GROWTH STOCK FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This prospectus offers shares of Growth Stock Fund (the "Fund"), which is a
diversified investment portfolio in Insurance Management Series (the "Trust"),
an open-end, diversified management investment company. The investment objective
of the Fund is capital appreciation. 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
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 annuity contracts and variable life
insurance policies 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 September
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, which is in paper form only, or a paper copy of this prospectus, if
you have received your prospectus electronically, 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 FUNDING VEHICLES FOR LIFE INSURANCE
COMPANIES WRITING VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE INSURANCE
POLICIES. THIS PROSPECTUS SHOULD BE ACCOMPANIED BY THE PROSPECTUS FOR SUCH
CONTRACTS.
Prospectus dated September 30, 1995
TABLE OF CONTENTS
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GENERAL INFORMATION 1
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INVESTMENT INFORMATION 1
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Investment Objective 1
Investment Policies 1
Investment Limitation 6
NET ASSET VALUE 6
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INVESTING IN THE FUND 6
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Purchases and Redemptions 6
What Shares Cost 7
Dividends 7
FUND INFORMATION 7
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Management of the Fund 7
Distribution of Fund Shares 9
Administration of the Fund 9
Expenses of the Fund 9
Brokerage Transactions 10
SHAREHOLDER INFORMATION 10
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Voting Rights 10
TAX INFORMATION 10
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Federal Taxes 10
State and Local Taxes 11
PERFORMANCE INFORMATION 11
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ADDRESSES 12
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GENERAL INFORMATION
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The Fund is a portfolio of the Trust which 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 annuity contracts and variable life insurance policies 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
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INVESTMENT OBJECTIVE
The investment objective of the Fund is capital appreciation. 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 endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies with prospects for above-average growth
in earnings and dividends or companies where significant fundamental changes are
taking place. Equity securities include common stocks, preferred stocks, and
securities (including debt securities) that are convertible into common stocks.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Board of Trustees ("Trustees") without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment adviser selects equity securities
on the basis of traditional research techniques, including assessment of
earnings and dividend growth prospects and of the risk and volatility of each
company's business. The Fund generally invests in companies with market
capitalization of $100,000,000 or more. The fundamental changes which the
investment adviser will seek to identify in companies include, for example,
restructuring of basic businesses or reallocations of assets which present
opportunities for significant share price appreciation. At times, the Fund will
invest in securities of companies which are deemed by the investment adviser to
be candidates for acquisition by other entities as indicated by changes in
ownership, changes in standard price-to-value ratios, and an examination of
other standard analytical indices.
The securities in which the Fund invests include, but are not limited to common
stocks, preferred stocks, convertible securities, securities of foreign issuers,
securities of other investment companies, and corporate obligations, including
bonds, debentures, notes, and warrants. In addition, the Fund
may engage in repurchase agreements, lend portfolio securities, purchase
securities on a when-issued or delayed-delivery basis, and invest in put and
call options, futures, and options on futures.
CONVERTIBLE SECURITIES. 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 preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and warrants
or a combination of the features of several of these securities. The Fund
invests in convertible bonds rated "B" or higher by Standard & Poor's Ratings
Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") at the time of
investment or, if unrated, of comparable quality. If a convertible bond is rated
below "B" according to the characteristics set forth hereafter after the Fund
has purchased it, the Fund is not required to drop the convertible bond from the
portfolio but will consider appropriate action. 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 are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's 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. The Fund
will exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the investment
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 Fund's investment 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 Fund's investment 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.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of foreign
issuers which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depositary receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions.
As a matter of practice, the Fund will not invest in the securities of a foreign
issuer if any such risk appears to the investment adviser to be substantial.
CORPORATE OBLIGATIONS. The Fund may invest up to 35% of its total assets in
bonds, debentures, notes and warrants of corporate issuers. These securities
will generally be rated "BBB" or better by S&P or "Baa" or better by Moody's at
the time of investment, or if unrated, of comparable quality. Securities which
are rated BBB by S&P or Baa by Moody's have speculative characteristics. Changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than higher-rated
bonds. The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates. Downgrades will be evaluated on a case by case
basis by the investment adviser. The investment 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.
In addition, with respect to the 35% limit, the Fund may invest up to 5% of its
assets in debt obligations rated "B" or better by S&P or Moody's.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other open-end investment companies and in the securities of
closed-end investment companies, but it will not own more than 3% of the total
outstanding voting stock of any investment company, invest more than 5% of its
total assets in any one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund will invest in other
investment companies primarily for the purpose of investing its short-term cash
which has not yet been invested in other portfolio instruments. Shareholders
should realize that, when the Fund invests in other investment companies,
certain fund expenses, such as custodian fees and administrative fees, may be
duplicated. The investment adviser will waive its investment advisory fee on
assets invested in securities of other investment companies.
REPURCHASE AGREEMENTS. The Fund will engage in repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other recognized
financial institutions sell U.S. government securities or other securities to
the Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. The Fund or its custodian will take possession of the
securities subject to repurchase agreements and these securities will be marked
to market daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities. In the event that such 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 found by the Fund's
investment adviser to be creditworthy pursuant to guidelines established by the
Trustees.
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 portfolio securities on a short-term or long-term basis, or both,
up to one-third of the value of its total assets to broker/dealers, banks, or
other institutional borrowers of securities. This is a fundamental policy which
may not be changed without the approval of shareholders. The Fund will only
enter into loan arrangements with broker/dealers, banks, or other institutions
which the investment adviser has determined are creditworthy under guidelines
established by the Trustees, and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the portfolio
securities loaned at all times. 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.
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 the transaction may cause the Fund
to miss a price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into these transactions, and the market values of
the securities purchased may vary from the purchase prices. Accordingly, the
Fund may pay more/less than the market value of the securities on the settlement
date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may also invest
temporarily in cash and cash items during times of unusual market conditions and
to maintain liquidity. Cash items may include short-term obligations such as:
.commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch Investors Service, Inc.;
.securities issued and/or guaranteed as to the payment of principal and
interest by the U.S. government or its agencies and instrumentalities;
.certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes, and other instruments of domestic and foreign banks and
other deposit institutions; and
.repurchase agreements.
PUT AND CALL OPTIONS. The Fund may purchase put options on stocks. These options
will be used only as a hedge to attempt to protect securities which the Fund
holds against decreases in value. The Fund may purchase these put options as
long as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio. The Fund may also write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Writing of
calls by the Fund is intended to generate income for the Fund and, thereby,
protect against price movements in particular securities in the Fund's
portfolio.
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a secondary
market on an exchange which may or may not exist for any particular call or put
option at any specific time. The absence of a liquid secondary market also may
limit the Fund's ability to dispose of the securities underlying an option. The
inability to close options also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market, while over-the-counter options may not.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell financial
futures and stock index futures contracts to hedge all or a portion of its
portfolio against changes in the price of its portfolio securities, but will not
engage in futures transactions for speculative purposes.
The Fund may also write call options and purchase put options on financial
futures and stock index futures contacts as a hedge to attempt to protect
securities in its portfolio against decreases in value.
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.
INVESTMENT LIMITATION
The Fund will not:
.borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its total assets and pledge up to 15% of
its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
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 annuity contracts and variable life
insurance policies. The use of Fund shares as investments for both variable
annuity contracts and variable life insurance policies 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
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
The net asset value is determined at the close of trading (normally 4:00 p.m.,
Eastern time) on the New York Stock Exchange each day the New York Stock
Exchange is open. 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 quarterly.
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.
Both the Trust and the adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .75 of 1% of the Fund's average daily net assets. The adviser
may voluntarily choose to waive a portion of its fee 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. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
James E. Grefenstette has been the Fund's portfolio manager since the
Fund's inception. Mr. Grefenstette joined Federated Investors in 1992 and
has been an Assistant Vice President of the Fund's investment adviser since
1994. From 1992 until 1994, Mr. Grefenstette acted as an investment
analyst. Mr. Grefenstette was a credit analyst at Westinghouse Credit Corp.
from 1990 until 1992, and an investment officer at Pittsburgh National Bank
from 1987 until 1990. Mr. Grefenstette received his M.B.A. in Finance from
Carnegie Mellon 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 as specified
below:
<TABLE>
<CAPTION>
MAXIMUM FEE AVERAGE AGGREGATE DAILY NET ASSETS
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Boston, Massachusetts, 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.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable portion of the Trust's
expenses. These expenses 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 Fund
documents for shareholders; registering the Trust, the Fund and shares of the
Fund; taxes and commissions; issuing, purchasing, repurchasing and redeeming
shares; fees for custodians, transfer agents, dividend disbursing agents,
shareholder servicing agents, and registrars; printing, mailing, auditing,
accounting, and legal expenses; reports to shareholders and government agencies;
meetings of Trustees and shareholders and proxy solicitations therefor;
insurance premiums; association membership dues; and such nonrecurring and
extraordinary items as may arise. However, the adviser may voluntarily waive
and/or reimburse some expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally 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.
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's 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 TAXES
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
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 specific 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, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
ADDRESSES
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<TABLE>
<S> <C> <C>
Insurance Management Series
Growth Stock Fund
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Advisers
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank and P.O.
Box 8604
Trust Company
Boston, Massachusetts 02266-8604
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O.
Box 8604
Boston, Massachusetts 02266-8604
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Independent Auditors
Deloitte & Touche LLP 125
Summer Street
Boston, Massachusetts 02110-1617
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</TABLE>
GROWTH STOCK FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
September 30, 1995
Cusip 458043 70 0
G01283-01 (9/95)
GROWTH STOCK FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Growth Stock Fund (the "Fund") dated September
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 September 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
INVESTMENT OBJECTIVE AND POLICIES1 ADMINISTRATIVE SERVICES 14
TYPES OF INVESTMENTS 1 TRANSFER AGENT AND DIVIDEND
FUTURES AND OPTIONS DISBURSING AGENT 14
TRANSACTIONS 2 BROKERAGE TRANSACTIONS 14
RESTRICTED AND ILLIQUID PURCHASING SHARES 14
SECURITIES 4 DETERMINING NET ASSET VALUE 14
WHEN-ISSUED AND DELAYED DETERMINING VALUE OF SECURITIES14
DELIVERY TRANSACTIONS 5 MASSACHUSETTS PARTNERSHIP LAW 15
LENDING OF PORTFOLIO SECURITIES5 TAX STATUS 15
REPURCHASE AGREEMENTS 5 THE FUND'S TAX STATUS 15
REVERSE REPURCHASE AGREEMENTS 5 SHAREHOLDER'S TAX STATUS 15
PORTFOLIO TURNOVER 6 TOTAL RETURN 15
INVESTMENT LIMITATIONS 6 YIELD 15
INSURANCE MANAGEMENT SERIES PERFORMANCE COMPARISONS 16
MANAGEMENT 8 ABOUT FEDERATED INVESTORS 17
THE FUNDS 12 MUTUAL FUND MARKET 17
FUND OWNERSHIP 12 APPENDIX 18
TRUSTEES' COMPENSATION 13
TRUSTEE LIABILITY 13
INVESTMENT ADVISORY SERVICES 13
ADVISER TO THE FUND 13
ADVISORY FEES 14
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is capital appreciation. The Fund pursues
this investment objective by investing primarily in equity securities of
companies with prospects for above-average growth in earnings and dividends or
companies where significant changes are taking place. The investment objective
cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund may invest in common stocks, preferred stocks, convertible securities,
securities of foreign issuers, U.S. government obligations, securities of other
investment companies; and corporate obligations, including bonds, debentures,
notes, and warrants. The Fund may also engage in repurchase agreements, lend
portfolio securities, purchase securities on a when-issued or delayed delivery
basis, and invest in put and call options, futures and options on futures. The
following supplements the discussion of acceptable investments in the
prospectus.
Corporate Debt Securities
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same
or a different issuer, participations based on revenues, sales or profits,
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
Corporate debt securities that are lower-rated (i.e., rated below BBB by
S&P or Baa by Moody's) are commonly referred to as "junk bonds." While
these lower-rated bonds will usually offer higher yields than higher-rated
securities, there is more risk associated with these investments. These
lower-rated bonds may be more susceptible to real or perceived adverse
economic conditions than investment grade bonds. These lower-rated bonds
are regarded as predominately speculative with regard to each issuer's
continuing ability to make principal and interest payments. In addition,
the secondary trading market for lower-rated bonds may be less liquid than
for investment grade bonds. As a result of these factors, lower-rated bonds
tend to have more price volatility and carry more risk to principal than
higher-rated bonds. The investment adviser will endeavor to limit these
risks through diversifying the portfolio and through careful credit
analysis of individual issuers.
Convertible Securities
As with all fixed-income securities, various market forces influence the
market value of convertible securities, including changes in the level of
interest rates. As interest rates increase, the market value of convertible
securities may decline and, conversely, as interest rates decline, the
market value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since
securities prices fluctuate, there can be no assurance of capital
appreciation, and most convertible securities will not reflect quite as
much capital appreciation as their underlying common stocks. When the
underlying common stock is experiencing a decline, the value of the
convertible security tends to decline to a level approximating the
yield-to-maturity basis of straight nonconvertible debt of similar
quality, often called "investment value," and may not experience
the same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege. If this appreciation
potential is not realized, the premium may not be recovered.
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.
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
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
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).
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued and/or guaranteed
by the U.S. government agencies or instrumentalities. These securities are
backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit System;
Federal Home Loan Bank System;
Student Loan Marketing Association;
Federal National Mortgage Association; and
Federal Home Loan Mortgage Corporation.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under 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 the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
The ability of the Board of Trustees ("Trustees") to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") 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 SEC has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees may 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-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. 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 price.
No fees or other expenses, other than normal transactions costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of its total assets.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend its portfolio
securities, up to one-third of the value of its total assets, to broker/dealers,
banks, or other institutional borrowers of securities. The collateral received
when the Fund lends portfolio securities must be valued daily and, should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Fund or the
borrower. The Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. The Fund
does not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if that were considered important with respect to
the investment.
REPURCHASE AGREEMENTS
The Fund 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 such 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 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 found by the Fund's investment
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.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objectives, 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 100%.
INVESTMENT LIMITATIONS
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous, and then only in amounts not in excess of one-third of the
value of its total assets; provided that, while borrowings and reverse
repurchase agreements outstanding exceed 5% of the Fund's total assets, any
such borrowings will be repaid before additional investments are made. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge or
hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of its total assets at the time of the
borrowing. For purposes of this limitation, the following are not deemed to
be pledges by the Fund: margin deposits for the purchase and sale of
futures contracts and related options, any segregation or collateral
arrangements made in connection with options activities or the purchase of
securities on a when-issued basis.
Concentration of Investments
The Fund will not purchase securities if, as a result of such purchase, 25%
or more of its total assets would be invested in any one industry. However,
the Fund may at any time invest 25% or more of its total assets in cash or
cash items and securities issued and/or guaranteed by the U.S. government,
its agencies or instrumentalities.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts, except that the Fund may purchase and sell
futures contracts and options on futures contracts provided that the sum of
its initial margin deposits for futures contracts plus premiums paid by it
for open options on 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.
Investing in Real Estate
The Fund will not purchase or sell real estate, including limited
partnership interests in real estate, although it may invest in securities
of companies whose business involves the purchase or sale of real estate or
in securities secured by real estate or interests in real estate.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio securities up to
one-third of its total assets. This shall not prevent the Fund from
purchasing or holding corporate or U.S. government bonds, debentures,
notes, certificates of indebtedness or other debt securities of an issuer,
entering into repurchase agreements, or engaging in other transactions
which are permitted by the Fund's investment objective and policies or the
Trust's Declaration of Trust.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
Diversification of Investments
With respect to 75% of its total assets, the Fund will not purchase the
securities of any one issuer (other than cash, cash items, or securities
issued and/or guaranteed by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities) if, as a result, more than 5% of its total assets would be
invested in the securities of that issuer.
In addition, the Fund will not purchase more than 10% of any class of the
outstanding voting securities of any one issuer. For these purposes, the
Fund considers common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.
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 changes
in these limitations become effective.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may invest in the
securities of issuers which invest in or sponsor such programs.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company,
will invest no more than 5% of its total assets in any one investment
company, and will invest no more than 10% of its total assets in investment
companies in general. The Fund will purchase securities of closed-end
investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
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 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, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
Investing in Put Options
The Fund will not purchase put options on securities, unless the securities
are held in the Fund's portfolio and not more than 5% of the value of the
Fund's total assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
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 the value of its net assets in
warrants. No more than 2% of the Fund's net assets, to be included within
the overall 5% limit on investments in warrants, may be warrants which are
not listed on the New York Stock Exchange or the American Stock Exchange.
(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 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 its net assets in illiquid
securities, including, among others, repurchase agreements providing for
settlement more than seven days after notice, over the counter options, and
certain restricted securities not determined by the Trustees to be liquid.
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 of total or net assets will not result in a violation
of such restriction.
The Fund has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
To comply with registration requirements in certain states, the Fund (1) will
limit the margin deposits on futures contracts entered into by the Fund to 5% of
its net assets, (2) will limit the aggregate value of the assets underlying
covered call options or put options written by the Fund to not more than 25% of
its net assets, and (3) will limit the premiums paid for options purchased by
the Fund to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification).
INSURANCE MANAGEMENT SERIES MANAGEMENT
Officers and Trustees are listed with their addresses, birth dates, principal
occupations during the past five years, and present positions with Insurance
Management Series.
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. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
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.
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.
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. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Executive 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.
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, Kochuba, Meyer and Flaherty
Two Gateway Center Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, 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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
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, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp., and Passport Research, Ltd.; Executive
Vice President, and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman, Treasurer, and
Trustee, Federated Administrative Services; Trustee or Director of some of the
Funds; Executive Vice President, President, or Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors;
Controller, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Senior Vice President,
Federated Shareholder Services; Senior Vice President, Federated Administrative
Services; Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Services Company; Executive Vice President, Secretary,
and Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive 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.
THE FUNDS
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 Government Money 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 Master Trust; Federated
Municipal Trust; Federated Short-Term Municipal Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S, Government
Secuities Fund: 3-5 Years; 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;; Insurance
Management Series; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity Income
Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities
Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc.
- - 1999; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds;
Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund,
Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; The Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
TRUSTEES' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST* FROM FUND COMPLEX +
John F. Donahue, $0 $0 for the Trust and
Trustee and Chairman 68 other investment companies in the
Fund Complex
Thomas G. Bigley, $252 $20,688 for the Trust and
Trustee 49 other investment companies in the Fund
Complex
John T. Conroy, Jr., $276 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
William J. Copeland, $276 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
J. Christopher Donahue, $0 $0 for the Trust and
Trustee and President 14 other investment companies in the
Fund Complex
James E. Dowd, $276 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $252 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr., $276 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
Peter E. Madden, $100 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
Gregor F. Meyer, $252 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
John E. Murray, Jr., $0 $0 for the Trust and
Trustee 68 other investment companies in the Fund
Complex
Wesley W. Posvar, $252 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund
Complex
Marjorie P. Smuts, $252 $106,460 for the Trust and
Trustee 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 six
portfolios.
+The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue.
The adviser shall not be liable to the Fund or any shareholder 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, Federated Advisers receives an annual investment
advisory fee as described in the prospectus.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. 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 upon 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 upon 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. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising Federated funds and other
accounts. To the extent that receipt of these services may supplant services for
which the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
PURCHASING SHARES
Shares of the Fund 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 of the Fund 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 VALUE OF SECURITIES
The values of the Fund's portfolio securities are determined as follows:
for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available; otherwise, as determined by an
independent pricing service;
for unlisted equity securities, the latest mean prices;
for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
for all other securities, at fair value as determined in good faith by the
Board of Trustees.
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 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.
SHAREHOLDER'S TAX STATUS
The Fund intends to comply with the variable asset diversification regulations
which are described in the prospectus and this Statement. 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 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 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, adjusted over the period by any additional
shares, assuming the quarterly 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 yield for the Fund 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. Also, the yield does not
reflect the charges and expenses of an insurance contract. 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 and market value of portfolio securities;
changes in Fund expenses; and
the relative amount of the Fund's cash flow.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified
period of time. From time to time, the Trust will quote its Lipper ranking
in the "growth funds" category in advertising and sales literature.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is cited
as a principal indicator of market conditions.
STANDARD & POOR'S LOW-PRICED INDEX compares a group of approximately twenty
actively traded stocks priced under $25 for one month periods and year-to-
date.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in the Standard & Poor's figures.
STANDARD & POOR'S 500 ("S&P 500") is an unmanaged index of common stocks in
industry, transportation, finance, and public utilities denoting general
market performance, as monitored by Standard & Poor's Corporation.
LIPPER GROWTH FUND AVERAGE is an average of the total returns for 251
growth funds tracked by Lipper Analytical Services, Inc., an independent
mutual fund rating service.
LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.
MORNINGSTAR, INC. , an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and 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
quarterly 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 funds using the Lipper Analytical Services money market
instruments average.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors.
In the equity sector, Federated has more than 25 years experience. As of
December 31, 1994, Federated managed 15 equity funds totaling approximately $4
billion in assets across growth, value, equity income, international, index and
sector (i.e. utility) styles. Federated's value-oriented management style
combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
Trust Organizations
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated mutual funds are available to consumers through major brokerage
firms nationwide including 200 New York Stock Exchange firms supported
by more wholesalers than any other mutual fund distributor. The marketing
effort to these firms is headed by James F. Getz, President, Broker/Dealer
Division.
*Source: Investment Company Institute
APPENDIX
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B--Debt rated "BB" and "B" is regarded, on balance as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "B" indicates the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
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 rate "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.
Cusip 458043700
G01283-02
