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty;
Director, Eat'N Park Restaurants, Inc., and Statewide Settlement
Agency, Inc.; Director, Trustee, or Managing General Partner of
the Funds; formerly, Counsel, Horizon Financial, F.A., Western
Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds;
formerly, President, State Street Bank and Trust Company and
State Street Boston Corporation and Trustee, Lahey Clinic
Foundation, Inc.
Gregor F. Meyer
Henny, Koehuba, Meyer and
Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty;
Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants,
Inc.; Director, Trustee, or Managing General Partner of the
Funds; formerly, Vice Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D.,
S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting
Partner, Mollica, Murray and Hogue; Director, Trustee or Managing
General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation,
Online Computer Library Center, Inc., and U.S. Space Foundation;
Chairman, Czecho Slovak Management Center; Director, Trustee, or
Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory
Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or
Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp., and
Passport Research, Ltd.; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer,
and Trustee, Federated Administrative Services; Trustee or
Director of some of the Funds; Vice President and Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated Research;
Vice President and Secretary, Federated Research Corp. and
Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated
Administrative Services; Secretary and Trustee, Federated
Shareholder Services; Executive Vice President and Director,
Federated Securities Corp.; Vice President and Secretary of the
Funds.
* This Trustee is deemed to be an "interested person" as
defined in the Investment Company Act of 1940, as
amended.
@ Member of the Executive Committee. The Executive
Committee of the Board of Trustees handles the
responsibilities of the Board of Trustees between
meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the
following investment companies: American Leaders Fund, Inc.;
Annuity Management Series; Arrow Funds; Automated Cash Management
Trust; Automated Government Money Trust; California Municipal
Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated
GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First Priority Funds;
Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S.
Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust;
Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty
Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-
- -1999; Liberty U.S. Government Money Market Trust; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; The
Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust;
Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-
Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding
shares.
As of April 4, 1995 there were no shareholders of record who
owned 5% or more of the outstanding shares of the Fund.
Trustees COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue
Trustee and Chairman $ 0 $0 for the Trust and
68 other investment companies in the Fund
Complex
Thoms G. Bigley
Trustee $252 $20,688 for the Trust and
49 other investment companies in the Fund
Complex
John T. Conroy, Jr.
Trustee $276 $117,202 for the Trust and
64 other investment companies in the Fund
Complex
William J. Copeland
Trustee $276 $117,202 for the Trust and
64 other investment companies in the Fund
Complex
J. Christopher Donahue
Trustee and President $ 0 $0 for the Trust and
14 other investment companies in the Fund
Complex
James E. Dowd
Trustee $276 $117,202 for the Trust and
64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D.
Trustee $252 $106,460 for the Trust and
64 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr.
Trustee $276 $117,202 for the Trust and
64 other investment companies in the Fund
Complex
Peter E. Madden
Trustee $ 100 $90,563 for the Trust and
64 other investment companies in the Fund
Complex
Gregor F. Meyer
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund
Complex
John E. Murray, Jr.
Trustee $0 $0 for the Trust and
68 other investment companies in the Fund
Complex
Wesley W. Posvar
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund
Complex
Marjorie P. Smuts
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund
Complex
*Information is furnished for the fiscal year ended December 31,
1994.
#The aggregate compensation is provided for the Trust which is
comprised of 6 portfolios.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All the
voting securities of Federated Investors are owned by a trust,
the trustees of which are John F. Donahue, his wife, and his son,
J. Christopher Donahue.
The Adviser shall not be liable to the Fund, the Trust, or any
shareholder of the Fund for any losses that may be sustained in
the purchase, holding, or sale of any security or for anything
done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual
investment advisory fee as described in the prospectus.
State Expense Limitations
The Adviser has undertaken to comply with the expense
limitation established by certain states for investment
companies whose shares are registered for sale in those
states. If the Fund's normal operating expenses (including
the investment advisory fees, but not including brokerage
commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average
net assets, and 1-1/2% per year of the remaining average net
assets, the Adviser will reimburse the Fund for its expenses
over the limitation.
If the Fund's monthly projected operating expenses exceed
this limitation, the investment advisory fees paid will be
reduced by the amounts of the excess, subject to an annual
adjustment. If the expense limitation is exceeded, the
amounts to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amounts of the investment
advisory fees.
This arrangement is not part of the advisory contract
agreement and may be amended or rescinded in the future.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain
electronic equipment and software to institutional customers in
order to facilitate the purchase of shares of funds offered by
Federated Securities Corp.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated
Investors, provides administrative personnel and services to the
Fund and receives an administrative fee as described in the
prospectus. Dr. Henry J. Gailliot, an officer of Federated
Advisers, the Adviser to the Fund, holds approximately 20% of the
outstanding common stock and serves as a director of Commercial
Data Services, Inc., a company which provides computer processing
services to Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent
is based on the size, type and number of accounts and
transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting
records. The fee paid for this service is based on the level of
the Fund's average net assets for the period plus out-of-pocket
expenses.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly
to the Fund or to the Adviser and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. The Adviser
determines in good faith that commissions charged by such persons
are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser
or by affiliates of Federated Investors in advising certain other
accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
The Adviser may engage in other non-U.S. transactions that may
have adverse effects on the market for securities in the Fund's
portfolio. The Adviser is not obligated to obtain any material
non-public ("inside") information about any securities issuer, or
to base purchase or sale recommendations on such information.
PURCHASING SHARES
Except under certain circumstances described in the prospectus,
shares are sold at their net asset value without a sales charge
on days the New York Stock Exchange is open for business. The
procedure for purchasing shares is explained in the prospectus
under "Purchases and Redemptions" and "What Shares Cost."
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net
asset value is calculated by the Fund are described in the
prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are
determined as follows:
- - according to the last reported sale price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for
that security, as determined by the Adviser is used.);
- - according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded
over-the-counter;
- - at fair value as determined in good faith by the Trustees; or
- - for short-term obligations with remaining maturities of less
than 60 days at the time of purchase, at amortized cost, which
approximates value.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider:
institutional trading in similar groups of securities; yield;
quality; coupon rate; maturity; type of issue; trading
characteristics; and other market data.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which
vary from the closing of the New York Stock Exchange. In
computing the net asset value, the Fund values foreign securities
at the latest closing price on the exchange on which they are
traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be
determined at the latest rate prior to the closing of the New
York Stock Exchange. Foreign securities quoted in foreign
currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the
closing of the New York Stock Exchange. If such events materially
affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the
Trustees, although the actual calculation may be done by others.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders of the Fund may be held
liable as partners under Massachusetts law for obligations of the
Fund. To protect shareholders of the Fund, the Fund has filed
legal documents with Massachusetts that expressly disclaim the
liability of shareholders for acts or obligations of the Fund.
These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign on behalf of the Fund.
In the unlikely event a shareholder of the Fund is held
personally liable for the Trust's obligations on behalf of the
Fund, the Trust is required to use the property of the Fund to
protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder
of the Fund for any act or obligation of the Trust on behalf of
the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust itself
cannot meet its obligations to indemnify shareholders and pay
judgments against them from the assets of the Fund.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to
meet the requirements of Subchapter M of the Internal Revenue
Code, as amended, applicable to regulated investment companies
and to receive the special tax treatment afforded to such
companies. To qualify for this treatment, the Fund must, among
other requirements:
- - derive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
- - derive less than 30% of its gross income from the sale of
securities held less than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income
earned during the year.
However, the Fund may invest in the stock of certain foreign
corporations which would constitute a Passive Foreign Investment
Company (PFIC). Federal income taxes may be imposed on the Fund
upon disposition of PFIC investments.
FOREIGN TAXES
Investment income on certain foreign securities in which the Fund
may invest may be subject to foreign withholding or other taxes
that could reduce the return on these securities. Tax treaties
between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
SHAREHOLDERS' TAX STATUS
The Fund intends to comply with the variable asset
diversification regulations which are described in the prospectus
and in this Statement of Additional Information. If the Fund
fails to comply with these regulations, contracts invested in the
Fund shall not be treated as annuity, endowment or life insurance
contracts under the Internal Revenue Code, as amended.
Contract owners should review the contract prospectus for
information concerning the federal income tax treatment of their
contracts and distributions from the Fund to the separate
accounts.
TOTAL RETURN
The average annual total return for shares of the Fund is the
average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value
of that investment. The ending redeemable value is computed by
multiplying the number of shares owned at the end of the period
by the offering price per share at the end of the period. The
number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with
$1,000, less any applicable sales load, adjusted over the period
by any additional shares, assuming the annual reinvestment of all
dividends and distributions. You should review the performance
figures for your insurance contract, which figures reflect the
applicable charges and expenses of the contract. Such
performance figures will accompany any advertisement of the
Fund's performance.
YIELD
The Fund's yield is determined by dividing the net investment
income per share (as defined by the SEC) earned by the Fund over
a thirty-day period by the offering price per share of the Fund
on the last day of the period. This value is then annualized
using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments
required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders. You should
review the performance figures for your insurance contract, which
figures reflect the applicable charges and expenses of the
contract. Such performance figures will accompany any
advertisement of the Fund's performance.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates on money market instruments;
- - changes in Fund expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely
because net earnings and offering price per share fluctuate
daily. Both net earnings and offering price per share are factors
in the computation of total return.
Investors may use financial publications and/or indices to obtain
a more complete view of the Fund's performance. When comparing
performance, investors should consider all relevant factors such
as the composition of any indices used, prevailing market
conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price.
The financial publications and/or indices which the Fund uses in
advertising may include:
- - LIPPER ANALYTICAL SERVICES, INC., for example, makes
comparative calculations for one-month, three-month, one-year,
and five-year periods which assume the reinvestment of all
capital gains distributions and income dividends.
- - MORGAN STANLEY EUROPE, AUSTRALIA, AND FAR EAST (EAFE) Index is
a market capitalization weighted foreign securities index,
which is widely used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets.
The index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its securities
daily in both U.S. dollars and local currency and calculates
total returns monthly. EAFE U.S. dollar total return is a net
dividend figure less Luxembourg withholding tax. The EAFE is
monitored by Capital International, S.A., Geneva, Switzerland.
- - SALOMON BROTHERS WORLD EQUITY INDEX EX U.S. is a capitalization-
weighted index comprised of equities from 22 countries
excluding the United States.
- - FT ACTUARIES WORLD - EX U.S. index is comprised of 1,740
stocks, excluding U.S. stocks, jointly compiled by the
Financial Times Ltd., Goldman, Sachs & Co., and NatWest
Securities Ltd. in conjunction with the Institute of Actuaries
and the Faculty of Actuaries.
Advertisements and sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods.
These total returns also represent the historic change in the
value of an investment in the Fund based on annual reinvestment
of dividends over a specified period of time.
From time to time as it deems appropriate the Fund may advertise
its performance using charts, graphs, and descriptions, compared
to federally insured bank products, including certificates of
deposit and time deposits and to money market fund using the
Lipper Analytical Services money market instruments average.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP BOND RATING DEFINITIONS
AAA-Debt rated "AAA" has the highest rating assigned by Standard
& Poor's Corporation. Capacity to pay interest and repay
principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in
small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effect of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB-Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
B-Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal payments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC-Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal.
CC-The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC debt
rating.
C-The rating C typically is applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed but debt service payments are
continued.
CI-The rating CI is reserved for income bonds on which no
interest is being paid.
D-Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA-Bonds which are rated AAA are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA-Bonds which are rated AA are judged to be of high quality by
all standards. Together with the AAA group, they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in AAA securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger
than in AAA securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
BAA-Bonds which are rated BAA are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as
well.
BA-Bonds which are BA are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
CAA-Bonds which are rated CAA are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
CA-Bonds which are rated C represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA-Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
"F-1+."
A-Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory
credit quality. The obligator's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely
to have adverse impact on these bonds, and, therefore, impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
BB-Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this
call are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest
and/or principal seems probably over time.
C-Bonds are in imminent default in payment of interest or
principal.
DDD,DD, AND D-Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. DDD represents the
highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATING
A-1 -- This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with
a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING
PRIME-1 - Issuers rated PRIME-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. PRIME-1 repayment capacity will
normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of
return on funds employed; conservative capitalization structure
with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high
internal cash generation; well-established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2 - Issuers rated PRIME-2 (or related supporting
institutions) have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many
of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING
F-1+ - Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 - Very Strong Credit Quality. Issues assigned this rating
reflect an assurance for timely payment only slightly less in
degree than issues rated F-1+.
F-2 - Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
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