EQUITY GROWTH AND INCOME FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This prospectus offers shares of Equity Growth and Income Fund (the "Fund"),
which is a diversified investment portfolio in Insurance Management Series (the
"Trust"), an open-end, diversified management investment company. The primary
investment objective of the Fund is to achieve long-term growth of capital. The
Fund's secondary objective is to provide income. 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 April 30,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS 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 April 30, 1995
TABLE OF CONTENTS
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FINANCIAL HIGHLIGHTS 1
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GENERAL INFORMATION 2
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INVESTMENT INFORMATION 2
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Investment Objective 2
Investment Policies 2
Investment Limitations 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 8
Administration of the Fund 9
Brokerage Transactions 9
SHAREHOLDER INFORMATION 9
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Voting Rights 9
TAX INFORMATION 10
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Federal Taxes 10
State and Local Taxes 10
PERFORMANCE INFORMATION 11
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APPENDIX 12
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ADDRESSES 15
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EQUITY GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.19
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Net realized and unrealized gain (loss) on investments (0.26)
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Total from investment operations (0.07)
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.19)
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NET ASSET VALUE, END OF PERIOD $ 9.74
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TOTAL RETURN** (0.70%)
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.54%(a)
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Net investment income 2.58%(a)
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Expense waiver/reimbursement (b) 25.42%(a)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $ 2,400
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Portfolio turnover rate 32%
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</TABLE>
* Reflects operations for the period from February 1, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to January 31, 1994, the Fund had no investment
activity.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
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 OBJECTIVES
The primary investment objective of the Fund is to achieve long-term growth of
capital. The Fund's secondary objective is to provide income. The investment
objectives cannot be changed without the approval of the Fund's shareholders.
While there is no assurance that the Fund will achieve its investment
objectives, it endeavors to do so by following the investment policies described
in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objectives by investing, under normal
circumstances, at least 65% of its total assets in common stock of "blue-chip"
companies. "Blue-chip" companies generally are top-quality, established growth
companies which, in the opinion of the investment adviser, meet one or more of
the following criteria:
industry leader with proven management capabilities;
historical and future earnings growth rate of approximately 10%
compounded annually;
strong balance sheet with pension liabilities funded;
products with brand recognition and consumer acceptance;
growing consumer-based demand with limited government sales;
ability to meet social, political, and environmental problems;
vigorous research effort with continuing new product flow;
low external capital requirements; and
not an import competitive company but possessing international
capabilities.
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 approach is based on the
conviction that over the long term the economy will continue to expand and
develop and that this economic growth will be
reflected in the growth of the revenues and earnings of blue-chip companies.
Given these long-term investment horizons, the Fund will attempt to hold its
portfolio securities throughout market cycles.
COMMON STOCKS. The Fund invests primarily in common stocks of blue-chip
companies selected by the Fund's investment adviser based on the criteria set
forth above and traditional research techniques and technical factors, including
assessment of earnings and dividend growth prospects and of the risk and
volatility of the company's industry. Other factors, such as product position or
market share, will also be considered by the Fund's investment adviser.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities and
warrants of the blue-chip companies. 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 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 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.
BANK INSTRUMENTS AND SECURITIES OF OTHER INVESTMENT COMPANIES. Primarily to
manage short-term cash, the Fund may also invest in certificates of deposit,
demand and time deposits, bankers' acceptances, deposit notes, and other
instruments of domestic and foreign banks and other deposit institutions ("Bank
Instruments") and 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
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 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;
and
repurchase agreements.
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 LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow 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.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 10% of its total assets in securities of other
investment companies.
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
Shares of the Fund are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Fund reserves the right to
reject any purchase request.
Net asset value of shares of the Fund will not be calculated on: (i) days on
which there are not sufficient changes in the value of the Fund's portfolio
securities that its net asset value might be materially affected; (ii) days on
which no shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase orders from separate accounts investing in the Fund which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the Fund determined on that day, as long as such purchase
orders are received by the Fund in proper form and in accordance with applicable
procedures by 8:00 a.m. (Eastern time) on the next business day and as long as
federal funds in the amount of such orders are received by the Fund on the next
business day. It is the responsibility of each insurance company which invests
in the Fund to properly transmit purchase orders and federal funds in accordance
with the procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared and paid 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.
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. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Peter R. Anderson has been the Fund's portfolio manager since the Fund
commenced operations. Mr. Anderson joined Federated Investors in 1972 as,
and is presently, a Senior Vice President of the Fund's investment adviser.
Mr. Anderson is a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Wisconsin.
Frederick L. Plautz has been the Fund's portfolio manager since December
1994. Mr. Plautz joined Federated Investors in 1990 as an Assistant Vice
President and has been a Vice President of the Fund's investment adviser
since October 1994. Mr. Plautz was a portfolio manager at Banc One Asset
Management Corp. from 1986 until 1990. Mr. Plautz received his M.S. in
Finance from the University of Wisconsin.
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,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is the transfer
agent for shares of the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.
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.
As of April 7, 1995, Aetna Life Insurance and Annuity, Hartford, Connecticut,
owned 82.89% of the voting securities of the Fund, and, therefore, may for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
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 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.
APPENDIX
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STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
NR--NR indicates that Fitch does not rate the specific issue. Plus or Minus (-):
Plus or minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderated reliance on debt
and ample asset protection.
Broad margins in earning coverage of fixed financila charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
F-1--(Highest Grade) Commercial paper assigned this rating is regarded as having
the strongest degree of assurance for timely payment.
F-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
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<TABLE>
<S> <C> <C>
Insurance Management Series
Equity Growth and Income 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 Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
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</TABLE>
EQUITY GROWTH AND
INCOME FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
458043502
3113010A (4/95)
Equity Growth and Income Fund
(A Portfolio of Insurance Management Series)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Equity Growth and Income Fund (the "Fund") dated
April 30, 1995. This Statement is not a prospectus itself. To
receive a copy of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
Investment Objectives and
Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 2
Lending of Portfolio
Securities 2
Reverse Repurchase
Agreements 2
Portfolio Turnover 3
Investment Limitations 3
Insurance Management Series
Management 5
Fund Ownership 10
Trustees Compensation 10
Trustee Liability 11
Investment Advisory
Services 11
Adviser to the Fund 11
Advisory Fees 11
Administrative Services 11
Transfer Agent and
Dividend
Disbursing Agent 11
Brokerage Transactions 11
Purchasing Shares 12
Determining Net Asset Value 12
Determining Value of
Securities 12
Massachusetts Partnership
Law 12
Tax Status 12
The Fund's Tax Status 12
Shareholder's Tax Status 13
Total Return 13
Yield 13
Performance Comparisons 13
Investment Objectives and Policies
The primary investment objective of the Fund is to achieve long-term
growth of capital. The Fund's secondary objective is to provide income.
The investment objectives cannot be changed without approval of
shareholders.
Types of Investments
The Fund invests, under normal circumstances, at least 65% of its total
assets in common stock of "blue-chip" companies, as defined in the
prospectus. The Fund may also invest in other securities of these
companies, U.S. government securities, repurchase agreements, and bank
instruments. The following supplements the discussion of acceptable
investments in the prospectus.
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
characteristics 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 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.
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:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o 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:
o Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
o Farmers Home Administration;
o Federal Home Loan Banks;
o Federal Home Loan Mortgage Corporation;
o Federal National Mortgage Association;
o Government National Mortgage Association; and
o Student Loan Marketing Association.
Bank Instruments
The Fund only invests in bank instruments (as defined in the
prospectus) either issued by an institution having capital,
surplus, and undivided profits over $100 million or insured by the
Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation. Bank instruments may include
Eurodollar Certificates of Deposit, Yankee Certificates of
Deposit, and Eurodollar Time Deposits. Institutions issuing
Eurodollar instruments are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as
reserve requirements, loan limitations, examinations, accounting,
auditing, recordkeeping and the public availability of
information.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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. No
fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment
for the securities to be purchased are segregated on the Fund's records
at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total
value of its assets.
Lending of Portfolio Securities
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.
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.
For the period from February 1, 1994, (date of initial public
investment) to December 31, 1994, the portfolio turnover rate of the
Fund was 32%.
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.
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 the
value of its total assets at the time of borrowing.
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.
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 objectives 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 objectives, 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. Also, 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 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, 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."
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7 1995, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: TransAmerica Occidental Life
Insurance Company owned approximately 95,028 shares (15.94%) and AEtna
Life Insurance and Annuity owned approximately 494,032 shares (82.89%).
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, the adviser earned advisory fees of $4,397, all of which was
waived.
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. For the period from December 9, 1993 (start
of business) to December 31, 1994, the Fund incurred $73,288 in costs
for administrative services. 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 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, the Fund paid $3,714 in brokerage commissions on brokerage
transactions.
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:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices;
o 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;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o 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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
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 Fund's cumulative total return for the period ended from February 1,
1994 (date of initial public investment) to December 31, 1994, was
(0.70%). Cumulative total return reflects the Fund's total performance
over a specific period of time. The Fund's cumulative total return is
representative of only eleven month of Fund activity.
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 Fund's yield for the thirty day period ended December 31, 1994 was
3.14%.
The yield for the Fund is determined 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 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 Securities and
Exchange Commission 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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the growth and income funds
category in advertising and sales literature.
o 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.
o 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 S&P index assumes reinvestment
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 S&P figures.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and 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.
458043502
3113010B (4/95)
UTILITY FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This prospectus offers shares of Utility Fund (the "Fund"), which is a
diversified investment portfolio in the Insurance Management Series (the
"Trust"), an open-end, diversified management investment company. The Fund
invests in equity and debt securities of utility companies to achieve high
current income and moderate 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 the insurance companies which provide for
investment in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated April 30,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS 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 April 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Limitation 5
NET ASSET VALUE 6
- ------------------------------------------------------
INVESTING IN THE FUND 6
- ------------------------------------------------------
Purchases and Redemptions 6
What Shares Cost 6
Dividends 7
FUND INFORMATION 7
- ------------------------------------------------------
Management of the Fund 7
Distribution of Fund Shares 8
Administration of the Fund 8
Brokerage Transactions 9
SHAREHOLDER INFORMATION 9
- ------------------------------------------------------
Voting Rights 9
TAX INFORMATION 10
- ------------------------------------------------------
Federal Taxes 10
State and Local Taxes 10
PERFORMANCE INFORMATION 10
- ------------------------------------------------------
ADDRESSES 11
- ------------------------------------------------------
UTILITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.48
- ------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------
Net investment income 0.34
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.19)
- ------------------------------------------------------------------------------------------ -------
Total from investment operations 0.15
- ------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.34)
- ------------------------------------------------------------------------------------------ -------
NET ASSET VALUE, END OF PERIOD $ 9.29
- ------------------------------------------------------------------------------------------ -------
TOTAL RETURN** 1.12%
- ------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------
Expenses 0.60%(a)
- ------------------------------------------------------------------------------------------
Net investment income 4.77%(a)
- ------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 54.83%(a)
- ------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 974
- ------------------------------------------------------------------------------------------
Portfolio turnover rate 73%
- ------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 14, 1994 (date of initial
public investment)
to December 31, 1994. For the period from December 9, 1993 (start of
business) to April 13, 1994, the net investment income was distributed to
the Fund's adviser.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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 this 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
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve high current income and
moderate capital appreciation. The investment objective cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
policies described in this prospectus.
INVESTMENT POLICIES
The Fund endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of equity and debt securities of
utility companies. Unless indicated otherwise, the investment policies may be
changed by the Board of Trustees ("Trustees") without shareholder approval.
Shareholders will be notified before any material change in these policies
becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of utility companies. The Fund intends to achieve its
investment objective by investing in equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies. Under normal market conditions, the Fund will invest at
least 65% of its total assets in securities of utility companies.
COMMON STOCKS. The Fund invests primarily in common stocks of utility
companies selected by the Fund's investment adviser on the basis of
traditional research techniques, including assessment of earnings and
dividend growth prospects and of the risk and volatility of the company's
industry. However, other factors, such as product position, market share,
or profitability will also be considered by the Fund's investment adviser.
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 as well as securities of foreign issuers that trade on foreign
stock exchanges. 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.
OTHER SECURITIES. The Fund may invest in preferred stocks, corporate
bonds, notes, and warrants of these companies and in cash, U.S. government
securities, and money market instruments in proportions determined by its
investment adviser.
RESTRICTED AND ILLIQUID SECURITIES. 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 its net assets.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash, cash items,
and short-term instruments, including notes and commercial paper, for liquidity
and during times of unusual market conditions for defensive purposes. Cash items
may include obligations such as:
certificates of deposit (including those issued by domestic and foreign
branches of FDIC insured banks);
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities;
and repurchase agreements.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-term or long-term basis, or
both, 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 equal to at
least 100% of the value of the 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.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund will only
purchase puts on portfolio securities which are traded on a recognized exchange.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or for 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
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of
long-term debt securities against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government at a certain time in the future. The seller of the contract
agrees to make delivery of the type of instrument called for in the contract and
the buyer agrees to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's
portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as
interest rate movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures and options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
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
the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
NET ASSET VALUE
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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 conflict which occur. Such action could result in one
or more participating insurance companies withdrawing their investment in the
Fund.
Shares of the Fund are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Fund are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Fund reserves the right to
reject any purchase request.
Net asset value of shares of the Fund will not be calculated on: (i) days on
which there are not sufficient changes in the value of the Fund's portfolio
securities that its net asset value might be materially affected; (ii) days on
which no shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase orders from separate accounts investing in the Fund which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the Fund determined on that day, as long as such purchase
orders are received by the Fund in proper form and in accordance with applicable
procedures by 8:00 a.m. (Eastern time) on the next business day and as long as
federal funds in the amount of such orders are received by the Fund on the next
business day. It is the responsibility of each insurance company which invests
in the Fund to properly transmit purchase orders and federal funds in accordance
with the procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared and paid monthly.
Shares of the Fund will begin earning dividends if owned on the 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
- --------------------------------------------------------------------------------
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 and sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .75 of 1% of the Fund's average daily net assets. The adviser
may voluntarily choose to waive a portion of its fees or reimburse the Fund
for certain operating expenses. The adviser can terminate this voluntary
waiver and reimbursement of expenses at any time at its sole discretion.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also
provide administrative services to a number of investment companies. Total
assets under management or administration by these and other subsidiaries
of Federated Investors are approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc., develops and
manages mutual funds primarily for the financial industry. Federated
Investors' track record of competitive performance and its disciplined,
risk averse investment philosophy serve approximately 3,500 client
institutions nationwide. Through these same client institutions, individual
shareholders also have access to this same level of investment expertise.
Christopher H. Wiles has been the Fund's portfolio manager since the Fund
commenced operations. Mr. Wiles joined Federated Investors in 1990 and has
been a Vice President of the Fund's investment adviser since 1992. Mr.
Wiles served as Assistant Vice President of the Fund's investment adviser
from 1990 until 1992. Mr. Wiles was a portfolio manager at Mellon Bank from
1986 until 1990. Mr. Wiles is a Chartered Financial Analyst and received
his M.B.A. in Finance from Cleveland State University.
Linda A. Duessel has been the Fund's portfolio manager since April 1995.
Ms. Duessel joined Federated Investors in 1991 as an Assistant Vice
President of the Fund's investment adviser. Ms. Duessel was employed at
Westinghouse Credit Corporation from 1983 to 1991, serving in a variety of
positions which culminated in her being named Vice President/Portfolio
Manager in the Merchant Banking Group in 1990. Ms Duessel served as a
Senior Staff Accountant at Arthur Young & Company from 1979 to 1982. Ms.
Duessel received her M.S.I.A. from Carnegie Mellon University. Ms. Duessel
is a Certified Public Accountant and a Chartered Financial Analyst.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM FEE AVERAGE AGGREGATE DAILY NET ASSETS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is the transfer
agent for shares of the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
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 operations 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.
As of April 7, 1995, Aetna Life Insurance and Annuity, Hartford, Connecticut,
owned 39.35%, and Life of Virginia, Richmond, Virginia, owned 40.77% of the
voting securities of the Fund, and,
therefore, may for certain purposes be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of shareholders.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Insurance Management Series
Utility Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
UTILITY FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
458043205
3113008A (4/95)
Utility Fund
(A Portfolio of Insurance Management Series)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Utility Fund (the "Fund") dated April 30, 1995. This
Statement is not a prospectus itself. To receive a copy of the
prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
Investment Objective and
Policies 1
U.S. Government
Obligations 1
When-Issued and Delayed
Delivery Transactions 1
Lending of Portfolio
Securities 1
Repurchase Agreements 1
Reverse Repurchase
Agreements 2
Restricted and Illiquid
Securities 2
Portfolio Turnover 2
Investment Limitations 3
Insurance Management Series
Management 5
Fund Ownership 10
Trustees Compensation 10
Trustee Liability 11
Investment Advisory
Services 11
Adviser to the Fund 11
Advisory Fees 11
Administrative Services 11
Transfer Agent and
Dividend
Disbursing Agent 11
Brokerage Transactions 11
Purchasing Shares 12
Determining Net Asset Value 12
Determining Value of
Securities 12
Massachusetts Partnership
Law 12
Tax Status 12
The Fund's Tax Status 12
Shareholder's Tax Status 13
Total Return 13
Yield 13
Performance Comparisons 13
Investment Objective and Policies
The Fund's investment objective is to achieve high current income and
moderate capital appreciation. The investment objective cannot be
changed without approval of shareholders. The Fund endeavors to achieve
its investment objective by investing primarily in a professionally
managed, diversified portfolio of equity and debt securities of utility
companies.
U.S. Government Obligations
The Fund may also invest in U.S. government obligations which 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
U.S. government agencies or instrumentalities. These securities are
backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow an amount limited to a specific line
of credit from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o 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:
o Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
o Farmers Home Administration;
o Federal Home Loan Banks;
o Federal Home Loan Mortgage Corporation;
o Federal National Mortgage Association;
o Government National Mortgage Association; and
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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. No
fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment
for the securities to be purchased are segregated on the Fund's records
at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total
value of its assets.
Lending of Portfolio Securities
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
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 deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
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.
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 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades. Portfolio Turnover
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 objective, without regard to the length of time a
particular security may have been held. Any such trading will increase
the Fund's portfolio turnover rate and transaction costs. The adviser to
the Fund does not anticipate that portfolio turnover will result in
adverse tax consequences.
For the period from April 14, 1994 (date of initial public investment)
to December 31, 1994, the portfolio turnover rate of the Fund was 73%.
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 the
value of its total assets at the time of borrowing. For purposes
of this limitation, the following are not deemed to be pledges:
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
securities of companies engaged principally in any one industry
other than the utilities 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 and stock index futures contracts and
related options.
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. Also, 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 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.
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 Fund's total assets would be invested in premiums on open
put option positions.
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.
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."
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7 1995, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: Lincoln Benefit Life Company
owned approximately 88,153 shares (15.97%), AEtna Life Insurance and
Annuity owned approximately 218,199 shares (39.53%) and Life of Virginia
owned approximately 225,059 shares (40.77%).
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, the adviser earned advisory fees of $2,077, all of which was
waived.
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. For the period from December 9, 1993 (start
of business) to December 31, 1994, the Fund incurred $73,289 in costs
for administrative services. 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 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, the Fund paid $476 in brokerage commissions on brokerage
transactions.
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:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices;
o 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;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o 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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
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 Fund's cumulative total return for the period from April 14, 1994
(date of initial public investment) to December 31, 1994 was 1.12%.
Cumulative total return reflects the Fund's total performance over a
specific period of time. The Fund's cumulative total return is
representative of eight months of Fund activity.
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
monthly reinvestment of all dividends and distributions. You should
review the performance figures for your insurance contract, which
figures reflect the applicable charges and expenses of the contract.
Such performance figures will accompany any advertisement of the Fund's
performance.
Yield
The Fund's yield for the thirty day period ended December 31, 1994 was
4.74%.
The yield for the Fund is determined 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 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 Securities and
Exchange Commission 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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "utility funds" category in
advertising and sales literature.
o 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.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industry, transportation,
financial, and public utility companies, can be used to compare
the total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the S&P index assumes reinvestment
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 S&P figures.
o Standard & Poor's Utility Index is an unmanaged index of common
stocks from forty different utilities. This index indicates daily
changes in the price of the stocks. The index also provides
figures for changes in price from the beginning of the year to
date, and for a twelve month period.
o Dow Jones Utility Index is an unmanaged index comprised of fifteen
utility stocks that tracks changes in price daily and over a six
month period. The index also provides the highs and lows for each
of the past five years.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for 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 monthly 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 average.
458043205
3113008B (4/95)
U.S. GOVERNMENT BOND FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This prospectus offers shares of U.S. Government Bond Fund (the "Fund"), which
is a diversified investment portfolio in Insurance Management Series (the
"Trust"), an open-end, diversified management investment company. The Fund seeks
current income by investing in a professionally managed, diversified portfolio
limited to U.S. government securities. 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 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 April 30,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS 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 April 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Limitations 5
NET ASSET VALUE 5
- ------------------------------------------------------
INVESTING IN THE FUND 6
- ------------------------------------------------------
Purchases and Redemptions 6
What Shares Cost 6
Dividends 6
FUND INFORMATION 7
- ------------------------------------------------------
Management of the Fund 7
Distribution of Fund Shares 8
Administration of the Fund 8
Brokerage Transactions 9
SHAREHOLDER INFORMATION 9
- ------------------------------------------------------
Voting Rights 9
TAX INFORMATION 9
- ------------------------------------------------------
Federal Taxes 9
State and Local Taxes 10
PERFORMANCE INFORMATION 10
- ------------------------------------------------------
ADDRESSES 11
- ------------------------------------------------------
U.S. GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.99
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.27
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.27
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.27)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.99
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 2.62%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.48%(a)
- -----------------------------------------------------------------------------------------
Net investment income 3.99%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 32.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,244
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from March 29, 1994 (date of initial
public investment) to
December 31, 1994. For the period from December 8, 1993 (start of business)
to March 28, 1994, net investment income was distributed to the Fund's adviser.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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 this 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
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of 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
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. For purposes of this 65% statement, the Fund will
consider collateralized mortgage obligations issued by U.S. government agencies
or instrumentalities to be U.S. government securities. Unless indicated
otherwise, the investment policies may be changed by the Board of Trustees
("Trustees") without the approval of the shareholders. Shareholders will be
notified before any material change becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in securities which are primary or
direct obligations of the U.S. government or its agencies or instrumentalities,
or which are guaranteed by the U.S. government, its agencies or
instrumentalities, and in certain collateralized mortgage obligations ("CMOs"),
described below, and repurchase agreements.
The U.S. government securities in which the Fund invests include:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives and Banks for Cooperatives; Federal Home
Loan Banks; Federal Home Loan Mortgage Corporation; Federal National
Mortgage Association; Government National Mortgage Association;
Export-Import Bank of the United States; Commodity Credit Corporation;
Federal Financing Bank; The Student Loan Marketing Association; National
Credit Union Administration; and Tennessee Valley Authority.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:
the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
The Fund may also invest in CMOs which are rated AAA by a nationally recognized
statistical rating agency and which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) privately issued securities which
are collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) privately issued securities which are collateralized by pools
of mortgages in which payment of principal and interest are guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities; and
(iii) other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal and
interest are supported by the credit of an agency or instrumentality of the U.S.
government. The mortgage-related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
Mortgage-backed securities may be subject to certain prepayment risks because
the underlying mortgage loans may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of favorable rates. At the time the Fund reinvests
the proceeds, it may receive a rate of interest which is actually lower than the
rate of interest paid on those securities.
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
Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which are found
by the Fund's 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 a 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 shareholder approval. 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 equal to at least 100%
of the value of the securities loaned in the form of cash or U.S. government
securities. 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/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.
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 LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date), or pledge securities except, under certain circumstances, the Fund
may borrow 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
the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 10% of its total assets in securities of other
investment companies.
NET ASSET VALUE
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
Shares of the Fund are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Fund reserves the right to
reject any purchase request.
Net asset value of shares of the Fund will not be calculated on: (i) days on
which there are not sufficient changes in the value of the Fund's portfolio
securities that its net asset value might be materially affected; (ii) days on
which no shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase orders from separate accounts investing in the Fund which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the Fund determined on that day, as long as such purchase
orders are received by the Fund in proper form and in accordance with applicable
procedures by 8:00 a.m. (Eastern time) on the next business day and as long as
federal funds in the amount of such orders are received by the Fund on the next
business day. It is the responsibility of each insurance company which invests
in the Fund to properly transmit purchase orders and federal funds in accordance
with the procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared and paid monthly.
Shares of the Fund will begin earning dividends if owned on the 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
- --------------------------------------------------------------------------------
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. An
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The adviser
may voluntarily waive a portion of its fee or reimburse the Fund for
certain operating expenses. The adviser can terminate this voluntary waiver
and reimbursement of expenses at any time at its sole discretion.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Kathleen M. Foody-Malus has been the Fund's portfolio manager since the
Fund commenced operations. Ms. Foody-Malus joined Federated Investors in
1983 and has been a Vice President of the Fund's investment adviser since
1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser from 1990 until 1992, and from 1986 until 1989 she acted
as
an investment analyst. Ms. Foody-Malus received her M.B.A. in
Accounting/Finance from the University of Pittsburgh.
James D. Roberge has been the Fund's portfolio manager since March 1995.
Mr. Roberge joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since October 1994. Prior to
this, Mr. Roberge served as an Assistant Vice President of the Fund's
investment adviser. From 1990 until 1992, Mr. Roberge acted as an
investment analyst. Mr. Roberge is a Chartered Financial Analyst and
received his M.B.A. in Finance from The University of Pennsylvania in 1990.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for shares of the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the other Funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
The insurance company separate accounts, as shareholders of the Fund, will vote
the Fund shares held in their separate accounts at meetings of the shareholders.
Voting will be in accordance with instructions received from contract owners of
the separate accounts, as more fully outlined in the prospectus of the separate
account.
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts business
trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or the
Fund's operation and for the election of Trustees in certain circumstances.
Trustees may be removed by the Trustees or by the 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.
As of April 10, 1995, tna Life Insurance and Annuity, Hartford, Connecticut,
owned 26.97%, and TransAmerica Occidental Life Insurance Company, Los Angeles,
California, owned 42.75%, of the voting securities of the Fund, and, therefore,
may, for certain purposes be deemed to control the Fund and be able to affect
the outcome of certain matters presented for a vote of shareholders.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Insurance Management Series
U.S. Government Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. GOVERNMENT
BOND FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
458043304
3113007A (4/95)
U.S. Government Bond Fund
(A Portfolio of Insurance Management Series)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of U.S. Government Bond Fund (the "Fund") dated April
30, 1995. This Statement is not a prospectus itself. To receive a
copy of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
Investment Objective and
Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Lending of Portfolio
Securities 1
Restricted and Illiquid
Securities 2
Reverse Repurchase
Agreements 2
Portfolio Turnover 2
Investment Limitations 3
Insurance Management Series
Management 5
Fund Ownership 10
Trustees Compensation 10
Trustee Liability 11
Investment Advisory
Services 11
Adviser to the Fund 11
Advisory Fees 11
Administrative Services 11
Transfer Agent and
Dividend Disbursing
Agent 11
Brokerage Transactions 11
Purchasing Shares 12
Determining Net Asset Value 12
Determining Value of
Securities 12
Massachusetts Partnership
Law 12
Tax Status 12
The Fund's Tax Status 12
Shareholder's Tax Status 13
Total Return 13
Yield 13
Performance Comparisons 13
Investment Objective and Policies
The Fund's investment objective is to provide current income. The
investment objective cannot be changed without the approval of
shareholders. Current income includes, in general, discount earned on
U.S. Treasury bills and agency discount notes, interest earned on all
other U.S. government securities, and short-term capital gains.
Types of Investments
The Fund invests in securities which are primary or direct obligations
of the U.S. government or its agencies or instrumentalities, or which
are guaranteed by the U.S. government, its agencies or instrumentalities
and in certain collateralized mortgage obligations, described below, and
repurchase agreements.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those
issued by the Government National Mortgage Association. The terms
and characteristics of the mortgage instruments may vary among
pass-through mortgage loan pools.
The market for such CMOs has expanded considerably since its
inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and
other investors make government-related pools highly liquid.
Stripped Mortgage-Related Securities
Some of the mortgage-related securities purchased by the Fund may
represent an interest solely in the principal repayments or solely
in the interest payments on mortgage-backed securities (stripped
mortgage-backed securities or "SMBSs"). Due to the possibility of
prepayments on the underlying mortgages, SMBSs may be more
interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which
SMBSs were issued, there may be substantial prepayment on the
underlying mortgages, leading to the relatively early prepayment
of principal-only SMBSs and a reduction in the amount of payment
made to holders of interest-only SMBSs. It is possible that the
Fund might not recover its original investment on interest-only
SMBSs if there are substantial prepayments on the underlying
mortgages. Therefore, interest-only SMBSs generally increase in
value as interest rates rise and decrease in value as interest
rates fall, counter to changes in value experienced by most fixed
income securities. The Fund's adviser intends to use this
characteristic of interest-only SMBSs to reduce the effects of
interest rate changes on the value of the Fund's portfolio, while
continuing to pursue current income.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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. No
fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment
for the securities to be purchased are segregated on the Fund's records
at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total
value of its assets.
Lending of Portfolio Securities
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 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.
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 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
nonexclusive 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
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 objective, without regard to length of time a
particular security may have been held. The Fund's policy of managing
its portfolio of U.S. government securities, including the sale of
securities held for a short period of time, to achieve its investment
objective of current income may result in high portfolio turnover. The
Fund will not attempt to set or meet a portfolio turnover rate as any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objective.
For the period from March 29, 1994 (date of initial public investment)
to December 31, 1994, the portfolio turnover rate of the Fund was 0%.
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.
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 amount borrowed or 15% of the
value of total assets at the time of borrowing.
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.
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. Also, 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.
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.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts.
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.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio
securities up to one-third of the value 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.
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 becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 15% of its total assets in
securities subject to restrictions on resale under the Securities
Act of 1933, except for commercial paper issued under Section 4(2)
of the Securities Act of 1933 and certain other restricted
securities which meet the criteria for liquidity as established by
the Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including, among others, repurchase
agreements providing for settlement more than seven days after
notice, 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."
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 10 1995, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: Lincoln Benefit Life Company
owned approximately 45,905 shares (20.83%), AEtna Life Insurance and
Annuity owned approximately 59,424 shares (26.97%) and TransAmerica
Occidental Life Insurance Company owned approximately 94,192 shares
(42.75%).
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 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.
For the period from December 8, 1993 (start of business) to December 31,
1994, the adviser earned advisory fees of $2,605, all of which was
waived.
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. For the period from December 8, 1993 (start
of business) to December 31, 1994, the Fund incurred $63,015 in costs
for administrative services. 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 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising 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.
For the period from December 8, 1993 (start of business) to December 31,
1994, the Fund paid $0 in brokerage commissions on brokerage
transactions.
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:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices;
o 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;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o 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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
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 Fund's cumulative total return for the period from March 29, 1994
(date of initial public investment) to December 31, 1994, was 2.62%.
Cumulative total return reflects a fund's total performance over a
specific period of time. The Fund's cumulative total return is
representative of only nine months of Fund activity.
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
monthly reinvestment of all dividends and distributions. You should
review the performance figures for your insurance contract, which
figures reflect the applicable charges and expenses of the contract.
Such performance figures will accompany any advertisement of the Fund's
performance.
Yield
The Fund did not calculate a thirty-day yield for the period ended
December 31, 1994.
The yield for the Fund is determined 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 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 Securities and
Exchange Commission 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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the growth and income funds
category in advertising and sales literature.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed-rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, the index calculates total
returns for one month, three month, twelve month, and ten year
periods, and year-to-date.
o Lehman Brothers Government/Corporate (Long-Term) Index is composed
of the same types of issues as defined above. However, the average
maturity of the bonds included in this index approximates 22
years.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for 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.
458043304
3113007B (4/95)
CORPORATE BOND FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This prospectus offers shares of Corporate Bond Fund (the "Fund"), which is a
diversified investment portfolio in Insurance Management Series (the "Trust"),
an open-end, diversified management investment company. The Fund invests in a
professionally managed, diversified portfolio limited primarily to fixed income
securities which seek to achieve high current income. 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 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.
SPECIAL RISKS
The Fund's portfolio consists primarily of lower-rated corporate debt
obligations, which are commonly referred to as "junk bonds." 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
predominantly 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 the market for investment grade
bonds. The Fund's investment adviser will endeavor to limit these risks through
diversifying the portfolio and through careful credit analysis of individual
issuers. Purchasers should carefully assess the risks associated with an
investment in this Fund. (See the sections in this prospectus entitled
"Investment Risks" and "Reducing Risks of Lower-Rated Securities.")
The Fund has also filed a Statement of Additional Information dated April 30,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS 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 April 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Risks 5
Investment Limitation 7
NET ASSET VALUE 7
- ------------------------------------------------------
INVESTING IN THE FUND 7
- ------------------------------------------------------
Purchases and Redemptions 7
What Shares Cost 7
Dividends 8
FUND INFORMATION 8
- ------------------------------------------------------
Management of the Fund 8
Distribution of Fund Shares 9
Administration of the Fund 9
Brokerage Transactions 10
SHAREHOLDER INFORMATION 10
- ------------------------------------------------------
Voting Rights 10
TAX INFORMATION 11
- ------------------------------------------------------
Federal Taxes 11
State and Local Taxes 11
PERFORMANCE INFORMATION 11
- ------------------------------------------------------
APPENDIX 12
- ------------------------------------------------------
ADDRESSES 16
- ------------------------------------------------------
CORPORATE BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
THE FOLLOWING TABLE HAS BEEN AUDITED BY DELOITTE & TOUCHE LLP, THE FUND'S
INDEPENDENT AUDITORS. THEIR REPORT, DATED FEBRUARY 10, 1995, ON THE FUND'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, AND ON THE FOLLOWING
TABLE FOR THE PERIOD PRESENTED, IS INCLUDED IN THE ANNUAL REPORT, WHICH IS
INCORPORATED BY REFERENCE. THIS TABLE SHOULD BE READ IN CONJUNCTION WITH THE
FUND'S FINANCIAL STATEMENTS AND NOTES THERETO, WHICH MAY BE OBTAINED FROM THE
FUND.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.75
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.12)
- ------------------------------------------------------------------------------------------- -------
Total from investment operations (0.37)
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.75)
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.01)(a)
- ------------------------------------------------------------------------------------------- -------
Total distributions (0.76)
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 8.87
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN** (3.73%)
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 0.41%(c)
- -------------------------------------------------------------------------------------------
Net investment income 9.11%(c)
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 10.01%(c)
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,457
- -------------------------------------------------------------------------------------------
Portfolio turnover rate 18%
- -------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 2, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9, 1993
(start of business) to February 1, 1994, the Fund had no public investment.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
December 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek high current income. The
investment objective cannot be changed without approval of 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
Unless stated otherwise, the Board of Trustees ("Trustees") can change the
investment policies without the approval of shareholders. Shareholders will be
notified before any material change becomes effective. The Fund endeavors to
achieve its objective by investing primarily in a professionally managed,
diversified portfolio of fixed income securities. The fixed income securities in
which the Fund intends to invest are lower-rated corporate debt obligations,
which are commonly referred to as "junk bonds." Some of these fixed income
securities may involve equity features. Capital growth will be considered, but
only when consistent with the investment objective of high current income.
ACCEPTABLE INVESTMENTS. The Fund invests at least 65% of its assets in
lower-rated fixed income bonds. Under normal circumstances, the Fund will not
invest more than 10% of the value of its total assets in equity securities. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates. The fixed income securities in which the Fund invests include,
but are not limited to:
preferred stocks;
bonds;
debentures;
notes;
equipment lease certificates; and
equipment trust certificates.
The securities in which the Fund may invest are generally rated BBB or lower by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service ("Fitch") or
Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are not rated
but are determined by the Fund's investment adviser to be of comparable quality.
Securities which are rated BBB or lower by S&P or Fitch or Baa or lower by
Moody's have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than highly rated bonds. A description of the
rating categories is contained in the Appendix to this prospectus. There is no
lower limit with respect to rating categories for securities in which the Fund
may invest. See "Investment Risks" below.
REPURCHASE AGREEMENTS. The Funds 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 adviser to
be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES. 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 its net assets.
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 shareholder approval. 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 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/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. The Fund may invest temporarily in cash and short-term
obligations for defensive purposes during times of unusual market conditions.
Short-term obligations may include:
certificates of deposit;
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 and variable rate demand master notes;
short-term notes;
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
repurchase agreements.
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 RISKS
The corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of the nationally recognized statistical rating
organizations (AAA, AA, or A for S&P or Fitch, and Aaa, Aa or A for Moody's) but
are in the lower rating categories or are unrated but are of comparable quality
and have speculative characteristics. Lower-rated or unrated bonds are commonly
referred to as "junk bonds." There is no minimal acceptable rating for a
security to be purchased or held in the Fund's portfolio, and the Fund may, from
to time, purchase or hold securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to this
prospectus.
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the prices or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers in lower-rated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell the
securities at an optimum time. As a result of these factors, lower-rated
securities tend to have more price volatility and carry more risk to principal
and income than higher-rated securities.
An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligation to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have issued. As a
result of these restructurings, holders of lower-rated securities may receive
less principal and interest than they had bargained for at the time such bonds
were purchased.
In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.
The secondary trading market for lower-rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. In 1989, legislation was
enacted that requires federally insured savings and loan associations to divest
their holdings of lower-rated bonds by 1994. The reduction of the number of
institutions empowered to purchase and hold lower-rated bonds could
have an adverse impact on the overall liquidity of the market. Adverse publicity
and the perception of investors relating to issuers, underwriters, dealers or
underlying business conditions, whether or not warranted by fundamental
analysis, may also affect the price or liquidity of lower-rated bonds. On
occasion, therefore, it may become difficult to price or dispose of a particular
security in the portfolio.
The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash). The
price of zero coupon bonds and pay-in-kind securities are generally more
sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
pay-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.
Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.
REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's investment adviser believes
that the risks of investing in lower-rated securities can be reduced. The
professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:
CREDIT RESEARCH. The Fund's investment adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest, or dividend coverage and earnings. In evaluating an
issuer, the adviser places special emphasis on the estimated current value
of the issuer's assets rather than historical cost.
DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS. The Fund's adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.
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 the value
of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
NET ASSET VALUE
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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 of the Fund will
closely monitor the operation of mixed funding and shared funding and will
consider appropriate action to avoid material conflicts and take appropriate
action in response to any material conflicts which occur. Such action could
result in one or more participating insurance companies withdrawing their
investment in the Fund.
Shares of the Fund are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Fund are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Fund reserves the right to
reject any purchase request.
Net asset value of shares of the Fund will not be calculated on: (i) days on
which there are not sufficient changes in the value of the Fund's portfolio
securities that its net asset value might be materially affected; (ii) days on
which no shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase orders from separate accounts investing in the Fund which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the Fund
determined on that day, as long as such purchase orders are received by the Fund
in proper form and in accordance with applicable procedures by 8:00 a.m.
(Eastern time) on the next business day and as long as federal funds in the
amount of such orders are received by the Fund on the next business day. It is
the responsibility of each insurance company which invests in the Fund to
properly transmit purchase orders and federal funds in accordance with the
procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared and paid monthly.
Shares of the Fund will begin earning dividends if owned on the 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
- --------------------------------------------------------------------------------
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. An
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .60 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. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Mark E. Durbiano has been the Fund's portfolio manager since the Fund
commenced operations. Mr. Durbiano joined Federated Investors in 1982 and
has been a Vice President of the Fund's investment adviser since 1988. Mr.
Durbiano is a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh.
DISTRIBUTION OF 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>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is the transfer
agent for shares of the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Board of Trustees.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
The insurance company separate accounts, as shareholders of the Fund, will vote
the Fund shares held in their separate accounts at meetings of the shareholders.
Voting will be in accordance with instructions received from contract owners of
the separate accounts, as more fully outlined in the prospectus of the separate
account.
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. As a Massachusetts business
trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust or the
Fund's operation and for the election of Trustees in certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the outstanding shares of
all series of the Trust.
As of April 7, 1995, Aetna Life Insurance and Annuity, Hartford, Connecticut,
owned 67.38% of the voting securities of the Fund, and, therefore, may, for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
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
- --------------------------------------------------------------------------------
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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B-rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied B or B-rating.
C--The rating C is reserved for income bonds on which no interest is being paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR--NR indicates that Fitch does not rate the specific issue. Plus + or Minus :
Plus or minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderated reliance on debt
and ample asset protection.
Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
F-1--(Highest Grade) Commercial paper assigned this rating is regarded as having
the strongest degree of assurance for timely payment.
F-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
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<TABLE>
<S> <C> <C>
Insurance Management Series
Corporate Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank P.O. Box 8604
and Trust Company Boston, Massachusetts 02266-8604
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
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</TABLE>
CORPORATE BOND FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
458043403
3113009A (4/95)
Corporate Bond Fund
(A Portfolio of Insurance Management Series)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Corporate Bond Fund (the "Fund") dated April 30,
1995. This Statement is not a prospectus itself. To receive a copy
of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
Investment Objective and
Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 2
Lending of Portfolio
Securities 2
Restricted and Illiquid
Securities 2
Portfolio Turnover 2
Investment Limitations 3
Insurance Management Series
Management 5
Fund Ownership 10
Trustees Compensation 10
Trustee Liability 11
Investment Advisory
Services 11
Adviser to the Fund 11
Advisory Fees 11
Administrative Services 11
Transfer Agent and
Dividend
Disbursing Agent 11
Brokerage Transactions 11
Purchasing Shares 12
Determining Net Asset Value 12
Determining Value of
Securities 12
Massachusetts Partnership
Law 12
Tax Status 12
The Fund's Tax Status 12
Shareholder's Tax Status 13
Total Return 13
Yield 13
Performance Comparisons 13
Investment Objective and Policies
The Fund's investment objective is to seek high current income. The
investment objective cannot be changed without approval of shareholders.
Types of Investments
The Fund endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of fixed income
securities. Some of these fixed income securities may involve equity
features. Capital growth will be considered, but only when consistent
with the investment objective of high current income.
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).
Equipment lease or trust certificates are secured obligations
issued in serial form, usually sold by transportation companies
such as railroads or airlines, to finance equipment purchases. The
certificate holders own a share of the equipment, which can be
resold if the issuer of the certificate defaults. The Fund does
not currently intend to invest more than 5% of its assets in
equipment lease certificates.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets
will be invested in equity securities, including common stocks,
warrants, or rights. The Fund's investment adviser may choose to
exceed this 10% limitation if unusual market conditions suggest
such investments represent a better opportunity to reach the
Fund's investment objective.
Temporary Investments
The Fund may also invest in temporary investments for defensive
purposes during times of unusual market conditions.
Certificates of Deposit
The Fund may invest in certificates of deposit of domestic and
foreign banks and savings and loans if they have capital, surplus,
and undivided profits of over $100,000,000, or if the principal
amount of the instrument is insured by the Bank Insurance Fund
("BIF") or the Savings Association Insurance Fund ("SAIF"), both
of which are administered by the Federal Deposit Insurance
Corporation. These instruments may include Eurodollar Certificates
of Deposit issued by foreign branches of U.S. or foreign banks,
Eurodollar Time Deposits which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks, Canadian
Time Deposits which are U.S. dollar-denominated deposits issued by
branches of major Canadian banks located in the United States, and
Yankee Certificates of Deposit which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks
and held in the United States.
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.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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. No
fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment
for the securities to be purchased are segregated on the Fund's records
at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total
value of its assets.
Lending of Portfolio Securities
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 cash 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.
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 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
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 objective, without regard to the length of time a
particular security may have been held. Any such trading will increase
the Fund's portfolio turnover rate and transaction costs. The adviser to
the Fund does not anticipate that portfolio turnover will result in
adverse tax consequences.
For the period from February 2, 1994 (date of initial public investment)
to December 31, 1994, the portfolio turnover rate of the Fund was 18%.
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.
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 the
value of its total assets at the time of borrowing.
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.
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. Also, 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 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 assets in illiquid
securities, including, among others, repurchase agreements
providing for settlement more than seven days after notice 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."
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7, 1995, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: Lincoln Benefit Life Company
Universal Life/Variable owned approximately 29,599 shares (10.90%),
Lincoln Benefit Life Company owned approximately 50,331 shares (18.54%)
and AEtna Life Insurance and Annuity owned approximately 182,916 shares
(67.38%).
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, the adviser earned advisory fees of $7,966, all of which was
waived.
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. For the period from December 9, 1993 (start
of business) to December 31, 1994, the Fund incurred $52,398 in costs
for administrative services. 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 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, the Fund paid $0 in brokerage commissions on brokerage
transactions.
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:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices;
o 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;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o 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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
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 Fund's cumulative total return for the period from February 2, 1994
(date of initial public investment) to December 31, 1994, was (3.73%).
Cumulative total return reflects the Fund's total performance over a
specific period of time. The Fund's cumulative total return is
representative of only eleven months of Fund activity.
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
monthly reinvestment of all dividends and distributions. You should
review the performance figures for your insurance contract, which
figures reflect the applicable charges and expenses of the contract.
Such performance figures will accompany any advertisement of the Fund's
performance.
Yield
The Fund's yield for the thirty day period ended December 31, 1994 was
10.43%.
The yield for the Fund is determined 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 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 Securities and
Exchange Commission 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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o 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:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the high current yield funds
category in advertising and sales literature.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include: non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi federal
corporations; and publicly issued, fixed-rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, Inc., the index calculates
total returns for one month, three month, twelve month, and ten
year periods and year-to-date.
o Lehman Brothers Government/Corporate (Long-Term) Index is composed
of the same types of issues as defined above. However, the average
maturity of the bonds included on this index approximates 22
years.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk adjusted returns. The maximum rating is five stars and
ratings are effective for two weeks.
Advertisements and sales literature for the Fund may quote total returns
which are calculated on nonstandardized base periods. These total
returns also represent the historic change in the value of an investment
in the Fund based on monthly 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 instrument average.
458043403
3113009B (4/95)
PRIME MONEY FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This prospectus offers shares of Prime Money Fund (the "Fund"), which is a
diversified investment portfolio in Insurance Management Series (the "Trust"),
an open-end management investment company. The Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity. Shares of the Fund may
only be sold 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.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE; THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
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.
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 April 30,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS 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 April 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Risks 6
Investment Limitation 6
Regulatory Compliance 7
NET ASSET VALUE 7
- ------------------------------------------------------
INVESTING IN THE FUND 7
- ------------------------------------------------------
Purchases and Redemptions 7
What Shares Cost 8
Dividends 8
FUND INFORMATION 8
- ------------------------------------------------------
Management of the Fund 8
Distribution of Fund Shares 9
Administration of the Fund 9
Brokerage Transactions 10
SHAREHOLDER INFORMATION 10
- ------------------------------------------------------
Voting Rights 10
TAX INFORMATION 11
- ------------------------------------------------------
Federal Taxes 11
State and Local Taxes 11
PERFORMANCE INFORMATION 11
- ------------------------------------------------------
ADDRESSES 13
- ------------------------------------------------------
PRIME MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.01
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.01)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 1.00
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 0.50%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.80%(a)
- -----------------------------------------------------------------------------------------
Net investment income 4.26%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 71.84%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 552
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from November 18, 1994 (date of initial
public investment) to
December 31, 1994. For the period from December 10, 1993 (start of business)
to
November 17, 1994, the Fund had no public investment.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. The investment objective cannot be
changed without approval of 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 exclusively in a
portfolio of money market instruments maturing in 397 days or less. The average
maturity of the money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Board of Trustees (the
"Trustees") without the approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high-quality money market
instruments that are either rated in one of the two highest short-term rating
categories by one or more nationally recognized statistical rating organizations
("NRSROs") or of comparable quality to securities having such ratings. Examples
of these instruments include, but are not limited to:
domestic issues of corporate debt obligations, including variable rate
demand notes;
commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
short-term credit facilities, such as demand notes;
asset-backed securities;
obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities");
repurchase agreements; and
other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest adjustment
or the date on which the Fund may next tender the security for repurchase.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). The Fund will treat
securities credit enhanced with a bank's letter of credit as bank
instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's two highest rating categories are determined without regard
for sub-categories and gradations. For example, securities rated A-1 or A-2 by
Standard & Poor's Ratings Group ("S&P"), Prime-1 or Prime-2 by Moody's Investors
Service, Inc. ("Moody's"), or F-1 or F-2 by Fitch Investors Service, Inc.
("Fitch") are all considered rated in one of the two highest short-term rating
categories. The Fund will limit its investments in securities rated in the
second highest short-term rating category (e.g., A-2 by S&P, Prime-2 by Moody's
or F-2 by Fitch) to not more than 5% of its total assets, with not more than 1%
invested in the securities of any one issuer. The Fund will follow applicable
regulations in determining whether a security rated by more than one NRSRO can
be treated as being in one of the two highest short-term rating categories;
currently, such securities
must be rated by two NRSROs in one of their two highest rating categories. See
"Regulatory Compliance."
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 deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Trustees.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% 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 10% of its net assets.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend its portfolio securities on a short-term or long-term basis, or
both, 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 shareholder approval. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the adviser has determined are creditworthy under guidelines established by the
Trustees and will receive collateral in the form of cash or U.S. government
securities equal to at least 100% of the value of the 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/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.
CONCENTRATION OF INVESTMENTS. The Fund will invest 25% or more of its total
assets in commercial paper issued by finance companies. The finance companies in
which the Fund intends to invest can be divided into two categories, commercial
finance companies and consumer finance companies. Commercial finance companies
are principally engaged in lending to corporations or other businesses. Consumer
finance companies are primarily engaged in lending to individuals. Captive
finance companies or finance subsidiaries which exist to facilitate the
marketing and financial activities of their parent will, for purposes of
industry concentration, be classified by the Fund in the industry of its parent
corporation.
In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
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 RISKS
ECDs, ETDs, Yankee CDs, CCPs, and Europaper are subject to somewhat different
risks than domestic obligations of domestic banks. Examples of these risks
include international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact of
interruptions in the flow of international currency transactions. Different
risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing
these instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan limitations, examinations, accounting, auditing,
and recordkeeping, and the public availability of information. These factors
will be carefully considered by the Fund's adviser in selecting investments for
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
the value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940, as amended. In particular, the Fund
will comply with the various requirements of Rule 2a-7 which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of the Fund's total assets in the securities of
any one issuer, although the Fund's investment limitations only requires such 5%
diversification with respect to 75% of its assets. The Fund will invest more
than 5% of its assets in any one issuer only under the circumstances permitted
by Rule 2a-7. The Fund will also determine the effective maturity of its
investments, as well as its ability to consider a security as having received
the requisite short-term ratings by NRSROs, according to Rule 2a-7. The Fund may
change these operational policies to reflect changes in the laws and regulations
without the approval of its shareholders.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the net asset value of its shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per share of the Fund is determined by subtracting total liabilities from
total assets and dividing by the number of shares outstanding.
The Fund cannot guarantee that its net asset value will always remain at $1.00
per share.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
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 of the Fund will
closely monitor the operation of mixed funding and shared funding and will
consider appropriate action to avoid material conflicts and take appropriate
action in response to any material conflicts which occur. Such action could
result in one or more participating insurance companies withdrawing their
investment in the Fund.
Shares of the Fund are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Fund are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Fund reserves the right to
reject any purchase request.
Net asset value of shares of the Fund will not be calculated on: (i) days on
which there are not sufficient changes in the value of the Fund's portfolio
securities that its net asset value might be materially affected; (ii) days on
which no shares are tendered for redemption and no orders to purchase shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Purchase orders from separate accounts investing in the Fund which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the Fund determined on that day, as long as such purchase
orders are received by the Fund in proper form and in accordance with applicable
procedures by 8:00 a.m. (Eastern time) on the next business day and as long as
federal funds in the amount of such orders are received by the Fund on the next
business day. It is the responsibility of each insurance company which invests
in the Fund to properly transmit purchase orders and federal funds in accordance
with the procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared daily and paid monthly.
Shares of the Fund begin earning dividends on the day that the Fund receives
federal funds. Dividends of the Fund are automatically reinvested in additional
shares of such Fund on payment dates at the ex-dividend date net asset value.
FUND INFORMATION
- --------------------------------------------------------------------------------
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, sale, or exchange of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The adviser receives an annual investment advisory fee
equal to .50 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. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM FEE AVERAGE AGGREGATE DAILY NET ASSETS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for shares of the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
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.
As of April 7, 1995, Aetna Life Insurance and Annuity, Hartford, Connecticut,
owned 79.11% of the voting securities of the Fund, and, therefore, may for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
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
- --------------------------------------------------------------------------------
From time to time the Fund advertises yield and effective yield. 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.
The yield represents the annualized rate of income earned on an investment in
the Fund over a seven day period. It is the annualized dividends earned during
the period on the investment, shown as a percentage of the investment. The
effective yield is calculated similarly to the yield, but, when annualized, the
income earned on an investment in the Fund is assumed to be reinvested daily.
The effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in the Fund after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
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
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Insurance Management Series
Prime Money Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank P.O. Box 8604
and Trust Company Boston, Massachusetts 02266-8604
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
PRIME MONEY FUND
PROSPECTUS
A Diversified Portfolio of
Insurance Management Series,
An Open-End, Management
Investment Company
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
--------------------------
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
458043106
3113011A (4/95)
Prime Money Fund
(A Portfolio of Insurance Management Series)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of Prime Money Fund (the "Fund") dated April 30, 1995.
This Statement is not a prospectus itself. To receive a copy of
the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
Investment Objective and
Policies 1
Types of Investments 1
When-Issued and Delayed
Delivery Transactions 1
Lending of Portfolio
Securities 2
Reverse Repurchase
Agreements 2
Restricted and Illiquid
Securities 2
Investment Limitations 3
Insurance Management Series
Management 5
Fund Ownership 10
Trustees Compensation 10
Trustee Liability 11
Investment Advisory
Services 11
Adviser to the Fund 11
Advisory Fees 11
Administrative Services 11
Transfer Agent and
Dividend
Disbursing Agent 11
Brokerage Transactions 11
Purchasing Shares 12
Determining Net Asset Value 12
Use of the Amortized Cost
Method 12
Massachusetts Partnership
Law 13
Tax Status 13
The Fund's Tax Status 13
Shareholder's Tax Status 13
Yield 13
Effective Yield 14
Performance Comparisons 14
Investment Objective and Policies
The Fund's investment objective is to provide current income consistent
with stability of principal and liquidity. The investment objective
cannot be changed without approval of shareholders.
Types of Investments
The Fund invests exclusively in money market instruments which mature in
397 days or less and which include, but are not limited to, high-quality
commercial paper and variable rate master demand notes, bank
instruments, and U.S. government obligations.
Bank Instruments
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers'
acceptances, the Fund may invest in:
o Eurodollar Certificates of Deposit issued by foreign branches
of U.S. or foreign banks;
o Eurodollar Time Deposits, which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in
the U.S.; and
o Yankee Certificates of Deposit, which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the U.S.
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 U.S. government agencies or
instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o 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:
o Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
o Farmers Home Administration;
o Federal Home Loan Banks;
o Federal Home Loan Mortgage Corporation;
o Federal National Mortgage Association;
o Government National Mortgage Association; and
o Student Loan Marketing Association.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. 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. No
fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment
for the securities to be purchased are segregated on the Fund's records
at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total
value of its assets.
Lending of Portfolio Securities
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
brokers/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.
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 assets are marked to
market daily and maintained until the transaction is settled.
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 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
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.
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 the
value of its total assets at the time of borrowing.
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
securities of companies engaged principally in any one industry
other than finance companies. 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.
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 money market
instruments, 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.
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 Restricted Securities
The Fund will not invest more than 10% 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 10% of its net assets in
illiquid securities, including, among others, repurchase
agreements providing for settlement more than seven days after
notice 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."
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 7 1995, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: National Home Life Insurance
Company owned approximately 711,424 shares (20.89%) and AEtna Life
Insurance and Annuity owned approximately 2,694,746 shares (79.11%).
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 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.
For the period from December 10, 1993 (start of business) to December
31, 1994, the adviser earned advisory fees of $287, all of which was
waived.
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. For the period from December 10, 1993
(start of business) to December 31, 1994, the Fund incurred $14,041 in
costs for administrative services. 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 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising 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.
For the period from December 10, 1993 (start of business) to December
31, 1994, the Fund paid $0 in brokerage commissions on brokerage
transactions.
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
The Fund attempts to stabilize the value of a share at $1.00. The days
on which net asset value is calculated by the Fund are described in the
prospectus.
Use of the Amortized Cost Method
The Trustees have decided that the best method for determining the value
of portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at
current market value.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-
7 (the "Rule") promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the Rule, the Trustees
must establish procedures reasonably designed to stabilize the net asset
value per share, as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market
conditions and the Fund's investment objective. Under the Rule, the Fund
is permitted to purchase instruments which are subject to demand
features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the
instrument from the issuer or a third party on (1) no more than 30 days'
notice or (2) at specified intervals not exceeding 397 calendar days on
no more than 30 days' notice. A standby commitment entitles the Fund to
achieve same-day settlement and to receive an exercise price equal to
the amortized cost of the underlying instrument plus accrued interest at
the time of exercise.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship
between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The
Trustees will decide what, if any, steps should be taken if there
is a difference of more than 0.5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset
value.
Investment Restrictions
The Rule requires that the Fund limit its investments to
instruments that, in the opinion of the Trustees, present minimal
credit risks and have received the requisite rating from one or
more nationally recognized statistical rating organizations. If
the instruments are not rated, the Trustees must determine that
they are of comparable quality. The Rule also requires the Fund to
maintain a dollar-weighted average portfolio maturity (not more
than 90 days) appropriate to the objective of maintaining a stable
net asset value of $1.00 per share. In addition, no instrument
with a remaining maturity of more than thirteen months can be
purchased by the Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to
90 days or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities
to take advantage of short-term market variations. This policy may, from
time to time, result in high portfolio turnover. Under the amortized
cost method of valuation, neither the amount of daily income nor the net
asset value is affected by any unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
shares of the Fund computed by dividing the annualized daily income on
the Fund's portfolio by the net asset value computed as above may tend
to be higher than a similar computation made by using a method of
valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares
of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
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:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
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.
Yield
The Fund calculates its yield daily, based upon the seven days ending on
the day of the calculation, called the "base period." This yield is
computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned
from the original one share and all dividends declared on the
original and any purchased shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The Fund's yield for the seven-day period ended December 31, 1994 was
4.16%.
Effective Yield
The Fund's effective yield is computed by compounding the unannualized
base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The Fund's effective yield for the seven-day period ended December 31,
1994 was 4.25%.
Effective yield does not reflect the charges and expense of a variable
annuity 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 a Fund's performance.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o the relative amount of the Fund's cash flow.
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 used in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instruments
funds" category in advertising and sales literature.
o Bank Rate Monitor National Index, Miami Beach, Florida, is a
financial reporting service which publishes weekly average rates
of 50 leading bank and thrift institution money market deposit
accounts. The rates published in the index are an average of the
personal account rates offered on the Wednesday prior to the date
of publication by ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. Account
minimums range upward from $2,500 in each institution, and
compounding methods vary. If more than one rate is offered, the
lowest rate is used. Rates are subject to change at any time
specified by the institution.
o Money, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day
compound (effective) yield. From time to time, the Fund will quote
its Money ranking in advertising and sales literature.
Advertisements and other sales literature for the Fund may refer to
total return. Total return is the historic change in the value of an
investment in the Fund based on the monthly reinvestment of dividends
over a specified period of time.
458043106
3113011B (4/95)
INSURANCE MANAGEMENT SERIES
PROSPECTUS
This prospectus offers shares of three portfolios (individually referred to as a
"Fund" or collectively as the "Funds") of Insurance Management Series (the
"Trust"), which is an open-end, management investment company. Shares of the
Funds may be sold only to separate accounts of insurance companies to serve as
the investment medium for variable life insurance policies and variable annuity
contracts issued by the insurance companies. This prospectus offers interests in
the following three separate investment portfolios, each having distinct
investment objectives and policies:
Utility Fund;
U.S. Government Bond Fund; and
Corporate Bond Fund.
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.
The separate accounts invest in one or more of the Funds in accordance with
allocation instructions received from owners of life insurance policies and
annuity contracts. Such allocation rights are described further in the
prospectus for the separate account. This prospectus contains the information
you should read and know before you invest in any of the Funds through the
variable annuity contracts and variable life insurance policies offered by
insurance companies which provide for investment in the Trust. Keep this
prospectus for future reference.
SPECIAL RISKS
The Corporate Bond Fund's portfolio consists primarily of lower-rated corporate
debt obligations, which are commonly referred to as "junk bonds." 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
predominantly 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 the market for investment grade
bonds. The Corporate Bond Fund's investment adviser will endeavor to limit these
risks through diversifying the portfolio and through careful credit analysis of
individual issuers. Purchasers should carefully assess the risks associated with
an investment in this Fund. (See the sections in this prospectus entitled
"Investment Risks" and "Reducing Risks of Lower-Rated Securities.")
The Trust has also filed a combined Statement of Additional Information dated
April 30, 1995, with the Securities and Exchange Commission. The information
contained in the combined Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the combined Statement
of Additional Information free of charge by calling 1-800-235-4669. To obtain
other information or to make inquiries about a Fund, contact the Trust at the
address listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS A POOLED FUNDING VEHICLE FOR LIFE
INSURANCE COMPANIES WRITING VARIABLE ANNUITY CONTRACTS AND VARIABLELIFE
INSURANCE POLICIES. THIS PROSPECTUS SHOULD BE ACCOMPANIED BY THE PROSPECTUS FOR
SUCH CONTRACTS.
Prospectus dated April 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------
GENERAL INFORMATION ON INSURANCE
MANAGEMENT SERIES 4
- ------------------------------------------------------
UTILITY FUND INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Investment Limitations 6
U.S. GOVERNMENT BOND FUND INVESTMENT INFORMATION 6
- ------------------------------------------------------
Investment Objective 6
Investment Policies 6
Investment Limitations 7
CORPORATE BOND FUND INVESTMENT
INFORMATION 7
- ------------------------------------------------------
Investment Objective 7
Investment Policies 7
Investment Risks 8
Investment Limitations 9
INVESTMENT PRACTICES 10
- ------------------------------------------------------
Repurchase Agreements 10
Restricted and Illiquid Securities 10
When-Issued and Delayed Delivery
Transactions 10
Lending of Portfolio Securities 10
Variable Asset Regulations 11
State Insurance Regulations 11
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN THE FUNDS 11
- ------------------------------------------------------
Purchases and Redemptions 11
What Shares Cost 12
Dividends 12
INSURANCE MANAGEMENT SERIES
INFORMATION 12
- ------------------------------------------------------
Management of Insurance
Management Series 12
Fund Managers 13
Distribution of Fund Shares 13
Administration of the Funds 13
Brokerage Transactions 14
Expenses of Each Fund 14
SHAREHOLDER INFORMATION 14
- ------------------------------------------------------
Voting Rights 14
TAX INFORMATION 15
- ------------------------------------------------------
Federal Taxes 15
State and Local Taxes 15
PERFORMANCE INFORMATION 15
- ------------------------------------------------------
APPENDIX 16
- ------------------------------------------------------
ADDRESSES 19
- ------------------------------------------------------
UTILITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.48
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.34
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.19)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.15
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.34)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.29
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 1.12%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.60%(a)
- -----------------------------------------------------------------------------------------
Net investment income 4.77%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 54.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 974
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 73%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 14, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to April 13, 1994, the net investment income was
distributed to the Fund's adviser.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
U.S. GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.99
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.27
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.27
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.27)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.99
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 2.62%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.48%(a)
- -----------------------------------------------------------------------------------------
Net investment income 3.99%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 32.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,244
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 0 %
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from March 29, 1994 (date of initial
public investment) to
December 31, 1994. For the period from December 8, 1993 (start of business)
to March 28, 1994, net investment income was distributed to the Fund's adviser.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
CORPORATE BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
THE FOLLOWING TABLE HAS BEEN AUDITED BY DELOITTE & TOUCHE LLP, THE FUND'S
INDEPENDENT AUDITORS. THEIR REPORT, DATED FEBRUARY 10, 1995, ON THE FUND'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, AND ON THE FOLLOWING
TABLE FOR THE PERIOD PRESENTED, IS INCLUDED IN THE ANNUAL REPORT, WHICH IS
INCORPORATED BY REFERENCE. THIS TABLE SHOULD BE READ IN CONJUNCTION WITH THE
FUND'S FINANCIAL STATEMENTS AND NOTES THERETO, WHICH MAY BE OBTAINED FROM THE
FUND.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.75
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.12)
- ------------------------------------------------------------------------------------------- -------
Total from investment operations (0.37)
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.75)
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.01)(a)
- ------------------------------------------------------------------------------------------- -------
Total distributions (0.76)
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 8.87
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN** (3.73%)
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 0.41%(c)
- -------------------------------------------------------------------------------------------
Net investment income 9.11%(c)
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 10.01%(c)
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,457
- -------------------------------------------------------------------------------------------
Portfolio turnover rate 18 %
- -------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 2, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9, 1993
(start of business) to February 1, 1994, the Fund had no public investment.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
December 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION ON
INSURANCE MANAGEMENT SERIES
- --------------------------------------------------------------------------------
Insurance Management Series 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. An insurance company chooses which portfolios
to make available as funding vehicles for its variable annuity contracts and
variable life insurance policies.
Shares of each Fund are sold at net asset value as described in the section
entitled "What Shares Cost." Shares of the Funds are redeemed at net asset
value.
Shares of beneficial interest in the following three separate portfolios are
offered by this prospectus:
Utility Fund--a portfolio seeking high current income and moderate
capital appreciation by investing primarily in a professionally managed,
diversified portfolio of equity and debt securities of utility companies;
U.S. Government Bond Fund--a portfolio seeking current income by
investing in U.S. government securities; and
Corporate Bond Fund--a portfolio seeking high current income by investing
in lower-rated fixed income securities, including preferred stocks,
bonds, debentures and notes.
Each of the Funds may also invest in certain other types of securities as
further described in this prospectus.
Since the Funds use a single prospectus, it is possible that one Fund might
become liable for a misstatement in the prospectus regarding another Fund. The
Board of Trustees ("Trustees") of the Trust considered this when approving the
use of a single prospectus.
UTILITY FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve high current income and
moderate capital appreciation. The investment objective cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
policies described in this prospectus.
INVESTMENT POLICIES
The Fund endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of equity and debt securities of
utility companies. Unless indicated otherwise, the investment policies may be
changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of utility companies. The Fund intends to achieve its
investment objective by investing in equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies. Under normal market conditions, the Fund will invest at
least 65% of its total assets in securities of utility companies.
COMMON STOCKS. The Fund invests primarily in common stocks of utility companies
selected by the Fund's investment adviser on the basis of traditional research
techniques, including assessment of earnings and dividend growth prospects and
of the risk and volatility of the company's industry. However, other factors,
such as product position, market share, or profitability will also be considered
by the Fund's investment adviser.
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, as well as
securities of foreign issuers that trade on foreign stock exchanges. 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.
OTHER SECURITIES. The Fund may invest in preferred stocks, corporate bonds,
notes, and warrants of these companies and in cash, U.S. government securities,
and money market instruments in proportions determined by its investment
adviser.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund will only
purchase puts on portfolio securities which are traded on a recognized exchange.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or for 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
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of
long-term debt securities against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government at a certain time in the future. The seller of the contract
agrees to make delivery of the type of instrument called for in the contract and
the buyer agrees to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures and options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash, cash items,
and short-term instruments, including notes and commercial paper, for liquidity
and during times of unusual market conditions for defensive purposes. Cash items
may include obligations such as:
. certificates of deposit (including those issued by domestic and foreign
branches of FDIC insured banks);
. obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
. repurchase agreements.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow 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.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
U.S. GOVERNMENT BOND FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of 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
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. For purposes of this 65% statement, the Fund will
consider collateralized mortgage obligations issued by U.S. government agencies
or instrumentalities to be U.S. government securities. Unless indicated
otherwise, the investment policies of the Fund may be changed by the Trustees
without the approval of shareholders. Shareholders will be notified before any
material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in securities which are primary or
direct obligations of the U.S. government or its agencies or instrumentalities,
or which are guaranteed by the U.S. government, its agencies or
instrumentalities, and in certain collateralized mortgage obligations ("CMOs"),
described below, and repurchase agreements.
The U.S. government securities in which the Fund invests include:
. note, bonds and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives and Banks for Cooperatives; Federal Home
Loan Banks; Federal Home Loan Mortgage Corporation; Federal Natonal
Mortgage Association; Government National Mortgage Association;
Export-Import Bank of the United States; Commodity Credit Corporation;
Federal Financing Bank; The Student Loan Marketing Association; National
Credit Union Adminstration; and Tennessee Valley Authority.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since it is
not obligated to do so. These instrumentalities are supported by:
. the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
. the credit of the agency or instrumentality.
The Fund may also invest in CMOs which are rated AAA by a nationally recognized
statistical rating agency and which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) privately issued securities which
are collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) privately issued securities which are collateralized by pools
of mortgages in which payment of principal and interest are guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities; and
(iii) other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal and
interest are supported by the credit of an agency or instrumentality of the U.S.
government. The mortgage-related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
Mortgage-backed securities may be subject to certain prepayment risks because
the underlying mortgage loans may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of favorable rates. At the time the Fund reinvests
the proceeds, it may receive a rate of interest which is actually lower than the
rate of interest paid on those securities.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow 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.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
. invest more than 10% of its total assets in securities of other
investment companies.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
CORPORATE BOND FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek high current income. The
investment objective cannot be changed without approval of 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
Unless stated otherwise, the Trustees can change the investment policies without
the approval of shareholders. Shareholders will be notified before any material
change becomes effective.
The Fund endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of fixed income securities. The
fixed income securities in which the Fund intends to invest are lower-rated
corporate debt obligations, which are commonly referred to as "junk bonds." Some
of these fixed income securities may involve equity features. Capital growth
will be considered, but only when consistent with the investment objective of
high current income.
ACCEPTABLE INVESTMENTS. The Fund invests at least 65% of its assets in
lowerrated fixed income bonds. Under normal circumstances, the Fund will not
invest more than 10% of the value of its total assets in equity securities. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates. The fixed income securities in which the Fund invests include,
but are not limited to:
. preferred stocks;
. bonds;
. debentures;
. notes;
. equipment lease certificates; and
. equipment trust certificates.
The securities in which the Fund may invest are generally rated BBB or lower by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Services Inc.
("Fitch") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are
not rated but are determined by the Fund's investment adviser to be of
comparable quality. Securities which are rated BBB or lower by S&P or Fitch or
Baa or lower by Moody's have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than highly rated bonds. A description
of the rating categories is contained in the Appendix to this combined
prospectus. There is no lower limit with respect to rating categories for
securities in which the Fund may invest. See "Investment Risks" below.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations for defensive purposes during times of unusual market conditions.
Short-term obligations may include:
. certificates of deposit;
. 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 and variable rate demand master notes;
. short-term notes;
. obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
. repurchase agreements.
INVESTMENT RISKS
The corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of the nationally recognized statistical rating
organizations (AAA, AA, or A for S&P or Fitch, and Aaa, Aa or A for Moody's) but
are in the lower rating categories or are unrated but are of comparable quality
and have speculative characteristics. Lower-rated or unrated bonds are commonly
referred to as "junk bonds." There is no minimal acceptable rating for a
security to be purchased or held in the Fund's portfolio, and the Fund may, from
to time, purchase or hold securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to this
combined prospectus.
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the prices or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers in lower-rated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell the
securities at an optimum time. As a result of these factors, lower-rated
securities tend to have more price volatility and carry more risk to principal
and income than higher-rated securities.
An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligation to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have issued. As a
result of these restructurings, holders of lower-rated securities may receive
less principal and interest than they had bargained for at the time such bonds
were purchased.
In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.
The secondary trading market for lower-rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. In 1989, legislation was
enacted that requires federally insured savings and loan associations to divest
their holdings of lower-rated bonds by 1994. The reduction of the number of
institutions empowered to purchase and hold lower-rated bonds could have an
adverse impact on the overall liquidity of the market. Adverse publicity and the
perception of investors relating to issuers, underwriters, dealers or underlying
business conditions, whether or not warranted by fundamental analysis, may also
affect the price or liquidity of lower-rated bonds. On occasion, therefore, it
may become difficult to price or dispose of a particular security in the
portfolio.
The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash). The
price of zero coupon bonds and pay-in-kind securities are generally more
sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
pay-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.
Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.
REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's investment adviser believes
that the risks of investing in lower-rated securities can be reduced. The
professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:
CREDIT RESEARCH. The Fund's investment adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest, or dividend coverage and earnings. In evaluating an
issuer, the adviser places special emphasis on the estimated current value
of the issuer's assets rather than historical cost.
DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS. The Fund's adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow 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.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
The following investment practices are common to two or more of the Funds and,
unless indicated otherwise, may be changed without approval of shareholders.
REPURCHASE AGREEMENTS
All of the Funds 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 a Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. Such 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 a
Fund, such 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 Funds believe that, under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
a Fund and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by each Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
Each 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
these Funds may otherwise invest pursuant to their respective investment
objectives and policies but which are subject to restriction on resale under
federal securities law. To the extent restricted securities are deemed to be
illiquid, these Funds 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 each
Fund.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a 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 Funds may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Funds 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 Funds may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each Fund may lend its 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 policy is a fundamental policy of each Fund and
may not be changed without shareholder approval. The Funds will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
adviser has determined are
creditworthy under guidelines established by the Trustees and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned at all times. There is the risk that
when lending portfolio securities, the securities may not be available to a Fund
on a timely basis and a 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.
VARIABLE ASSET REGULATIONS
The Funds are 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 a Fund may be represented by any one investment, no more
than 70% of the total assets of a Fund may be represented by any two
investments, no more than 80% of the total assets of a Fund may be represented
by any three investments, and no more than 90% of the total assets of a 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 a 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 Funds will be operated at all times so as to comply with the foregoing
diversification requirements.
STATE INSURANCE REGULATIONS
The Funds are intended to be funding vehicles 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 applied to the Trust, each Fund may be limited in its ability to
engage in such investments and to manage its portfolio with desired flexibility.
The Trust intends that each 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 Funds.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset values per share of Utility Fund, U.S. Government Bond Fund and
Corporate Bond Fund fluctuate. They are determined by dividing the sum of the
market value of all securities and other assets of the particular Fund, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
Shares of the Funds are not sold directly to the general public. The Funds'
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 Funds intend to engage in mixed funding and shared funding in the future.
Although the Funds do 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 would 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
Trust.
Shares of the Funds are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Funds are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Trust reserves the right to
reject any purchase request. Net asset value of shares of the Funds will not be
calculated on: (i) days on which there are not sufficient changes in the value
of a 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; or (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 Funds which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the applicable Fund determined on that day, as long as such
purchase orders are received by the applicable 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 respective Funds on the next business day. It is the
responsibility of each insurance company which invests in the Funds to properly
transmit purchase orders and federal funds in accordance with the procedures
described above.
DIVIDENDS
Dividends on shares of Utility Fund, U.S. Government Bond Fund, and Corporate
Bond Fund are declared and paid monthly.
Shares of Utility Fund, U.S. Government Bond Fund, and Corporate Bond Fund will
begin earning dividends if owned on the applicable record date. Dividends of
each Fund are automatically reinvested in additional shares of such Fund on
payment dates at the ex-dividend date net asset value.
INSURANCE MANAGEMENT SERIES INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF INSURANCE MANAGEMENT SERIES
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders. An 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 Funds are made by Federated Advisers, the Funds'
investment adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the Funds and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from each Fund.
ADVISORY FEES. The Funds' adviser receives an annual investment advisory
fee equal to .75 of 1% of the average daily net assets for Utility Fund and
.60 of 1% of the average daily net assets for U.S. Government Bond Fund and
Corporate Bond Fund. The adviser may voluntarily choose to waive a portion
of its fees or reimburse a Fund for certain operating expenses. The adviser
can terminate this voluntary reimbursement of expenses at any time at its
sole discretion.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also
provide administrative services to a number of investment companies. Total
assets under management or administration by these and other subsidiaries
of Federated Investors are approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc., develops and
manages mutual funds primarily for the financial industry.
Federated Investors' track record of competitive performance and its
disciplined, risk averse investment philosophy serve approximately 3,500
client institutions nationwide. Through these same client institutions,
individual shareholders also have access to this same level of investment
expertise.
FUND MANAGERS
UTILITY FUND. Christopher H. Wiles has been the Fund's portfolio manager since
the Fund commenced operations. Mr. Wiles joined Federated Investors in 1990 and
has been a Vice President of the Fund's investment adviser since 1992. Mr. Wiles
served as Assistant Vice President of the Fund's investment adviser from 1990
until 1992. Mr. Wiles was a portfolio manager at Mellon Bank from 1986 until
1990. Mr. Wiles is a Chartered Financial Analyst and received his M.B.A. from
Cleveland State University.
Linda A. Duessel has been the Fund's portfolio manager since April 1995. Ms.
Duessel joined Federated Investors in 1991 as an Assistant Vice President of the
Fund's investment adviser. Ms. Duessel was employed at Westinghouse Credit
Corporation from 1983 to 1991, serving in a variety of positions which
culminated in her being named Vice President/Portfolio Manager in the Merchant
Banking Group in 1990. Ms. Duessel served as a Senior Staff Accountant at Arthur
Young & Company from 1979 to 1982. Ms. Duessel received her M.S.I.A. from
Carnegie Mellon University. Ms. Duessel is a Certified Public Accountant and a
Chartered Financial Analyst.
U.S. GOVERNMENT BOND FUND. Kathleen M. Foody-Malus has been the Fund's portfolio
manager since the Fund commenced operations. Ms. Foody-Malus joined Federated
Investors in 1983 and has been a Vice President of the Fund's investment adviser
since 1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser from 1990 until 1992, and from 1986 until 1989 she acted as
investment analyst. Ms. Foody-Malus received her M.B.A. in Accounting/Finance
from the University of Pittsburgh.
James D. Roberge has been the Fund's portfolio manager since March 1, 1995. Mr.
Roberge joined Federated Investors in 1990 and has been a Vice President of the
Fund's investment adviser since October 1994. Prior to this, Mr. Roberge served
as an Assistant Vice President of the Fund's investment adviser. From 1990 until
1992, Mr. Roberge acted as an investment analyst. Mr. Roberge is a Chartered
Financial Analyst and received his M.B.A. in Finance from Wharton Business
School in 1990.
CORPORATE BOND FUND. Mark E. Durbiano has been the Fund's portfolio manager
since the Fund commenced operations. Mr. Durbiano joined Federated Investors in
1982 and has been a Vice President of the Fund's investment adviser since 1988.
Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in Finance
from the University of Pittsburgh.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Funds.
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 FUNDS
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
<C> <S>
.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. Average
aggregate daily net assets include those of all mutual funds advised by
affiliates of Federated Investors. 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 Funds.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is the transfer
agent for shares of the Funds and dividend disbursing agent for the Funds.
INDEPENDENT AUDITORS. The independent auditors for the Funds are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.
EXPENSES OF EACH FUND
Each Fund pays all of its own expenses and its allocable share of Trust
expenses. These expenses may include, but are not limited to, the cost of:
organizing the Trust and continuing its existence; Trustees' fees; investment
advisory and administrative services; printing prospectuses and other documents
for contract holders; registering the Trust, the Funds, and shares of the Funds;
taxes and commissions; issuing, purchasing, repurchasing, and redeeming shares;
custodians, transfer agents, dividend disbursing agents, contract holders
servicing agents, and registrars; printing, mailing, auditing, accounting, and
legal expenses; reports to contract holders and governmental agencies; meetings
of Trustees and contract holders and proxy solicitations therefor; insurance;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the investment adviser may voluntarily reimburse some
expenses.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
The insurance company separate accounts, as shareholders of each Fund, will vote
the Fund shares held in their separate accounts at meetings of shareholders.
Voting will be in accordance with instructions received from contract owners of
the separate accounts, as more fully outlined in the prospectus of each such
separate account.
Each share of each of the Funds gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each Fund have equal voting rights, except that only shares of a particular Fund
are entitled to vote on matters affecting that 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 a Fund's or the
Trust's operation and for the election of Trustees under 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.
As of April 7, 1995, Aetna Life Insurance and Annuity, Hartford, Connecticut,
owned 39.53%, and Life of Virginia, Richmond, Virginia, owned 40.77%, of the
voting securities of Utility Fund, and, therefore, may, for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders. As of April 10, 1995, Aetna Life Insurance
and Annuity, Hartford, Connecticut, owned 26.97%, and TransAmerica Occidental
Life
Insurance Company, Los Angeles, California, owned 42.75%, of the voting
securities of U.S. Government Bond Fund, and, therefore, may, for certain
purposes be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders. As of April 7, 1995, Aetna
Life Insurance and Annuity, Hartford, Connecticut, owned 67.38% of the voting
securities of Corporate Bond Fund, and, therefore, may, for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
The Funds will pay no federal income tax because the Funds expect to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by each of
the Funds in the Trust will not be combined for tax purposes with those realized
by any other Fund.
Each Fund intends to comply with the variable asset diversification regulations
which are described earlier in this prospectus. If a Fund fails to comply with
these regulations, contracts invested in that 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 each 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
- --------------------------------------------------------------------------------
From time to time Utility Fund, U.S. Government Bond Fund and Corporate Bond
Fund advertise total return and yield.
Total return represents the change, over a specific period of time, in the value
of an investment in a 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 yields of Utility Fund, U.S. Government Bond Fund and Corporate Bond Fund
are 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 a Fund and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
Performance information for each Fund will not reflect the charges and expenses
of a variable annuity or variable life insurance contract. Because shares of
each 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 a Fund's performance.
From time to time, each Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
C--The rating C is reserved for income bonds on which no interest is being paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR--NR indicates that Fitch does not rate the specific issue. Plus + or Minus :
Plus or minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderated reliance on debt and
ample asset protection.
. Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Insurance Management Series
Utility Fund Federated Investors Tower
U.S. Government Bond Fund Pittsburgh, Pennsylvania 15222-3779
Corporate Bond Fund
- -----------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
INSURANCE
MANAGEMENT
SERIES
PROSPECTUS
An Open-End, Management
Investment Company
. Utility Fund
. U.S. Government Bond Fund
. Corporate Bond Fund
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
458043205
458043304
458043403
3120303A (4/95)
Insurance Management Series
offering three portfolios:
oUtility Fund;
oU.S. Government Bond Fund; and
oCorporate Bond Fund.
Combined Statement of Additional Information
This Combined Statement of Additional Information should be read
with the combined prospectus of Insurance Management Series (the
"Trust") dated April 30, 1995. This Statement is not a prospectus
itself. To receive a copy of the combined prospectus, write or
call the Trust.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About
the Trust 1
Investment Information 1
Investment Objectives 1
Utility Fund 1
U.S. Government Bond
Fund 1
Corporate Bond Fund 1
Types of Investments 1
Utility Fund 1
U.S. Government
Obligations 1
U.S. Government Bond Fund 2
Collateralized Mortgage
Obligations (CMOs) 2
Stripped Mortgage-
Related Securities 2
Corporate Bond Fund 2
Corporate Debt
Securities 2
Equity Securities 2
Temporary Investments 2
Certificates of Deposit 3
Portfolio Turnover 3
Investment Limitations 3
Selling Short and Buying
on Margin 3
Issuing Senior
Securities and
Borrowing Money 3
Pledging Assets 3
Concentration of
Investments 3
Investing in Commodities 4
Investing in Real Estate 4
Lending Cash or
Securities 4
Underwriting 4
Diversification of
Investments 4
Investing in Restricted
Securities 4
Investing in Illiquid
Securities 4
Investing in Put Options 4
Writing Covered Call
Options 4
Investment Practices of the
Funds 5
Repurchase Agreements 5
Reverse Repurchase
Agreements 5
Restricted and Illiquid
Securities 5
When-Issued and Delayed
Delivery Transactions 6
Lending of Portfolio
Securities 6
Insurance Management Series
Management 6
Fund Ownership 11
Trustees Compensation 12
Trustee Liability 12
Investment Advisory
Services 13
Adviser to the Funds 13
Advisory Fees 13
Administrative Services 13
Brokerage Transactions 13
Purchasing Shares 14
Determining Net Asset Value 14
Determining Value of
Securities 14
Massachusetts Partnership
Law 14
Tax Status 15
The Funds' Tax Status 15
Shareholder's Tax Status 15
Total Return 15
Yield 15
Performance Comparisons 16
General Information About the Trust
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated September 15, 1993. This Statement of
Additional Information includes information about three of the Trust's
portfolios (individually referred to as a "Fund" and collectively as the
"Funds"):
o Utility Fund;
o U.S. Government Bond Fund; and
o Corporate Bond Fund.
Shares of the Funds are sold only to insurance companies as funding
vehicles for variable annuity and variable life insurance contracts
issued by the insurance companies. The Trust has separate portfolios. An
insurance company chooses which portfolios to make available as funding
vehicles for its variable annuity and variable life insurance policies.
Investment Information
Investment Objectives
Utility Fund
The Utility Fund's investment objective is to achieve high current
income and moderate capital appreciation.
U.S. Government Bond Fund
The U.S. Government Bond Fund's investment objective is to provide
current income. Current income includes, in general, discount
earned on U.S. Treasury bills and agency discount notes, interest
earned on all other U.S. government securities and short-term
capital gains.
Corporate Bond Fund
The Corporate Bond Fund's investment objective is to seek high
current income.
The investment objectives of the Funds cannot be changed without the
approval of shareholders.
Types of Investments
Utility Fund
The Utility Fund endeavors to achieve its investment objective by
investing primarily in a professionally managed, diversified portfolio
of equity and debt securities of utility companies.
U.S. Government Obligations
The Fund may also invest in U.S. government obligations which 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
U.S. government agencies or instrumentalities. These securities are
backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow an amount limited to a specific line
of credit from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o 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:
o Federal Farm Credit System;
o Federal Home Loan Banks System;
o Student Loan Marketing Association;
o Federal National Mortgage Association; and
o Federal Home Loan Mortgage Corporation.
U.S. Government Bond Fund
The U.S. Government Bond Fund invests in U.S. government securities
which are primary or direct obligations of the U.S. government or its
agencies or instrumentalities, or which are guaranteed by the U.S.
government, its agencies or instrumentalities, and in certain
collateralized mortgage obligations described below, and repurchase
agreements.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those
issued by the Government National Mortgage Association. The terms
and characteristics of the mortgage instruments may vary among
pass-through mortgage loan pools.
The market for such CMOs has expanded considerably since its
inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and
other investors make government-related pools highly liquid.
Stripped Mortgage-Related Securities
Some of the mortgage-related securities purchased by the Fund may
represent an interest solely in the principal repayments or solely
in the interest payments on mortgage-backed securities (stripped
mortgage-backed securities or "SMBSs"). Due to the possibility of
prepayments on the underlying mortgages, SMBSs may be more
interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which
SMBSs were issued, there may be substantial prepayment on the
underlying mortgages, leading to the relatively early prepayment
of principal-only SMBSs and a reduction in the amount of payment
made to holders of interest-only SMBSs. It is possible that the
Fund might not recover its original investment on interest-only
SMBSs if there are substantial prepayments on the underlying
mortgages. Therefore, interest-only SMBSs generally increase in
value as interest rates rise and decrease in value as interest
rates fall, counter to changes in value experienced by most fixed
income securities. The Fund's adviser intends to use this
characteristic of interest-only SMBSs to reduce the effects of
interest rate changes on the value of the Fund's portfolio, while
continuing to pursue current income.
Corporate Bond Fund
The Corporate Bond Fund endeavors to achieve its objective by investing
primarily in a professionally managed, diversified portfolio of fixed
income securities. Some of these fixed income securities may involve
equity features. Capital growth will be considered, but only when
consistent with the investment objective of high current income.
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).
Equipment lease or trust certificates are secured obligations
issued in serial form, usually sold by transportation companies
such as railroads or airlines, to finance equipment purchases. The
certificate holders own a share of the equipment, which can be
resold if the issuer of the certificate defaults. The Fund does
not currently intend to invest more than 5% of its assets in
equipment lease certificates.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets
will be invested in equity securities, including common stocks,
warrants, or rights. The Fund's investment adviser may choose to
exceed this 10% limitation if unusual market conditions suggest
such investments represent a better opportunity to reach the
Fund's investment objective.
Temporary Investments
The Fund may also invest in temporary investments for defensive
purposes during times of unusual market conditions.
Certificates of Deposit
The Fund may invest in certificates of deposit of domestic and
foreign banks and savings and loans if they have capital, surplus,
and undivided profits of over $100,000,000, or if the principal
amount of the instrument is insured by the Bank Insurance Fund
("BIF") or the Savings Association Insurance Fund ("SAIF"), both
of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"). These instruments may include Eurodollar
Certificates of Deposit issued by foreign branches of U.S. or
foreign banks, Eurodollar Time Deposits which are U.S. dollar
denominated deposits in foreign branches of U.S. or foreign banks,
Canadian Time Deposits which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States, and Yankee Certificates of Deposit which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the United States.
Portfolio Turnover
Securities in a Fund's portfolio will be sold whenever a 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. The U.S. Government Bond Fund's
policy of managing its portfolio of U.S. government securities,
including the sale of securities held for a short period of time, to
achieve its investment objective of current income may result in high
portfolio turnover. The U.S. Government Bond Fund will not attempt to
set or meet a portfolio turnover rate as any turnover would be
incidental to transactions undertaken in an attempt to achieve the
Fund's investment objective.
For the period from April 14, 1994 (date of initial public investment)
to December 31, 1994, the portfolio turnover rate of Utility Fund was
73%. For the period from March 29, 1994 (date of initial public
investment) to December 31, 1994, the portfolio turnover rate of U.S.
Government Bond Fund was 0%. For the period from February 2, 1994 (date
of initial public investment) to December 31, 1994, the portfolio
turnover rate of Corporate Bond Fund was 18%.
Investment Limitations
Selling Short and Buying on Margin
The Funds 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 Utility 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 Funds will not issue senior securities except that each 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 such 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 such Fund's
total assets; provided that, while borrowings and reverse
repurchase agreements outstanding exceed 5% of each such Fund's
total assets, any such borrowings will be repaid before additional
investments are made. The Funds will not borrow money or engage in
reverse repurchase agreements for investment leverage purposes.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, each Fund
may mortgage, pledge or hypothecate assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of total assets at the time of the time of borrowing.
For purposes of this limitation, the following are not deemed to
be pledges by the Utility 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 Utility Fund will not purchase securities if, as a result of
such purchase, 25% or more of its total assets would be invested
in securities of companies engaged principally in any one industry
other than the utilities industry. However, the Utility 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.
The Corporate Bond Fund and U.S. Government Bond Fund will not
purchase securities if, as a result of such purchase, 25% or more
of their respective total assets would be invested in any one
industry. However, each Fund may at any time invest 25% or more of
its respective 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 Funds will not purchase or sell commodities, commodity
contracts, or commodity futures contracts, except that the Utility
Fund may purchase and sell futures and stock index futures
contracts and related options.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests in real estate, although each Fund 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
No Fund will lend any of its assets, except portfolio securities
up to one-third of its total assets. This shall not prevent a 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 objectives and policies or the Trust's Declaration of
Trust.
Underwriting
No Fund will not underwrite any issue of securities, except as
such Fund may be deemed to be an underwriter under the Securities
Act of 1933 in connection with the sale of securities in
accordance with its respective investment objectives, policies,
and limitations.
Diversification of Investments
With respect to 75% of its total assets, no Fund will 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 such Fund's total assets would be invested in the securities of
that issuer.
In addition, no Fund will purchase more than 10% of any class of
the outstanding voting securities of any one issuer. For these
purposes, the Funds consider 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 by the Funds 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 becomes
effective.
Investing in Restricted Securities
No Fund will 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
No Fund will 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 (with respect to the Utility Fund) and certain
restricted securities not determined by the Trustees to be liquid.
Investing in Put Options
The Utility 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 Fund's total assets would be invested in
premiums on open put option positions.
Writing Covered Call Options
The Utility 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.
With respect to all of the Funds, 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.
No Fund has any present intention to borrow money in excess of 5% of the
value of its net assets during the coming fiscal year.
For purposes of their policies and limitations, the Funds consider
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."
Investment Practices of the Funds
The following investment practices are common to two or more of the
Funds and, unless indicated otherwise, may be changed without approval
of shareholders.
Repurchase Agreements
All of the Funds will engage in repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
organized financial institutions sell U.S. government securities or
other securities to the FUnd and agree at the tiume of sale to
repurchase them at a mutually agreed upon time and price. A 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
a Fund, a 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 a Fund
might be delayed pending court action. The Funds believe that under the
regular procedures normally in effect for custody of a 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 Funds will only enter into
repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Funds'
adviser to be creditworthy pursuant to guidelines established by the
Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, a 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 a 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 a 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.
Restricted and Illiquid Securities
The Funds 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 Funds, 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 Funds through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
nonexclusive 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
Funds believe 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace
trades.
When-Issued and Delayed Delivery Transactions
All the Funds may purchase securities on a when-issued or delayed
delivery basis. These transactions are made to secure what is considered
to be an advantageous price and yield for a 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. A 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, all of the Funds may lend their
portfolio securities, up to one-third of the value of each Fund's 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 or loan but would terminate the loan and regain the right to
vote if that were considered important with respect to the investment.
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Funds' outstanding shares.
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 Funds
The Fund's investment adviser is Federated Advisers. It is a subsidiary
of Federated Investors. All 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 Funds 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 annual investment
advisory fees as described in the prospectus.
For the period from December 9, 1993 (start of business) to December
31, 1994, the adviser earned advisory fees from Utility Fund and
Corporate Bond Fund of $2,077, and $7,966, respectively, all of which
was voluntarily waived. For the period from December 8, 1993 (start of
business) to December 31, 1994, the adviser earned advisory fees from
U.S. Government Bond Fund of $2,605, all of which was voluntarily
waived.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Trust for a fee as
described in the prospectus. For the period from December 9, 1993 (start
of business), to December 31, 1994, Utility Fund and Corporate Bond Fund
incurred $73,289, and $52,398, respectively, for administrative
services. For the period from December 8, 1993 (start of business), to
December 31, 1994, U.S. Government Bond Fund incurred $63,015 for
administrative services.
Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to
the Trust, 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 Trust
or to the adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising 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.
For the period from December 9, 1993 (start of business) to December 31,
1994, Utility Fund and Corporate Bond Fund paid $476, and $0,
respectively, in brokerage commissions. For the period from December 8,
1993 (start of business) to December 31, 1994, the U.S. Government Bond
Fund paid $0 in brokerage commissions.
Purchasing Shares
Shares of the Funds 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 Funds is explained in the
Prospectus under "Purchases and Redemptions" and "What Shares Cost."
Determining Net Asset Value
Net asset value of the Utility Fund, U.S. Government Bond Fund and
Corporate Bond Fund generally changes each day. The days on which net
asset value is calculated by the Funds are described in the prospectus.
Determining Value of Securities
The values of the portfolio securities in the Utility Fund, U.S.
Government Bond Fund and Corporate Bond Fund are determined as follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices;
o 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;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good
faith by the Trustees.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may reflect:
institutional trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data.
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 Fund 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 that Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay
any judgment against a shareholder of a Fund for any act or obligation
of the Trust on behalf of that 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 that Fund.
Tax Status
The Funds' Tax Status
The Funds will pay no federal income tax because each 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, a
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Shareholder's Tax Status
Each Fund intends to comply with the variable asset diversification
regulations which are described in the Prospectus and this Statement of
Additional Information. If a Fund fails to comply with these
regulations, contracts invested in that 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 each Fund to the separate accounts.
Total Return
Utility Fund's cumulative total return for the period from April 14,
1994 (date of initial public investment), to December 31, 1994, was
1.12%. U.S. Government Bond Fund's cumulative total return for the
period from March 29, 1994, (date of initial public investment), to
December 31, 1994, was 2.62%. Corporate Bond Fund's cumulative total
return for the period from February 2, 1994 (date of initial public
investment), to December 31, 1994, was (3.73%). Cumulative total returns
reflect a Fund's total performance over a specific period of time. The
Fund's cumulative total returns are representative of nine, nine and
eleven months of Fund activity, respectively.
The average annual total return for the Utility Fund, U.S. Government
Bond Fund and Corporate Bond 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 monthly
or quarterly, as applicable, 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 a Fund's performance.
Yield
The yield for the Utility Fund, and Corporate Bond Fund for the thirty-
day period ended December 31, 1994, was 4.74%, and 10.43%, respectively.
The U.S. Government Bond Fund did not calculate a thirty-day yield for
the period ended December 31, 1994.
The yield for the Utility Fund, U.S. Government Bond Fund and Corporate
Bond Fund is determined 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 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 Securities and Exchange Commission
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 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
Each Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o the relative amount of the Fund's cash flow.
A Fund's performance fluctuates on a daily basis largely because net
earnings and net asset value per share fluctuate daily. Both net
earnings and net asset value 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 Funds' 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 net asset value. The financial publications and/or indices which
the Funds use in advertising may include:
o 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.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industrial, 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.
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Trust
may quote its Lipper ranking in various fund categories in
advertising and sales literature.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include: non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed-rate, non- convertible
domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine
years. Tracked by Shearson Lehman Brothers, Inc., the index
calculates total returns for one month, three month, twelve month,
and ten year periods and year-to-date.
o Lehman Brothers Government/Corporate (Long-Term) Index is composed
of the same types of issues as defined above. However, the average
maturity of the bonds included in this index approximates 22
years.
o Lehman Brothers Government Index is an unmanaged index comprised
of all publicly issued, non-convertible domestic debt of the U.S.
government, or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S.
government. Only notes and bonds with a minimum outstanding
principal of $1 million and a minimum maturity of one year are
included.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi- weekly Mutual Fund Values. Mutual Fund Values rates
more than 1,000 NASDAQ- listed mutual funds of all types,
according to their risk-adjusted returns. The maximum rating is
five stars, and ratings are effective for two weeks.
o Bank Rate Monitor National Index, Miami Beach, Florida, is a
financial reporting service which publishes weekly average rates
of 50 leading bank and thrift institution money market deposit
accounts. The rates published in the index are an average of the
personal account rates offered on the Wednesday prior to the date
of publication by ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. Account
minimums range upward from $2,500 in each institution, and
compounding methods vary. If more than one rate is offered, the
lowest rate is used. Rates are subject to change at any time
specified by the institution.
o Money, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day
compound (effective) yield. From time to time, a Fund will quote
its Money ranking in advertising and sales literature.
o Standard & Poor's Utility Index is an unmanaged index of common
stocks from forty different utilities. This index indicates daily
changes in the price of the stocks. The index also provides
figures for changes in price from the beginning of the year to
date, and for a twelve month period.
o Dow Jones Utility Index is an unmanaged index comprised of fifteen
utility stocks that tracks changes in price daily and over a six
month period. The index also provides the highs and lows for each
of the past five years.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industrial, 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.
Advertisements and other sales literature for the Funds 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 Funds based on monthly reinvestment of dividends over
a specific period of time.
From time to time as it deems appropriate, the Funds may advertise their
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 instrument average.
3120303B (4/95)
INSURANCE MANAGEMENT SERIES
PROSPECTUS
This prospectus offers shares of six portfolios (individually referred to as a
"Fund" or collectively as the "Funds") of Insurance Management Series (the
"Trust"), which is an open-end, management investment company. Shares of the
Funds may be sold only to separate accounts of insurance companies to serve as
the investment medium for variable life insurance policies and variable annuity
contracts issued by the insurance companies. The Trust offers interests in the
following six separate investment portfolios, each having distinct investment
objectives and policies:
. Equity Growth and Income Fund;
. Utility Fund;
. Prime Money Fund;
. U.S. Government Bond Fund;
. Corporate Bond Fund; and
. International Stock Fund.
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.
The separate accounts invest in one or more of the Funds in accordance with
allocation instructions received from owners of life insurance policies and
annuity contracts. Such allocation rights are described further in the
prospectus for the separate account. This prospectus contains the information
you should read and know before you invest in any of the Funds through the
variable annuity contracts and variable life insurance policies offered by
insurance companies which provide for investment in the Trust. Keep this
prospectus for future reference.
SPECIAL RISKS
The Corporate Bond Fund's portfolio consists primarily of lower-rated corporate
debt obligations, which are commonly referred to as "junk bonds." 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
predominantly 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 the market for investment grade
bonds. The Corporate Bond Fund's investment adviser will endeavor to limit these
risks through diversifying the portfolio and through careful credit analysis of
individual issuers. Purchasers should carefully assess the risks associated with
an investment in this Fund. (See the sections in this prospectus entitled
"Investment Risks" and "Reducing Risks of Lower-Rated Securities.")
An investment in the Prime Money Fund is neither insured nor guaranteed by the
U.S government. The Prime Money Fund attempts to maintain a stable net asset
value of $1.00 per share; there can be no assurance that the Prime Money Fund
will be able to do so.
The Trust has also filed a combined Statement of Additional Information dated
April 30, 1995 with the Securities and Exchange Commission. The information
contained in the combined Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the combined Statement
of Additional Information free of charge by calling 1-800-235-4669. To obtain
other information or to make inquiries about a Fund, contact the Trust at the
address listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS A POOLED FUNDING VEHICLE 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 April 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------
GENERAL INFORMATION ON
INSURANCE MANAGEMENT SERIES 6
- ------------------------------------------------------
EQUITY GROWTH AND INCOME FUND
INVESTMENT INFORMATION 6
- ------------------------------------------------------
Investment Objectives 6
Investment Policies 6
Investment Limitations 8
UTILITY FUND INVESTMENT INFORMATION 8
- ------------------------------------------------------
Investment Objective 8
Investment Policies 8
Investment Limitation 10
PRIME MONEY FUND INVESTMENT
INFORMATION 10
- ------------------------------------------------------
Investment Objective 10
Investment Policies 10
Investment Risks 12
Investment Limitation 12
Regulatory Compliance 13
U.S. GOVERNMENT BOND FUND INVESTMENT INFORMATION 13
- ------------------------------------------------------
Investment Objective 13
Investment Policies 13
Investment Limitations 14
CORPORATE BOND FUND INVESTMENT
INFORMATION 14
- ------------------------------------------------------
Investment Objective 14
Investment Policies 14
Investment Risks 15
Investment Limitations 16
INTERNATIONAL STOCK FUND
INVESTMENT INFORMATION 17
- ------------------------------------------------------
Investment Objective 17
Investment Policies 17
Investment Limitations 21
INVESTMENT PRACTICES 22
- ------------------------------------------------------
Repurchase Agreements 22
Restricted and Illiquid Securities 23
When-Issued and Delayed Delivery
Transactions 23
Lending of Portfolio Securities 23
Variable Asset Regulations 23
State Insurance Regulations 24
NET ASSET VALUE 24
- ------------------------------------------------------
INVESTING IN THE FUNDS 24
- ------------------------------------------------------
Purchases and Redemptions 24
What Shares Cost 24
Dividends 25
INSURANCE MANAGEMENT SERIES INFORMATION 25
- ------------------------------------------------------
Management of Insurance
Management Series 25
Fund Managers 26
Distribution of Fund Shares 27
Administration of the Trust 27
Brokerage Transactions 27
Expenses of Each Fund 27
SHAREHOLDER INFORMATION 28
- ------------------------------------------------------
Voting Rights 28
TAX INFORMATION 28
- ------------------------------------------------------
Federal Taxes 28
State and Local Taxes 29
PERFORMANCE INFORMATION 29
- ------------------------------------------------------
APPENDIX 30
- ------------------------------------------------------
ADDRESSES 33
- ------------------------------------------------------
EQUITY GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.19
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.26)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations (0.07)
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.19)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.74
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** (0.70%)
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.54%(a)
- -----------------------------------------------------------------------------------------
Net investment income 2.58%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 25.42%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 2,400
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 32%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 1, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to January 31, 1994, the Fund had no investment
activity.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
UTILITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.48
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.34
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.19)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.15
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.34)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.29
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 1.12%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.60%(a)
- -----------------------------------------------------------------------------------------
Net investment income 4.77%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 54.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 974
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 73%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from April 14, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to April 13, 1994, the net investment income was
distributed to the Fund's adviser.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
PRIME MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.01
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.01)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 1.00
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 0.50%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.80%(a)
- -----------------------------------------------------------------------------------------
Net investment income 4.26%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 71.84%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 552
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from November 18, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 10,
1993 (start of business) to November 17, 1994, the Fund had no public
investment.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
U.S. GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.99
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.27
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.27
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.27)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.99
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 2.62%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.48%(a)
- -----------------------------------------------------------------------------------------
Net investment income 3.99%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 32.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 1,244
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from March 29, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 8,
1993 (start of business) to March 28, 1994, net investment income was
distributed to the Fund's adviser.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
CORPORATE BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
THE FOLLOWING TABLE HAS BEEN AUDITED BY DELOITTE & TOUCHE LLP, THE FUND'S
INDEPENDENT AUDITORS. THEIR REPORT, DATED FEBRUARY 10, 1995, ON THE FUND'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, AND ON THE FOLLOWING
TABLE FOR THE PERIOD PRESENTED, IS INCLUDED IN THE ANNUAL REPORT, WHICH IS
INCORPORATED BY REFERENCE. THIS TABLE SHOULD BE READ IN CONJUNCTION WITH THE
FUND'S FINANCIAL STATEMENTS AND NOTES THERETO, WHICH MAY BE OBTAINED FROM THE
FUND.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.75
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.12)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations (0.37)
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.75)
- -----------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.01)(a)
- ----------------------------------------------------------------------------------------- -------
Total distributions (0.76)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 8.87
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** (3.73%)
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.41%(c)
- -----------------------------------------------------------------------------------------
Net investment income 9.11%(c)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 10.01%(c)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,457
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 18%
- -----------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 2, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to February 1, 1994, the Fund had no public
investment.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.
GENERAL INFORMATION ON
INSURANCE MANAGEMENT SERIES
- --------------------------------------------------------------------------------
Insurance Management Series 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.
Shares of each 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 each Fund are sold at net asset value as
described in the section entitled "What Shares Cost." Shares of the Funds are
redeemed at net asset value.
The Trust, which is designed to meet a variety of investment objectives, offers
shares of beneficial interest in the following six separate portfolios:
. Equity Growth and Income Fund--a portfolio seeking long-term growth of
capital and income by investing in the securities of "blue-chip"
companies;
. Utility Fund--a portfolio seeking high current income and moderate
capital appreciation by investing primarily in a professionally managed
and diversified portfolio of equity and debt securities of utility
companies;
. Prime Money Fund--a portfolio seeking current income consistent with
stability of principal and liquidity by investing in high quality money
market instruments;
. U.S. Government Bond Fund--a portfolio seeking current income by
investing in U.S. government securities;
. Corporate Bond Fund--a portfolio seeking high current income by investing
in lower-rated fixed income securities, including preferred stocks,
bonds, debentures and notes; and
. International Stock Fund--a portfolio seeking a total return on its
assets by investing in the equity securities of issuers located in at
least three different countries outside of the United States.
Each of the Funds may also invest in certain other types of securities as
further described in this prospectus.
Since the Funds use a single prospectus, it is possible that one Fund might
become liable for a misstatement in the prospectus regarding another Fund. The
Board of Trustees ("Trustees") of the Trust considered this when approving the
use of a single prospectus.
EQUITY GROWTH AND INCOME FUND
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is to achieve long-term growth of
capital. The Fund's secondary objective is to provide income. The investment
objectives cannot be changed without the approval of the Fund's shareholders.
While there is no assurance that the Fund will achieve its investment
objectives, it endeavors to do so by following the investment policies described
in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objectives by investing, under normal
circumstances, at least 65% of its total assets in common stock of "blue-chip"
companies. "Blue-chip" companies generally are top-quality, established growth
companies which, in the opinion of the investment adviser, meet one or more of
the following criteria:
. industry leader with proven management capabilities;
. historical and future earnings growth rate of approximately 10%
compounded annually;
. strong balance sheet with pension liabilities funded;
. products with brand recognition and consumer acceptance;
. growing consumer-based demand with limited government sales;
. ability to meet social, political, and environmental problems;
. vigorous research effort with continuing new product flow;
. low external capital requirements; and
. not an import competitive company but possessing international
capabilities.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the 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 approach is based on the
conviction that over the long term the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of blue-chip companies. Given these long-term investment
horizons, the Fund will attempt to hold its portfolio securities throughout
market cycles.
COMMON STOCKS. The Fund invests primarily in common stocks of blue-chip
companies selected by the Fund's investment adviser based on the criteria
set forth above and traditional research techniques and technical factors,
including assessment of earnings and dividend growth prospects and of the
risk and volatility of the company's industry. Other factors, such as
product position or market share, will also be considered by the Fund's
investment adviser.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities and
warrants of the blue-chip companies. 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 conversation
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 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 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.
BANK INSTRUMENTS AND SECURITIES OF OTHER INVESTMENT COMPANIES. Primarily
to manage short-term cash, the Fund may also invest in certificates of
deposit, demand and time deposits, bankers' acceptances, deposit notes, and
other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments") and securities of other investment
companies.
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. ("Fitch");
. securities issued and/or guaranteed as to the payment of principal and
interest by the U.S. government or its agencies and instrumentalities;
and
. repurchase agreements.
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.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
. invest more than 10% of its total assets in securities of other
investment companies.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
UTILITY FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve high current income and
moderate capital appreciation. The investment objective cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
policies described in this prospectus.
INVESTMENT POLICIES
The Fund endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of equity and debt securities of
utility companies. Unless indicated otherwise, the investment policies may be
changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of utility companies. The Fund intends to achieve its
investment objective by investing in equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies. Under normal market conditions, the Fund will invest at
least 65% of its total assets in securities of utility companies.
COMMON STOCKS. The Fund invests primarily in common stocks of utility
companies selected by the Fund's investment adviser on the basis of
traditional research techniques, including assessment of earnings and
dividend growth prospects and of the risk and volatility of the company's
industry. However, other factors, such as product position, market share,
or profitability will also be considered by the Fund's investment adviser.
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, as well as securities of foreign issuers that trade on foreign
stock exchanges. 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.
OTHER SECURITIES. The Fund may invest in preferred stocks, corporate
bonds, notes, and warrants of these companies and in cash, U.S. government
securities, and money market instruments in proportions determined by its
investment adviser.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund will only
purchase puts on portfolio securities which are traded on a recognized exchange.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or for 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
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of
long-term debt securities against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government at a certain time in the future. The seller of the contract
agrees to make delivery of the type of instrument called for in the contract and
the buyer agrees to take delivery of the instrument at the specified future
time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures and options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash, cash items,
and short-term instruments, including notes and commercial paper, for liquidity
and during times of unusual market conditions for defensive purposes. Cash items
may include obligations such as:
. certificates of deposit (including those issued by domestic and foreign
branches of FDIC insured banks);
. obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
. repurchase agreements.
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.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
PRIME MONEY FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. The investment objective cannot be
changed without approval of 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 exclusively in a
portfolio of money market instruments maturing in 397 days or less. The average
maturity of the money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in high-quality money market
instruments that are either rated in one of the two highest short-term rating
categories by one or more nationally recognized statistical rating organizations
("NRSROs") or of comparable quality to securities having such ratings. Examples
of these instruments include, but are not limited to:
. domestic issues of corporate debt obligations, including variable rate
demand notes;
. commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
. certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
. short-term credit facilities, such as demand notes;
. asset-backed securities;
. obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities");
. repurchase agreements; and
. other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest adjustment
or the date on which the Fund may next tender the security for repurchase.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). The Fund will treat
securities credit enhanced with a bank's letter of credit as Bank
Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's two highest rating categories are determined without regard
for sub-categories and gradations. For example, securities rated A-1+, A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 (+ or -) or F-2 (+ or -) by
Fitch are all considered rated in one of the two highest short-term rating
categories. The Fund will limit its investments in securities rated in the
second highest short-term rating category (e.g., A-2 by S&P, Prime-2 by Moody's
or F-2 (+ or -) by Fitch) to not more than 5% of its total assets, with not more
than 1% invested in the securities of any one issuer. The Fund will follow
applicable regulations in determining whether a security rated by more than one
NRSRO can be treated as being in one of the two highest short-term rating
categories; currently, such securities must be rated by two NRSROs in one of
their two highest rating categories. See "Regulatory Compliance."
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
CONCENTRATION OF INVESTMENTS. The Fund will invest 25% or more of its total
assets in commercial paper issued by finance companies. The finance companies in
which the Fund intends to invest can be divided into two categories, commercial
finance companies and consumer finance companies. Commercial finance companies
are principally engaged in lending to corporations or other businesses. Consumer
finance companies are primarily engaged in lending to individuals. Captive
finance companies or finance subsidiaries which exist to facilitate the
marketing and financial activities of their parent will, for purposes of
industry concentration, be classified by the Fund in the industry of its parent
corporation.
In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, CCP, and Europaper are subject to somewhat different
risks than domestic obligations of domestic banks. Examples of these risks
include international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact of
interruptions in the flow of international currency transactions. Different
risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing
these instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan limitations, examinations, accounting, auditing,
and recordkeeping, and the public availability of information. These factors
will be carefully considered by the Fund's adviser in selecting investments for
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.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
combined prospectus and its combined Statement of Additional Information, in
order to comply with applicable laws and regulations, including the provisions
of and regulations under the Investment Company Act of 1940, as amended. In
particular, the Fund will comply with the various requirements of Rule 2a-7
which regulates money market mutual funds. For example, with limited exceptions,
Rule 2a-7 prohibits the investment of more than 5% of the Fund's total assets in
the securities of any one issuer, although the Fund's investment limitations
only requires such 5% diversification with respect to 75% of its assets. The
Fund will invest more than 5% of its assets in any one issuer only under the
circumstances permitted by Rule 2a-7. The Fund will also determine the effective
maturity of its investments, as well as its ability to consider a security as
having received the requisite short-term ratings by NRSROs, according to Rule
2a-7. The Fund may change these operational policies to reflect changes in the
laws and regulations without the approval of its shareholders.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
U.S. GOVERNMENT BOND FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of 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
Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. For purposes of this 65% statement, the Fund will
consider collateralized mortgage obligations issued by U.S. government agencies
or instrumentalities to be U.S. government securities. Unless indicated
otherwise, the investment policies of the Fund may be changed by the Trustees
without the approval of shareholders. Shareholders will be notified before any
material change in these polices becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in securities which are primary or
direct obligations of the U.S. government or its agencies or instrumentalities,
or which are guaranteed by the U.S. government, its agencies or
instrumentalities, and in certain collateralized mortgage obligations ("CMOs"),
described below, and repurchase agreements.
The U.S. government securities in which the Fund invests include:
. note, bonds and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives and Banks for Cooperatives; Federal Home
Loan Banks; Federal Home Loan Mortgage Corporation; Federal Natonal
Mortgage Association; Government National Mortgage Association;
Export-Import Bank of the United States; Commodity Credit Corporation;
Federal Financing Bank; The Student Loan Marketing Association; National
Credit Union Adminstration; and Tennessee Valley Authority.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:
. the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
. the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
. the credit of the agency or instrumentality.
The Fund may also invest in CMOs which are rated AAA by a nationally recognized
statistical rating agency and which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) privately issued securities which
are collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) privately issued securities which are collateralized by pools
of mortgages in which payment of principal and interest are guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities; and
(iii) other privately issued securities in which the proceeds of the issuance
are invested in mortgage-backed securities and payment of the principal and
interest are supported by the credit of an agency or instrumentality of the U.S.
government. The mortgage-related securities provide for a periodic payment
consisting of both interest and principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
Mortgage-backed securities may be subject to certain prepayment risks because
the underlying mortgage loans may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining interest rates because many borrowers refinance their mortgages to
take advantage of favorable rates. At the time the Fund reinvests the proceeds,
it may receive a rate of interest which is actually lower than the rate of
interest paid on those securities.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow 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.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
. invest more than 10% of its total assets in securities of other
investment companies.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
CORPORATE BOND FUND INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek high current income. The
investment objective cannot be changed without approval of 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
Unless stated otherwise, the Trustees can change the investment policies without
the approval of shareholders. Shareholders will be notified before any material
change becomes effective. The Fund endeavors to achieve its objective by
investing primarily in a professionally managed, diversified portfolio of fixed
income securities. The fixed income securities in which the Fund intends to
invest are lower-rated corporate debt obligations, which are commonly referred
to as "junk bonds." Some of these fixed income securities may involve equity
features. Capital growth will be considered, but only when consistent with the
investment objective of high current income.
ACCEPTABLE INVESTMENTS. The Fund invests at least 65% of its assets in
lower-rated fixed income bonds. Under normal circumstances, the Fund will not
invest more than 10% of the value of its total assets in equity securities. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates. The fixed income securities in which the Fund invests include,
but are not limited to:
. preferred stocks;
. bonds;
. debentures;
. notes;
. equipment lease certificates; and
. equipment trust certificates.
The securities in which the Fund may invest are generally rated BBB or lower by
S&P or Fitch or Baa or lower by Moody's, or are not rated but are determined by
the Fund's investment adviser to be of comparable quality. Securities which are
rated BBB or lower by S&P or Fitch or Baa or lower by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
highly rated bonds. A description of the rating categories is contained in the
Appendix to this combined prospectus. There is no lower limit with respect to
rating categories for securities in which the Fund may invest. See "Investment
Risks" below.
TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations for defensive purposes during times of unusual market conditions.
Short-term obligations may include:
. certificates of deposit;
. 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 and variable rate demand master notes;
. short-term notes;
. obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and
. repurchase agreements.
INVESTMENT RISKS
The corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of the nationally recognized statistical rating
organizations (AAA, AA, or A for S&P or Fitch and Aaa, Aa or A for Moody's) but
are in the lower rating categories or are unrated but are of comparable quality
and have speculative characteristics. Lower-rated or unrated bonds are commonly
referred to as "junk bonds." There is no minimal acceptable rating for a
security to be purchased or held in the Fund's portfolio, and the Fund may, from
to time, purchase or hold securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to this
combined prospectus.
Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the prices or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers in lower-rated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell the
securities at an optimum time. As a result of these factors, lower-rated
securities tend to have more price volatility and carry more risk to principal
and income than higher-rated securities.
An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligation to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have issued. As a
result of these restructurings, holders of lower-rated securities may receive
less principal and interest than they had bargained for at the time such bonds
were purchased.
In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.
The secondary trading market for lower-rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. In 1989, legislation was
enacted that requires federally insured savings and loan associations to divest
their holdings of lower-rated bonds by 1994. The reduction of the number of
institutions empowered to purchase and hold lower-rated bonds could have an
adverse impact on the overall liquidity of the market. Adverse publicity and the
perception of investors relating to issuers, underwriters, dealers or underlying
business conditions, whether or not warranted by fundamental analysis, may also
affect the price or liquidity of lower-rated bonds. On occasion, therefore, it
may become difficult to price or dispose of a particular security in the
portfolio.
The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash). The
price of zero coupon bonds and pay-in-kind securities are generally more
sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
pay-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.
Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.
REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's investment adviser believes
that the risks of investing in lower-rated securities can be reduced. The
professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:
CREDIT RESEARCH. The Fund's investment adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest, or dividend coverage and earnings. In evaluating an
issuer, the adviser places special emphasis on the estimated current value
of the issuer's assets rather than historical cost.
DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS. The Fund's adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.
INVESTMENT LIMITATIONS
The Fund will not:
. borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to
buy it back on a set date) or pledge securities except, under certain
circumstances, the Fund may borrow 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.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
INTERNATIONAL STOCK FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to obtain a total return on its assets. The
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it attempts to do so by following the investment policies
described in this prospectus.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund will attempt to achieve its objective by
investing at least 65% of its assets (and under normal market conditions
substantially all of its assets) in equity securities of issuers located in at
least three different countries outside of the United States. The Fund's
investment approach is based on the premise that investing in such non-U.S.
securities provides three potential benefits over investing solely in U.S.
securities: (1) the opportunity to invest in foreign issuers believed to have
superior growth potential; (2) the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the U.S.; and
(3) the opportunity to reduce portfolio volatility to the extent that securities
markets inside and outside the U.S. do not move in harmony. The Fund may
purchase sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs");
corporate and government fixed income securities of issuers outside of the U.S.;
convertible securities; and options and financial futures contracts. In
addition, the Fund may enter into forward commitments, repurchase agreements,
and foreign currency transactions; and maintain reserves in foreign or U.S.
money market instruments.
Unless otherwise indicated, the investment policies may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change to these policies becomes effective.
DEPOSITARY RECEIPTS. The Fund may purchase sponsored or unsponsored ADRs,
GDRs, and EDRs (collectively, "Depositary Receipts"). ADRs are Depositary
Receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs
and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Ownership of
unsponsored Depositary Receipts may not entitle the Fund to financial or
other reports from the issuer of the underlying security, to which it would
be entitled as the owner of sponsored Depositary Receipts.
FIXED INCOME SECURITIES. At the date of this prospectus, the Fund has
committed its assets primarily to dividend-paying equity securities of
established companies that appear to have growth potential. However, as a
temporary defensive position, the Fund may shift its emphasis to fixed
income securities, warrants, or other obligations of foreign companies or
governments, if they appear to offer potential higher return. Fixed income
securities include preferred stock, bonds, notes, or other debt securities
which are investment grade or higher, as described
below. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
The debt securities in which the Fund will invest will possess a minimum
credit rating of BBB as assigned by S&P or Baa by Moody's, or, if unrated,
will be judged by the Fund's adviser to be of comparable quality. Because
the average quality of the Fund's portfolio investments should remain
constantly between AAA and BBB, the Fund may avoid the adverse consequences
that may arise for some debt securities in difficult economic
circumstances. Downgraded securities will be evaluated on a case by case
basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security
will be sold. A description of the ratings categories is contained in the
Appendix to the Statement of Additional Information.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities that
are rated, at the time of purchase, investment grade by an NRSRO or, if
unrated, of comparable quality as determined by the adviser. Convertible
securities are fixed income securities which may be exchanged or converted
into a predetermined number of the issuer's underlying common stock at the
option of the holder during a specified time period. Convertible securities
may take the form of convertible bonds, convertible preferred stock or
debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full fact value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which entitle the holder to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bonds' maturity. Convertible securities are senior to equity securities
and, therefore, have a claim to assets of the corporation prior to the
holders of common stock in the case of liquidation. However, convertible
securities are generally subordinated to similar nonconvertible securities
of the same company. The interest income and dividends from convertible
bonds and preferred stocks provide a stable stream of income with generally
higher yields than common stocks, but lower than nonconvertible securities
of similar quality. A Fund will exchange or convert the convertible
securities held in its portfolio into shares of the underlying common
stocks when, in the adviser's opinion, the investment characteristics of
the underlying common shares will assist the Fund in achieving its
investment objective. Otherwise, the Fund will hold or trade the
convertible securities. In selecting convertible securities for the Fund,
the adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument, and the investment potential of the
underlying equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the adviser
considers numerous factors, including the economic and political outlook,
the value of the security relative to other investment alternatives, trends
in the determinants of the issuer's profits, and the issuer's management
capability and practices.
OPTIONS AND FINANCIAL FUTURES CONTRACTS. The Fund may purchase put and
call options, financial futures contracts, and options on financial futures
contracts. In addition, the Fund may write (sell) put and call options with
respect to securities in the Fund's portfolio.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase
securities for a fixed price at a date beyond customary settlement time.
The Fund may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on the Fund's records
at the trade date and maintained until the transaction has been settled.
Risk is involved if the value of the security declines before settlement.
Although the Fund enters
into forward commitments with the intention of acquiring the security, it
may dispose of the commitment prior to settlement and realize a short-term
profit or loss.
MONEY MARKET INSTRUMENTS. The Fund may invest in foreign and U.S. money market
instruments, including interest-bearing call deposits with banks, government
obligations, certificates of deposit, banker's acceptances, commercial paper,
short-term corporate debt securities, and repurchase agreements. The commercial
paper in which the Fund invests will be rated A-1 by S&P or P-1 by Moody's.
These investments may be used to temporarily invest cash received from the sale
of Fund shares, to establish and maintain reserves for temporary defensive
purposes, or to take advantage of market opportunities. Investments in the World
Bank, Asian Development Bank, or Inter-American Development Bank are not
anticipated.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange
contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund. Further,
the Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations.
Cross-hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability that
is the subject of the hedge.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. A
forward foreign currency exchange contract ("forward contract") is an obligation
to purchase or sell an amount of a particular currency at a specific price and
on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs ("trade date"). The
period between the trade date and settlement date will vary between 24 hours and
30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency. No more than 30% of the Fund's assets will be committed to
forward contracts for hedging purposes at any time. (This restriction does not
include forward contracts entered into to settle securities transactions.)
The Fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the U.S. dollar value of foreign
currency-denominated portfolio securities and against increases in the U.S.
dollar cost of such securities to be acquired. As in the case of other kinds of
options, however, the writing of an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the Fund's position,
it may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by the Fund are traded
on U.S. and foreign exchanges or over-the-counter.
RISKS ASSOCIATED WITH FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FINANCIAL
FUTURES CONTRACTS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Fund's adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest or currency exchange rate movements.
In these events, the Fund may lose money on the futures contract or option.
Also, it is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Fund's adviser
will consider liquidity before entering into such transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
RISKS ASSOCIATED WITH NON-U.S. SECURITIES. Investing in non-U.S. securities
carries substantial risks in addition to those associated with domestic
investments. In an attempt to reduce some of these risks, the Fund diversifies
its investments broadly among foreign countries, including both developed and
developing countries. At least three different countries will always be
represented.
The Fund occasionally takes advantage of the unusual opportunities for higher
returns available from investing in developing countries. These investments,
however, carry considerably more volatility and risk because they are associated
with less mature economies and less stable political systems.
CURRENCY RISKS. Because the Fund may purchase securities denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates could affect the Fund's net asset value; the value of interest
earned; gains and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be distributed to
shareholders by the Fund. If the value of a foreign currency rises against
the U.S. dollar, the value of the Fund assets denominated in that currency
will increase; correspondingly, if the value of a foreign currency declines
against the U.S. dollar, the value of Fund assets denominated in that
currency will decrease.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental interpretation,
speculation and other economic and political conditions. Although the Fund
values its assets daily in U.S. dollars, the Fund will not convert its
holdings of foreign currencies to U.S. dollars daily. When the Fund
converts its holdings to another currency, it may incur conversion costs.
Foreign exchange dealers may realize a profit on the difference between the
price at which they buy and sell currencies.
FOREIGN COMPANIES. Other differences between investing in non-U.S. and
U.S. securities include:
. less publicly available information about foreign companies;
. the lack of uniform financial accounting standards applicable to
foreign companies;
. less readily available market quotations on foreign companies;
. differences in government regulation and supervision of foreign
stock exchanges, brokers, listed companies, and banks;
. differences in legal systems which may affect the ability to
enforce contractual obligations or obtain court judgements;
. generally lower foreign stock market volume;
. the likelihood that foreign securities may be less liquid or more
volatile;
. foreign brokerage commissions may be higher;
. unreliable mail service between countries; and
. political or financial changes which adversely affect investments
in some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as
the Fund. Investors are advised that when such policies are instituted, the
Fund will abide by them.
SHORT SALES. The Fund intends to sell securities short from time to time,
subject to certain restrictions. A short sale occurs when a borrowed
security is sold in anticipation of a decline in its price. If the decline
occurs, shares equal in number to those sold short can be purchased at the
lower price. If the price increases, the higher price must be paid. The
purchased shares are then returned to the original lender. Risk arises
because no loss limit can be placed on the transaction. When the Fund
enters into a short sale, assets equal to the market price of the
securities sold short or any lesser price at which the Fund can obtain such
securities, are segregated on the Fund's records and maintained until the
Fund meets its obligations under the short sale.
DEVELOPING/EMERGING MARKETS. The economics of individual emerging
countries may differ favorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Further, the economics of developing countries generally are
heavily dependent on international trade and, accordingly, have been, and
may continue to be, adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been, and may continue to be,
adversely affected by economic conditions in the countries with which they
trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in certain debt securities and domestic companies may be subject
to limitation in other emerging countries. Foreign ownership limitations
also may be imposed by the charters of individual companies in emerging
countries to prevent, among other concerns, violation of foreign investment
limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in
some emerging countries. The Fund could be adversely affected by delays in,
or a refusal to grant, any required governmental registration or approval
for such repatriation. Any investment subject to such repatriation controls
will be considered illiquid if it appears reasonably likely that this
process will take more than seven days.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such
countries or the value of the Fund's investments in those countries. In
addition, it may be difficult to obtain and enforce a judgment in a court
outside of the U.S.
INVESTMENT LIMITATIONS
The Fund will not:
. with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the securities (other than securities
issued or guaranteed by the government of the U.S. or its agencies or
instrumentalities) of any one issuer, or acquire more than 10% of the
outstanding voting securities of any one issuer;
. sell securities short except under strict limitations;
. borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge its assets to secure such borrowings; or
. permit margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts,
to exceed 5% of the fair market value of the Fund's total assets, after
taking into account the unrealized profits and losses on the contracts.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
. invest more than 5% of its assets in warrants;
. own securities of other investment companies, except under certain
circumstances and subject to certain limitations not exceeding 10% of its
total assets (the Fund will indirectly bear its proportionate share of
any fees and expenses paid by other investment companies, in addition to
the fees and expenses payable directly by the Fund);
. invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;
. invest more than 15% of the value of its net assets in illiquid
securities, including securities not determined by the Trustees to be
liquid, repurchase agreements with maturities longer than seven days
after notice, and certain over-the-counter options; or
. purchase put options on securities unless the securities or an offsetting
call option is held in the Fund's portfolio.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 200%. A portfolio turnover rate of 100% would occur, for
example, if all the securities in the Fund's portfolio were replaced once in a
period of one year. The Fund's rate of portfolio turnover may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater brokerage commissions and
other expenses which must be borne directly by the Fund and, thus, indirectly by
its shareholders. In addition, a high rate of portfolio turnover may result in
the realization of larger amounts of capital gains which, when distributed to
the Fund's shareholders, are taxable to them. Nevertheless, transactions for the
Fund's portfolio will be based only upon investment considerations and will not
be limited by any other considerations when the Fund's investment adviser deems
it appropriate to make changes in the Fund's portfolio.
INVESTMENT PRACTICES
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The following investment practices are common to two or more of the Funds and,
unless indicated otherwise, may be changed without approval of shareholders.
REPURCHASE AGREEMENTS
All of the Funds 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 a Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. Such 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 a
Fund, such 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 Funds believe that, under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
a Fund and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by each Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
Each 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
these Funds may otherwise invest pursuant to their respective investment
objectives and policies but which are subject to restriction on resale under
federal securities law. To the extent restricted securities are deemed to be
illiquid, these Funds 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 each
Fund (10% with respect to the Prime Money Fund).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a 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, a Fund may pay more/less than the market
value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Funds 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 funds may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each Fund may lend its 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. (The International Stock Fund is not subject to this
one-third limitation). This policy is a fundamental policy of each Fund and may
not be changed without shareholder approval. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the adviser
has determined are creditworthy under guidelines established by the Trustees and
will receive collateral in the form of cash or U.S. government securities equal
to at least 100% of the value of the securities loaned at all times. There is
the risk that when lending portfolio securities, the securities may not be
available to a Fund on a timely basis and a 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.
VARIABLE ASSET REGULATIONS
The Funds are 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 a Fund may be represented by any one investment, no more
than 70% of the total assets of a Fund may be represented by any two
investments, no more than 80% of the total assets of a Fund may be represented
by any three investments, and no more than 90% of the total assets of a 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 a 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 Funds will be operated at all times so as to comply with the foregoing
diversification requirements.
STATE INSURANCE REGULATIONS
The Funds are intended to be funding vehicles 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 applied to the Trust, each Fund may be limited in its ability to
engage in such investments and to manage its portfolio with desired flexibility.
The Trust intends that each 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 Funds.
NET ASSET VALUE
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The net asset values per share of the Equity Growth and Income Fund, Utility
Fund, U.S. Government Bond Fund, Corporate Bond Fund and International Stock
Fund fluctuate. They are determined by dividing the sum of the market value of
all securities and other assets of the particular Fund, less liabilities, by the
number of shares outstanding.
Prime Money Fund attempts to stabilize the net asset value of its shares at
$1.00 by valuing the portfolio securities using the amortized cost method. The
net asset value per share of Prime Money Fund is determined by subtracting total
liabilities from total assets and dividing by the number of shares outstanding.
Prime Money Fund cannot guarantee that its net asset value will always remain at
$1.00 per share.
INVESTING IN THE FUNDS
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PURCHASES AND REDEMPTIONS
Shares of the Funds are not sold directly to the general public. The Funds'
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 Funds intend to engage in mixed funding and shared funding in the future.
Although the Funds do 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 would 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
Trust.
Shares of the Funds are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Funds are sold and redeemed at the net asset value calculated at
4:00 p.m. (Eastern time), Monday through Friday. The Trust reserves the right to
reject any purchase request.
Net asset value of shares of a Funds will not be calculated on: (i) days on
which there are not sufficient changes in the value of a 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; or (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 Funds which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the applicable Funds determined on that day, as long as such
purchase orders are received by the applicable 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 respective Funds on the next business day. It is the
responsibility of each insurance company which invests in the Funds to properly
transmit purchase orders and federal funds in accordance with the procedures
described above.
DIVIDENDS
Dividends on shares of International Stock Fund are declared and paid annually.
Dividends on shares of the Equity Growth and Income Fund are declared and paid
quarterly. Dividends on shares of the Prime Money Fund are declared daily and
paid monthly. Dividends on shares of the Utility Fund, the U.S. Government Bond
Fund, and the Corporate Bond Fund are declared and paid monthly.
Shares of the Prime Money Fund begin earning dividends on the day that the Fund
receives federal funds. Shares of the Equity Growth and Income Fund, Utility
Fund, U.S. Government Bond Fund, Corporate Bond Fund, and International Stock
Fund will begin earning dividends if owned on the applicable record date.
Dividends of each Fund are automatically reinvested in additional shares of such
Fund on payment dates at the ex-dividend date net asset value.
INSURANCE MANAGEMENT SERIES INFORMATION
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MANAGEMENT OF INSURANCE MANAGEMENT SERIES
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders. An 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 Funds are made by Federated Advisers, the Funds'
investment adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the Funds and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from each Fund.
ADVISORY FEES. The Funds' adviser receives an annual investment advisory
fee equal to 1% of the average daily net assets for the International Stock
Fund, .75 of 1% of the average daily net assets for the Equity Growth and
Income Fund and the Utility Fund, .60 of 1% of the average daily net assets
for the U.S. Government Bond Fund and the Corporate Bond Fund, and .50 of
1% of the average daily net assets for the Prime Money Fund. The adviser
may voluntarily choose to waive a portion of its fees or reimburse a Fund
for certain operating expenses. The adviser can terminate this voluntary
waiver and reimbursement of expenses at any time at its sole discretion.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under
management or administration by these and other subsidiaries of Federated
Investors are approximately $70 billion. Federated Investors, which was
founded in 1956 as Federated Investors, Inc., develops and manages mutual
funds primarily for the financial industry. Federated Investors' track
record of competitive performance and its disciplined, risk averse
investment philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions, individual shareholders
also have access to this same level of investment expertise.
FUND MANAGERS
EQUITY GROWTH AND INCOME FUND. Peter R. Anderson has been the Fund's
co-portfolio manager since the Fund commenced operations. Mr. Anderson joined
Federated Investors in 1972 as, and is presently, a Senior Vice President of the
Fund's investment adviser. Mr. Anderson is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Wisconsin.
Michael P. Donnelly has been the Fund's co-portfolio manager since the Fund
commenced operations. Mr. Donnelly joined Federated Investors in 1989 and has
been an Assistant Vice President of the Fund's investment adviser since 1992.
From 1989 until 1991, Mr. Donnelly acted as an investment analyst for the
investment adviser. Mr. Donnelly was a Fixed Income Associate at Donaldson,
Lufkin & Jenrette from 1987 until 1989. Mr. Donnelly is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of Virginia.
Frederick L. Plautz has been the Fund's co-portfolio manager since April 1,
1995. Mr. Plautz joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since October 1994. Prior to this,
Mr. Plautz served as an Assistant Vice President of the investment adviser. Mr.
Plautz was a portfolio manager at Banc One Asset Management Corp. from 1986
until 1990. Mr. Plautz received his M.S. in Finance from the University of
Wisconsin.
UTILITY FUND. Christopher H. Wiles has been the Fund's portfolio manager since
the Fund commenced operations. Mr. Wiles joined Federated Investors in 1990 and
has been a Vice President of the Fund's investment adviser since 1992. Mr. Wiles
served as Assistant Vice President of the Fund's investment adviser from 1990
until 1992. Mr. Wiles was a portfolio manager at Mellon Bank from 1986 until
1990. Mr. Wiles is a Chartered Financial Analyst and received his M.B.A. from
Cleveland State University.
Linda A. Duessel has been the Fund's portfolio manager since April 1995. Ms.
Duessel joined Federated Investors in 1991 as an Assistant Vice President of the
Fund's investment adviser. Ms. Duessel was employed at Westinghouse Credit
Corporation from 1983 to 1991, serving in a variety of positions which
culminated in her being named Vice President/Portfolio Manager in the Merchant
Banking Group in 1990. Ms. Duessel served as a Senior Staff Accountant at Arthur
Young & Company from 1979 to 1982. Ms. Duessel received her M.S.I.A. from
Carnegie Mellon University. Ms. Duessel is a Certified Public Accountant and a
Chartered Financial Analyst.
U.S. GOVERNMENT BOND FUND. Kathleen M. Foody-Malus has been the Fund's portfolio
manager since the Fund commenced operations. Ms. Foody-Malus joined Federated
Investors in 1983 and has been a Vice President of the Fund's investment adviser
since 1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser from 1990 until 1992, and from 1986 until 1989 she acted as
investment analyst. Ms. Foody-Malus received her M.B.A. in Accounting/Finance
from the University of Pittsburgh.
James D. Roberge has been the Fund's portfolio manager since March 1, 1995. Mr.
Roberge joined Federated Investors in 1990 and has been a Vice President of the
Fund's investment adviser since October 1994. Prior to this, Mr. Roberge served
as an Assistant Vice President of the Fund's investment adviser. From 1990 until
1992, Mr. Roberge acted as an investment analyst. Mr. Roberge is a Chartered
Financial Analyst and received his M.B.A. in Finance from Wharton Business
School in 1990.
CORPORATE BOND FUND. Mark E. Durbiano has been the Fund's portfolio manager
since the Fund commenced operations. Mr. Durbiano joined Federated Investors in
1982 and has been a Vice President of the Fund's investment adviser since 1988.
Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in Finance
from the University of Pittsburgh.
INTERNATIONAL STOCK FUND. Randall S. Bauer has been the Fund's portfolio manager
since the Fund commenced operations. Mr. Bauer joined Federated Investors in
1989 and has been a Vice President of the Fund's investment adviser since
January 1994. Prior to this, Mr. Bauer served as an Assistant Vice President of
the Fund's investment adviser. Mr. Bauer was an Assistant Vice President of the
International Banking Division at Pittsburgh National Bank from 1982 until 1989.
Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance
from Pennsylvania State University.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Funds.
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 TRUST
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 Trust.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM FEE AVERAGE AGGREGATE DAILY NET ASSETS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Funds.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is the transfer
agent for shares of the Funds and dividend disbursing agent for the Funds.
INDEPENDENT AUDITORS. The independent auditors for the Funds are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.
EXPENSES OF EACH FUND
Each Fund pays all of its own expenses and its allocable share of Trust
expenses. These expenses may include, but are not limited to, the cost of:
organizing the Trust and continuing its existence; Trustees' fees; investment
advisory and administrative services; printing prospectuses and other documents
for contract holders; registering the Trust, the Funds, and shares of the Funds;
taxes and commissions; issuing, purchasing, repurchasing, and redeeming shares;
custodians, transfer agents, dividend disbursing agents, contract holders
servicing agents, and registrars; printing, mailing, auditing, accounting, and
legal expenses; reports to contract holders and governmental agencies; meetings
of Trustees and contract holders and proxy solicitations therefor; insurance;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the investment adviser may voluntarily reimburse some
expenses.
SHAREHOLDER INFORMATION
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VOTING RIGHTS
The insurance company separate accounts, as shareholders of each Fund, will vote
the Fund shares held in their separate accounts at meetings of shareholders.
Voting will be in accordance prospectus of each such separate account.
Each share of each of the Funds gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each Fund have equal voting rights, except that only shares of a particular Fund
are entitled to vote on matters affecting that 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
operation and for the election of Trustees under 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.
As of April 7, 1995, tna Life Insurance and Annuity, Hartford, Connecticut,
owned 82.89% of the voting securities of Equity Growth and Income Fund, and,
therefore, may, for certain purposes be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
As of April 7, 1995, tna Life Insurance and Annuity, Hartford, Connecticut,
owned 39.53%, and Life of Virginia, Richmond, Virginia, owned 40.77%, of the
voting securities of Utility Fund, and therefore, may, for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders. As of April 7, 1995, tna Life Insurance
and Annuity, Hartford, Connecticut, owned 79.11% of the voting securities of
Prime Money Fund, and, therefore, may, for certain purposes be deemed to control
the Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders. As of April 10, 1995, tna Life Insurance and Annuity,
Hartford, Connecticut, owned 26.97%, and TransAmerica Occidental Life Insurance
Company, Los Angeles, California, owned 42.75%, of the voting securities of U.S.
Government Bond Fund, and, therefore, may, for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders. As of April 7, 1995, tna Life Insurance and Annuity,
Hartford, Connecticut, owned 67.38% of the voting securities of Corporate Bond
Fund, and, therefore, may, for certain purposes be deemed to control the Fund
and be able to affect the outcome of certain matters presented for a vote of
shareholders.
TAX INFORMATION
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FEDERAL TAXES
The Funds will pay no federal income tax because the Funds expect to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by each of
the Funds in the Trust will not be combined for tax purposes with those realized
by any other Fund.
Each Fund intends to comply with the variable asset diversification regulations
which are described earlier in this prospectus. If a Fund fails to comply with
these regulations, contracts invested in that 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 each Fund to the separate accounts.
STATE AND LOCAL TAXES
Contract owners are urged to consult their own tax advisers regarding the status
of theircontracts under state and local tax laws.
PERFORMANCE INFORMATION
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From time to time the Equity Growth and Income Fund, Utility Fund, U.S.
Government Bond Fund, Corporate Bond Fund, and International Stock Fund
advertise total return and yield and the Prime Money Fund will advertise yield
and effective yield.
Total return represents the change, over a specific period of time, in the value
of an investment in a 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 yields of the Equity Growth and Income Fund, Utility Fund, U.S. Government
Bond Fund Corporate Bond Fund, and International Stock Fund are 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.
The yield of Prime Money Fund represents the annualized rate of income earned on
an investment in the Fund over a seven-day period. It is the annualized
dividends earned during the period on the investment, shown as a percentage of
the investment. The effective yield of the Fund is calculated similarly to the
yield, but, when annualized, the income earned on an investment in the Fund is
assumed to be reinvested daily. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.
Performance information for each Fund will not reflect the charges and expenses
of a variable annuity or variable life insurance contract. Because shares of
each 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 a Fund's performance.
From time to time, each Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
APPENDIX
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STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
C--The rating C is reserved for income bonds on which no interest is being paid.
D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR--NR indicates that Fitch does not rate the specific issue. Plus + or Minus :
Plus or minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
. Leading market positions inwell established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderated reliance on debt and
ample asset protection.
. Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
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<TABLE>
<S> <C> <C>
Insurance Management Series
Equity Growth and Income Fund Federated Investors Tower
Utility Fund Pittsburgh, Pennsylvania 15222-3779
Prime Money Fund
U.S. Government Bond Fund
Corporate Bond Fund
International Stock Fund
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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 Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
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</TABLE>
INSURANCE
MANAGEMENT
SERIES
PROSPECTUS
An Open-End, Management
Investment Company
. Equity Growth and Income Fund
. Utility Fund
. Prime Money Fund
. U.S. Government Bond Fund
. Corporate Bond Fund
. International Stock Fund
April 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
458043502 458043304
458043205 458043403
458043106 458043601
4011006A (4/95)
Insurance Management Series
consisting of six portfolios:
o Equity Growth and Income Fund;
o Utility Fund;
o Prime Money Fund;
o U.S. Government Bond Fund;
o Corporate Bond Fund; and
o International Stock Fund.
Combined Statement of Additional Information
This Combined Statement of Additional Information should be read
with the combined prospectus of Insurance Management Series (the
"Trust") dated April 30, 1995. This Statement is not a prospectus
itself. To receive a copy of the combined prospectus, write or
call the Trust.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About
the Trust 1
Investment Information 1
Investment Objectives 1
Equity Growth and Income
Fund 1
Utility Fund 1
Prime Money Fund 1
U.S. Government Bond
Fund 1
Corporate Bond Fund 1
International Stock Fund 1
Types of Investments 1
Equity Growth and Income
Fund 1
Convertible Securities 1
Warrants 2
Bank Instruments 2
U.S. Government
Obligations 2
Utility Fund 3
Prime Money Fund 3
Bank Instruments 3
U.S. Government Bond Fund 3
Collateralized Mortgage
Obligations (CMOs) 3
Stripped Mortgage-
Related Securities 3
Corporate Bond Fund 3
Corporate Debt
Securities 4
Equity Securities 4
Temporary Investments 4
Certificates of Deposit 4
International Stock Fund 4
Futures and Options
Transactions 4
Futures Contracts 4
"Margin" in Futures
Transactions 5
Put Options on Financial
and Stock Index
Futures Contracts 6
Call Options on
Financial and Stock
Index Futures
Contracts 6
Purchasing Put Options
on Portfolio
Securities and Stock
Indices 7
Writing Covered Call
Options on Portfolio
Securities and Stock
Indices 7
Foreign Currency Hedging
Transactions 7
Risks 8
Portfolio Turnover 8
Investment Limitations 8
Selling Short and Buying
on Margin 8
Issuing Senior
Securities and
Borrowing Money 9
Pledging Assets 9
Concentration of
Investments 9
Investing in Commodities 10
Investing in Real Estate 10
Lending Cash or
Securities 10
Underwriting 10
Diversification of
Investments 10
Investing in Restricted
Securities 10
Investing in Illiquid
Securities 10
Investing in Put Options 11
Writing Covered Call
Options 11
Purchasing Securities to
Exercise Control 11
Investing in Warrants 11
Investing in Securities
of Other Investment
Companies 11
Investing in New Issuers 11
Investing in Minerals 11
Investing in Restricted
Securities 11
Investing in Illiquid
Securities 11
Dealing in Puts and
Calls 11
Investing in Issuers
Whose Securities are
Owned by Officers and
Trustees of the Trust 12
Arbitrage Transactions 12
Investment Practices of the
Funds 12
Repurchase Agreements 12
Reverse Repurchase
Agreements 12
Restricted and Illiquid
Securities 12
When-Issued and Delayed
Delivery Transactions 13
Lending of Portfolio
Securities 13
Insurance Management Series
Management 13
Fund Ownership 18
Trustees Compensation 19
Trustee Liability 19
Investment Advisory
Services 20
Adviser to the Funds 20
Advisory Fees 20
Administrative Services 20
Brokerage Transactions 20
Purchasing Shares 21
Determining Net Asset Value 21
Determining Value of
Securities 21
Trading in Foreign
Securities 21
Use of the Amortized Cost
Method 22
Monitoring Procedures 22
Investment Restrictions 22
Massachusetts Partnership
Law 23
Tax Status 23
The Funds' Tax Status 23
Shareholder's Tax Status 23
Foreign Taxes 23
Total Return 23
Yield 24
Effective Yield 24
Performance Comparisons 24
General Information About the Trust
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated September 15, 1993. It consists of six
portfolios (individually referred to as a "Fund" and collectively as the
"Funds"):
o Equity Growth and Income Fund;
o Utility Fund;
o Prime Money Fund;
o U.S. Government Bond Fund;
o Corporate Bond Fund; and
o International Stock Fund.
Shares of the Fund are sold only to insurance companies as funding
vehicles for variable annuity and variable life insurance contracts
issued by the insurance companies.
Investment Information
Investment Objectives
Equity Growth and Income Fund
The Equity Growth and Income Fund's primary investment objective
is to achieve long-term growth of capital. The Fund's secondary
objective is to provide income.
Utility Fund
The Utility Fund's investment objective is to achieve high current
income and moderate capital appreciation.
Prime Money Fund
The Prime Money Fund's investment objective is to provide current
income consistent with stability of principal and liquidity.
U.S. Government Bond Fund
The U.S. Government Bond Fund's investment objective is to provide
current income. Current income includes, in general, discount
earned on U.S. Treasury bills and agency discount notes, interest
earned on all other U.S. government securities and short-term
capital gains.
Corporate Bond Fund
The Corporate Bond Fund's investment objective is to seek high
current income.
International Stock Fund
The International Stock Fund's investment objective is to obtain a
total return on its assets.
The investment objectives of the Funds cannot be changed without the
approval of shareholders.
Types of Investments
Equity Growth and Income Fund
The Equity Growth and Income Fund invests, under normal circumstances,
at least 65% of its total assets in common stock of "blue-chip"
companies, as defined in the prospectus. The Fund may also invest in
other securities of these companies, U.S. government securities,
repurchase agreements, and bank instruments. The following supplements
the discussion of acceptable investments in the prospectus.
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
characteristics 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.
Bank Instruments
The Fund only invests in Bank Instruments (as defined in the
prospectus) either issued by an institution having capital,
surplus, and undivided profits over $100 million or insured by the
Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation. Bank Instruments may include
Eurodollar Certificates of Deposit, Yankee Certificates of
Deposit, and Eurodollar Time Deposits. Institutions issuing
Eurodollar instruments are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as
reserve requirements, loan limitations, examinations, accounting,
auditing, recordkeeping and the public availability of
information.
U.S. Government Obligations
The types of U.S. government obligations in which the Equity
Growth and Income Fund, the Utility Fund and the Prime Money 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, its
agencies or instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o 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:
o Federal Farm Credit System;
o Federal Home Loan Banks System;
o Student Loan Marketing Association;
o Federal National Mortgage Association; and
o Federal Home Loan Mortgage Corporation.
Utility Fund
The Utility Fund endeavors to achieve its investment objective by
investing primarily in a professionally managed and diversified
portfolio of equity and debt securities of utility companies. The Fund
may also invest in the types of U.S. government obligations set forth
above in the section describing the Equity Growth and Income Fund.
Prime Money Fund
The Prime Money Fund invests exclusively in money market instruments
which mature in 397 days or less and which include, but are not limited
to, commercial paper and variable rate master demand notes, bank
instruments, and U.S. government obligations of the type set forth above
in the section describing the Equity Growth and Income Fund.
Bank Instruments
In addition to domestic bank obligations such as certificates of
deposit, demand and time deposits, savings shares, and bankers'
acceptances, the Fund may invest in:
o Eurodollar Certificates of Deposit issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits, which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located
in the U.S.; and
o Yankee Certificates of Deposit, which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the U.S.
U.S. Government Bond Fund
The U.S. Government Bond Fund invests in U.S. government securities
which are primary or direct obligations of the U.S. government or its
agencies or instrumentalities or which are guaranteed by the U.S.
government, its agencies or instrumentalities, and in certain
collateralized mortgage obligations described below, and repurchase
agreements.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those
issued by the Government National Mortgage Association. The terms
and characteristics of the mortgage instruments may vary among
pass-through mortgage loan pools.
The market for such CMOs has expanded considerably since its
inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and
other investors make government-related pools highly liquid.
Stripped Mortgage-Related Securities
Some of the mortgage-related securities purchased by the Fund may
represent an interest solely in the principal repayments or solely
in the interest payments on mortgage-backed securities (stripped
mortgage-backed securities or "SMBSs"). Due to the possibility of
prepayments on the underlying mortgages, SMBSs may be more
interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which
SMBSs were issued, there may be substantial prepayment on the
underlying mortgages, leading to the relatively early prepayment
of principal-only SMBSs and a reduction in the amount of payment
made to holders of interest-only SMBSs. It is possible that the
Fund might not recover its original investment on interest-only
SMBSs if there are substantial prepayments on the underlying
mortgages. Therefore, interest-only SMBSs generally increase in
value as interest rates rise and decrease in value as interest
rates fall, counter to changes in value experienced by most fixed
income securities. The Fund's adviser intends to use this
characteristic of interest-only SMBSs to reduce the effects of
interest rate changes on the value of the Fund's portfolio, while
continuing to pursue current income.
Corporate Bond Fund
The Corporate Bond Fund endeavors to achieve its objective by investing
primarily in a professionally managed, diversified portfolio of fixed
income securities. Some of these fixed income securities may involve
equity features. Capital growth will be considered, but only when
consistent with the investment objective of high current income.
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).
Equipment lease or trust certificates are secured obligations
issued in serial form, usually sold by transportation companies
such as railroads or airlines, to finance equipment purchases. The
certificate holders own a share of the equipment, which can be
resold if the issuer of the certificate defaults. The Fund does
not currently intend to invest more than 5% of its assets in
equipment lease certificates.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets
will be invested in equity securities, including common stocks,
warrants, or rights. The Fund's investment adviser may choose to
exceed this 10% limitation if unusual market conditions suggest
such investments represent a better opportunity to reach the
Fund's investment objective.
Temporary Investments
The Fund may also invest in temporary investments for defensive
purposes during times of unusual market conditions.
Certificates of Deposit
The Fund may invest in certificates of deposit of domestic and
foreign banks and savings and loans if they have capital, surplus,
and undivided profits of over $100,000,000, or if the principal
amount of the instrument is insured by the Bank Insurance Fund or
the Savings Association Insurance Fund, both of which are
administered by the Federal Deposit Insurance Corporation
("FDIC"). These instruments may include Eurodollar Certificates of
Deposit issued by foreign branches of U.S. or foreign banks,
Eurodollar Time Deposits which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks, Canadian
Time Deposits which are U.S. dollar-denominated deposits issued by
branches of major Canadian banks located in the United States, and
Yankee Certificates of Deposit which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks
and held in the United States.
International Stock Fund
The International Stock Fund invests in a diversified portfolio of
equity securities issued by non-U.S. issuers. The International Stock
Fund will invest at least 65%, and under normal market conditions,
substantially all of its total assets, in equity securities of issuers
located in at least three different countries outside of the United
States. The International Stock Fund may also purchase sponsored or
unsponsored American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs") and European Depositary Receipts ("EDRs"); purchase
investment grade corporate and government fixed income securities of
issuers outside the U.S.; enter into forward commitments, repurchase
agreements, and foreign currency transactions; and maintain reserves in
foreign or U.S. money market instruments.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of shares of
the International Stock Fund, the International Stock 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
International Stock 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 International Stock
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 International Stock Fund will not engage in futures
transactions for speculative purposes.
Futures Contracts
The International Stock 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 International Stock 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
International Stock 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 International Stock Fund's
anticipated holding period. The International Stock 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 International Stock 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 International Stock 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 International Stock Fund is valued
daily at the official settlement price of the exchange on which it
is traded. Each day the International Stock 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 International Stock Fund but is instead settlement
between the International Stock 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 International Stock Fund
will mark to market its open futures positions. The International
Stock 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 International Stock 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
International Stock 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
International Stock 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
International Stock 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 International Stock Fund will not register as a
commodities pool operator.
Put Options on Financial and Stock Index Futures Contracts
The International Stock Fund may purchase listed put options on
financial and stock index futures contracts to protect portfolio
securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates or
stock prices. Unlike entering directly into a futures contract,
which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a
futures contracts entitles (but does not obligate) its purchaser
to decide on or before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value
during the term of an option, the related futures contracts will
also decrease in value and the option will increase in value. In
such an event, the International Stock Fund will normally close
out its option by selling an identical option. If the hedge is
successful, the proceeds received by the International Stock 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 International Stock 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 International Stock 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 International Stock 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 International Stock 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
International Stock Fund's interest to deliver the underlying
futures position. A closing purchase transaction consists of the
purchase by the International Stock Fund of an option having the
same term as the option sold by the International Stock Fund, and
has the effect of canceling the International Stock Fund's
position as a seller. The premium which the International Stock
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
International Stock Fund may write listed and over-the-counter
call options on financial and stock index futures contracts to
hedge its portfolio. When the International Stock 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 International Stock Fund's obligation under a call
option on a future (to sell a futures contract) costs less to
fulfill, causing the value of the International Stock 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 International Stock Fund keeps the premium
received for the option. This premium can substantially offset the
drop in value of the International Stock Fund's portfolio
securities.
When the International Stock 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 International Stock 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
International Stock 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
International Stock Fund's portfolio securities. A put option
gives the International Stock 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 International Stock Fund may also write covered call options
to generate income and thereby protect against price movements in
the Fund's portfolio securities. As writer of a call option, the
Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of
the exercise price or, in the case of a securities index, a cash
payment equal to the difference between the closing price of the
index and the exercise price of the option. The Fund may only sell
call options either on securities held in its portfolio or on
securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any
additional consideration).
Foreign Currency Hedging Transactions
In order to hedge against foreign currency exchange rate risks, the
International Stock Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as
purchase put or call options on foreign currencies, as described below.
The International Stock Fund may also conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market.
The International Stock Fund may enter into forward foreign currency
exchange contracts ("forward contracts") to attempt to minimize the risk
to the International Stock Fund from adverse changes in the relationship
between the U.S. dollar and foreign currencies. A forward contract is an
obligation to purchase or sell a specific currency for an agreed price
at a future date which is individually negotiated and privately traded
by currency traders and their customers. The International Stock Fund
may enter into a forward contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security. In
addition, for example, when the International Stock Fund believes that a
foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the
International Stock Fund's portfolio securities denominated in such
foreign currency, or when the International Stock Fund believes that the
U.S. dollar may suffer a substantial decline against a foreign currency,
it may enter into a forward contract to buy that foreign currency for a
fixed dollar amount. This second investment practice is generally
referred to as "cross-hedging." Because in connection with the
International Stock Fund's forward foreign currency transactions an
amount of the International Stock Fund's assets equal to the amount of
the purchase will be held aside or segregated to be used to pay for the
commitment, the International Stock Fund will always have cash, cash
equivalents or high quality debt securities available sufficient to
cover any commitments under these contracts or to limit any potential
risk. The segregated account will be marked to market on a daily basis.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In
such event, the International Stock Fund's ability to utilize forward
contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the International Stock Fund than if it had not engaged
in such contracts.
The International Stock Fund may purchase and write put and call options
on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases
in the dollar cost of foreign securities to be acquired. As is the case
with other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount
of the premium received, and the International Stock Fund could be
required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on
foreign currency may constitute an effective hedge against fluctuation
in exchange rates, although, in the event of rate movements adverse to
the International Stock Fund's position, the International Stock Fund
may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies to be written or purchased by the
International Stock Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
The International Stock Fund may enter into exchange-traded contracts
for the purchase or sale for future delivery of foreign currencies
("foreign currency futures"). This investment technique will be used
only to hedge against anticipated future changes in exchange rates which
otherwise might adversely affect the value of the International Stock
Fund's portfolio securities or adversely affect the prices of securities
that the International Stock Fund intends to purchase at a later date.
The successful use of foreign currency futures will usually depend on
the ability of the adviser to forecast currency exchange rate movements
correctly. Should exchange rates move in an unexpected manner, the
International Stock Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
Risks
When the International Stock Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the securities or
foreign currency subject to the futures contracts may not correlate
perfectly with the prices of the securities or currency in the
International Stock Fund's portfolio. This may cause the futures
contract and any related options to react differently to market changes
than the portfolio securities or foreign currency. In addition, the
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements or foreign
currency exchange rate fluctuations. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the adviser
will consider liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at
any particular time. The International Stock Fund's ability to establish
and close out futures and options positions depends on this secondary
market. The inability to close out these positions could have an adverse
effect on the International Stock Fund's ability to effectively hedge
its portfolio.
To minimize risks, the International Stock Fund may not purchase or sell
futures contracts or related options if immediately thereafter the sum
of the amount of margin deposits on the International Stock Fund's
existing futures positions and premiums paid for related options would
exceed 5% of the value of the Fund's total assets after taking into
account the unrealized profits and losses on those contracts it has
entered into; and, provided further, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing such 5%. When the International Stock Fund
purchases futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures contracts (less
any related margin deposits), will be deposited in a segregated account
with the International Stock Fund's custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use
of such futures contract is unleveraged. When the International Stock
Fund sells futures contracts, it will either own or have the right to
receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.
Portfolio Turnover
Securities in the portfolios of the Equity Growth and Income Fund, the
Utility Fund, the U.S. Government Bond Fund, the Corporate Bond Fund,
and the International Stock Fund will be sold whenever such Fund's
investment adviser believes it is appropriate to do so in light of such
Fund's investment objective, without regard to the length of time a
particular security may have been held. The U.S. Government Bond Fund's
policy of managing its portfolio of U.S. government securities,
including the sale of securities held for a short period of time, to
achieve its investment objective of current income may result in high
portfolio turnover. The U.S. Government Bond Fund will not attempt to
set or meet a portfolio turnover rate as any turnover would be
incidental to transactions undertaken in an attempt to achieve the
Fund's investment objective.
For the period from February 1, 1994 (date of initial public investment)
to December 31, 1994, the portfolio turnover rate of Equity Growth and
Income Fund was 32%. For the period from April 14, 1994 (date of
initial public investment) to December 31, 1994, the portfolio turnover
rate of Utility Fund was 73%. For the period from March 29, 1994 (date
of initial public investment) to December 31, 1994, the portfolio
turnover rate of U.S. Government Bond Fund was 0%. For the period from
February 2, 1994 (date of initial public investment) to December 31,
1994, the portfolio turnover rate of Corporate Bond Fund was 18%.
Investment Limitations
Selling Short and Buying on Margin
The Funds 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 Utility 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.
The International Stock Fund may make margin payments in
connection with its use of financial futures contracts or related
options and transactions.
The Fund will not sell securities short unless (1) it owns, or has
a right to acquire, an equal amount of such securities, or (2) it
has segregated an amount of its other assets equal to the lesser
of the market value of the securities sold short or the amount
required to acquire such securities. The segregated amount will
not exceed 10% of the International Stock Fund's net assets. While
in a short position, the International Stock Fund will retain the
securities, rights, or segregated assets. To comply with
registration requirements in certain states, the International
Stock Fund (1) will limit short sales of securities of any class
of any one issuer to the lesser of 2% of the International Stock
Fund's net assets or 2% of the securities of that class, (2) will
make short sales only on securities listed on recognized stock
exchanges. The latter restrictions, however, do not apply to short
sales of securities the International Stock Fund holds or has a
right to acquire without the payment of any further consideration,
and (3) will not invest more that 5% of its total assets in
restricted securities. (If state requirements change, these
restrictions may be revised without shareholder notification.)
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that each Fund
may borrow money directly or through reverse repurchase agreements
(or, with respect to International Stock Fund, as required by
forward commitments to purchase securities or currencies) as a
temporary, extraordinary, or emergency measure to facilitate
management of the portfolio by enabling such 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 each such Fund's total assets,
any such borrowings will be repaid before additional investments
are made. The Funds will not borrow money or engage in reverse
repurchase agreements for investment leverage purposes.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, each Fund
may mortgage, pledge or hypothecate assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of total assets at the time of borrowing. (The
International Stock Fund is not subject to this 15% limitation.)
For purposes of this limitation, the following are not deemed to
be pledges by the Utility 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.
For purposes of this limitation, neither the deposit of underlying
securities or other assets in escrow in connection with the
writing of put or call options or the purchase of securities on a
when-issued basis nor margin deposits for the purchase and sale of
financial futures contracts and related options are deemed to be a
pledge by the International Stock Fund.
Concentration of Investments
The Utility Fund will not purchase securities if, as a result of
such purchase, 25% or more of its total assets would be invested
in securities of companies engaged principally in any one industry
other than the utilities industry. However, the Utility 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.
The Fund will not purchase securities if, as a result of such
purchase, 25% or more of its total assets would be invested in
securities of companies engaged principally in any one industry
other than finance companies. 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.
The International Stock Fund will not invest 25% or more of its
total assets in securities of issuers having their principal
business activities in the same industry.
The Equity Growth and Income Fund, the U.S. Government Bond Fund,
and the Corporate Bond Fund will not purchase securities if, as a
result of such purchase, 25% or more of their respective total
assets would be invested in any one industry. However, each Fund
may at any time invest 25% or more of its respective 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 Funds will not purchase or sell commodities, commodity
contracts, or commodity futures contracts, except that the Utility
Fund may purchase and sell futures and stock index futures
contracts and related options, and the International Stock Fund
may purchase and sell financial futures contracts and options on
financial futures contracts, provided that the sum of its initial
margin deposits for financial futures contracts plus premiums paid
by it for open options on financial futures contracts, may not
exceed 5% of the fair market value of the International Stock
Fund's total assets, after taking into account the unrealized
profits and lossed on those contracts. Further, the International
Stock Fund may engage in foreign currency transactions and
purchase or sell forward contracts with respect to foreign
currencies and related options.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests in real estate, although each Fund 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
No Fund will lend any of its assets, except portfolio securities
up to one-third of its total assets. (The International Stock Fund
is not subject to this one-third limitation). This shall not
prevent a Fund from purchasing or holding money market instruments
(with respect to the Prime Money Fund) 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
No Fund will underwrite any issue of securities, except as such
Fund may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities in accordance
with its respective investment objectives, policies, and
limitations.
Diversification of Investments
With respect to 75% of its total assets, no Fund will purchase the
securities of any one issuer (other than securities issued and/or
guaranteed by the U.S. government, its agencies or
instrumentalities, and with respect to all Funds except the
International Stock Fund, repurchase agreements collateralized by
such securities, cash and cash items) if, as a result, more than
5% of such Fund's total assets would be invested in the securities
of that issuer.
In addition, no Fund will purchase more than 10% of any class of
the outstanding voting securities of any one issuer. For these
purposes, the Funds consider 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 by the Funds 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 becomes
effective.
Investing in Restricted Securities
No Fund will invest more than 15% (10% with respect to the Prime
Money Fund) 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
No Fund will invest more than 15% (10% with respect to the Prime
Money Fund) 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 (with
respect to the Utility Fund and the International Stock Fund) and
certain restricted securities not determined by the Trustees to be
liquid.
The Prime Money Fund will not invest more than 10% of its net
assets in illiquid securities, including, among others, repurchase
agreements providing for settlement more than seven days after
notice and certain restricted securities not determined by the
Trustees to be liquid.
Investing in Put Options
The Utility Fund and the International Stock Fund will not
purchase put options on securities, unless the securities are held
in the Fund's portfolio and, with respect to the Utility Fund, not
more than 5% of the Utility Fund's total assets would be invested
in premiums on open put option positions.
Writing Covered Call Options
The Utility Fund and the International Stock 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 International Stock Fund will not purchase securities of a
company for the purpose of exercising control or management.
Investing in Warrants
The International Stock Fund will not invest more than 5% of its
assets in warrants, including those acquired in units or attached
to other securities. To comply with certain state restrictions,
the Fund will limit its investment in such warrants not listed on
recognized stock exchanges to 2% of its total assets. (If state
restrictions change, this latter restriction may be revised
without notice to shareholders.) For purposes of this investment
restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The International Stock Fund will not purchase securities of other
investment companies, except by purchase in the open market
involving only customary brokerage commissions and as a result of
which not more than 10% of the value of its total assets would be
invested in such securities, or except as part of a merger,
consolidation or other acquistion.
Investing in New Issuers
The International Stock Fund will not invest more than 5% of the
value of its total assets in securities of issuers which have
records of less than three years of continuous operations,
including the operation of any predecessor.
Investing in Minerals
The International Stock Fund will not invest in interests in oil,
gas, or other mineral exploration or development programs, other
than debentures or equity stock interests.
Investing in Issuers Whose Securities are Owned by Officers and
Trustees of the Trust
The International Stock Fund will not purchase or retain the
securities of any issuer if the officers and Trustees of the Trust
or the International Stock Fund's investment adviser or sub-
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Arbitrage Transactions
To comply with certain state restrictions, the International Stock
Fund will not enter into transactions for the purpose of engaging
in arbitrage. If state requirements change, this restriction may
be revised without shareholder notification.
With respect to all of the Funds, 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.
No Fund has any present intention to borrow money in excess of 5% of the
value of its net assets during the coming fiscal year.
For purposes of their policies and limitations, the Funds consider
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."
Investment Practices of the Funds
The following investment practices are common to two or more of the
Funds and, unless indicated otherwise, may be changed without approval
of shareholders.
Repurchase Agreements
All of the Funds will engage in repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
organized 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. A 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 a Fund, a
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 a Fund
might be delayed pending court action. The Funds believe that under the
regular procedures normally in effect for custody of a 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 Funds will only enter into
repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Funds'
adviser to be creditworthy pursuant to guidelines established by the
Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, a 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 a 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 a 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.
Restricted and Illiquid Securities
The Funds 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 Funds, 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 Funds through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
nonexclusive 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
Funds believe 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
o dealer undertakings to make a market in the security; and
o 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 or yield for a 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 prices. No fees or
other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained
until the transaction has been settled. None of the Funds intends to
engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of
its assets.
Lending of Portfolio Securities
In order to generate additional income, all of the Funds may lend their
portfolio securities, up to one-third of the value of each Fund's total
assets, to broker/dealers, banks, or other institutional borrowers of
securities. (The International stock Fund is not subject to htis one-
third limitation).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.
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present
positions with Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
Fund
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.
* This Trustee is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Trustees handles the responsibilities of the Board
of Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond
Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal
Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; World
Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
Trustees Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
<S> <C> <C>
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
</TABLE>
*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 Funds
The investment adviser to the Funds is Federated Advisers. It is a
subsidiary of Federated Investors. All 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 Funds 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 annual investment
advisory fees as described in the prospectus.
For the period from December 9, 1993 (start of business) to December 31,
1994, the adviser earned advisory fees from Equity Growth and Income
Fund, Utility Fund, and Corporate Bond Fund of $4,397, $2,077, and
$7,966, respectively, all of which was voluntarily waived. For the
period from December 10, 1993 (start of business) to December 31, 1994,
the adviser earned advisory fees from the Prime Money Fund of $287, all
of which was voluntarily waived. For the period from December 8, 1993
(start of business) to December 31, 1994, the adviser earned advisory
fees from the U.S. Government Bond Fund of $2,605, all of which was
voluntarily waived.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Trust for a fee as
described in the prospectus. For the period from December 9, 1993
(start of business) to December 31, 1994, Equity Growth and Income Fund,
Utility Fund, and Corporate Bond Fund incurred $73,288, $73,289, and
$52,398, respectively, for administrative services. For the period from
December 10, 1993 (start of business) to December 31, 1994, the Prime
Money Fund incurred $14,041 for administrative services. For the period
from December 8, 1993 (start of business) to December 31, 1994, the U.S.
Government Bond Fund incurred $63,015 for administrative services.
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 Trust
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising 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.
The Adviser may engage in other non-U.S. transactions that may have
adverse effects on the market for securities in the International Stock
Fund's portfolio. The Adviser is not obligated to obtain any material
non-public ("inside") information about any securities issuer, or to
base purchase or sale recommendations on such information.
For the period from December 9, 1993 (start of business) to December 31,
1994, Equity Growth and Income Fund, Utility Fund, and Corporate Bond
Fund paid $3,714, $476, and $0, respectively, in brokerage commissions.
For the period from December 10, 1993 (start of business) to December
31, 1994, the Prime Money Fund paid $0 in brokerage commissions. For the
period from December 8, 1993 (start of business) to December 31, 1994,
the U.S. Government Bond Fund paid $0 in brokerage commissions.
Purchasing Shares
Shares of the Funds 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 Funds is explained in the
prospectus under "Purchases and Redemptions" and "What Shares Cost."
Determining Net Asset Value
Net asset value of the Equity Growth and Income Fund, Utility Fund, U.S.
Government Bond Fund, Corporate Bond Fund, and International Stock Fund
generally changes each day. The days on which net asset value is
calculated by the Funds are described in the prospectus.
Determining Value of Securities
The values of the portfolio securities in the Equity Growth and Income
Fund, Utility Fund, U.S. Government Bond Fund, and Corporate Bond Fund,
and are determined as follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices;
o 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;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good
faith by the Board of Trustees.
The values of the portfolio securities in the International Stock Fund
are determined as follows:
o according to the last reported sale price on a recognized
securities exchange, if available. (If a security is traded on
more than one exchange, the price on the primary market for that
security, as determined by the Adviser, is used.);
o according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-
the-counter;
o at fair value as determined in good faith by the Board of
Trustees; or
o for short-term obligations with remaining maturities of less than
60 days at the time of purchase, at amortized cost, which
approximates value.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from
the closing of the New York Stock Exchange. In computing the net asset
value, the Fund values foreign securities at the latest closing price on
the exchange on which they are traded immediately prior to the closing
of the New York Stock Exchange. Certain foreign currency exchange rates
may also be determined at the latest rate prior to the closing of the
New York Stock Exchange. Foreign securities quoted in foreign currencies
are translated into U.S. dollars at current rates. Occasionally, events
that affect these values and exchange rates may occur between the times
at which they are determined and the closing of the New York Stock
Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as
determined in good faith by the Trustees, although the actual
calculation may be done by others.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may reflect:
institutional trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data.
Use of the Amortized Cost Method
The Trustees have decided that the best method for determining the value
of portfolio instruments for the Prime Money Fund is amortized cost.
Under this method, portfolio instruments are valued at the acquisition
cost as adjusted for amortization of premium or accumulation of discount
rather than at current market value.
The Prime Money Fund's use of the amortized cost method of valuing
portfolio instruments depends on its compliance with certain conditions
in Rule 2a-7 (the "Rule") promulgated by the Securities and Exchange
Commission under the Investment Company Act of 1940. Under the Rule, the
Trustees must establish procedures reasonably designed to stabilize the
net asset value per share, as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market
conditions and the Prime Money Fund's investment objective. Under the
Rule, the Prime Money Fund is permitted to purchase instruments which
are subject to demand features or standby commitments. As defined by the
Rule, a demand feature entitles the Prime Money Fund to receive the
principal amount of the instrument from the issuer or a third party on
(1) no more than 30 days' notice or (2) at specified intervals not
exceeding 397 calendar days on no more than 30 days' notice. A standby
commitment entitles the Prime Money Fund to achieve same-day settlement
and to receive an exercise price equal to the amortized cost of the
underlying instrument plus accrued interest at the time of exercise.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship
between the amortized cost value per share and the net asset value
per share based upon available indications of market value. The
Trustees will decide what, if any, steps should be taken if there
is a difference of more than 0.5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity)
to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset
value.
Investment Restrictions
The Rule requires that the Prime Money Fund limit its investments
to instruments that, in the opinion of the Trustees, present
minimal credit risks and have received the requisite rating from
one or more nationally recognized statistical rating
organizations. If the instruments are not rated, the Trustees must
determine that they are of comparable quality. The Rule also
requires the Prime Money Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to
the objective of maintaining a stable net asset value of $1.00 per
share. In addition, no instrument with a remaining maturity of
more than thirteen months can be purchased by the Prime Money
Fund.
Should the disposition of a portfolio security result in a dollar-
weighted average portfolio maturity of more than 90 days, the
Prime Money Fund will invest its available cash to reduce the
average maturity to 90 days or less as soon as possible.
The Prime Money Fund may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This
policy may, from time to time, result in high portfolio turnover. Under
the amortized cost method of valuation, neither the amount of daily
income nor the net asset value is affected by any unrealized
appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on
shares of the Prime Money Fund computed by dividing the annualized daily
income on the Prime Money Fund's portfolio by the net asset value
computed as above may tend to be higher than a similar computation made
by using a method of valuation based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares
of the Prime Money Fund computed the same way may tend to be lower than
a similar computation made by using a method of calculation based upon
market prices and estimates.
Massachusetts Partnership Law
Under certain circumstances, shareholders of a Fund may be held liable
as partners under Massachusetts law for obligations of the Fund. To
protect shareholders, each 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 Funds.
In the unlikely event a shareholder of a 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 a Fund for any act or obligation
of the Trust on behalf of that Fund. Therefore, financial loss resulting
from liability as a shareholder of a Fund will occur only if the Trust
itself cannot meet its obligations to indemnify shareholders and pay
judgments against them from the assets of that Fund.
Tax Status
The Funds' Tax Status
The Funds will pay no federal income tax because each 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, a
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
However, the International Stock Fund may invest in the stock of certain
foreign corporations which would constitute a Passive Foreign Investment
Company (PFIC). Federal income taxes may be imposed on the International
Stock Fund upon disposition of PFIC investments.
Shareholder's Tax Status
Each Fund intends to comply with the variable asset diversification
regulations which are described in the prospectus and this Statement. If
a Fund fails to comply with these regulations, contracts invested in
that 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 each Fund to the separate accounts.
Foreign Taxes
Investment income on certain foreign securities in which the
International Stock Fund may invest may be subject to foreign
withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes
to which the International Stock Fund would be subject.
Total Return
Equity Growth and Income Fund's cumulative total return for the period
from February 1, 1994 (date of initial public investment) to December
31, 1994, was (0.70%). Utility Fund's cumulative total return for the
period from April 14, 1994 (date of initial public investment) to
December 31, 1994, was 1.12%. U.S. Government Bond Fund's cumulative
total return for the period from March 29, 1994 (date of initial public
investment) to December 31, 1994, was 2.62%. Corporate Bond Fund's
cumulative total return for the period from February 2, 1994 (date of
initial public investment) to December 31, 1994, was (3.73%).
Cumulative total returns reflect a Fund's total performance over a
specific period of time. The Fund's cumulative total returns are
representative of eleven, nine, nine, and eleven months of Fund
activity, respectively.
The average annual total return for the Equity Growth and Income Fund,
Utility Fund, U.S. Government Bond Fund, Corporate Bond Fund and
International Stock 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 monthly,
quarterly, or annual, as applicable, 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 a Fund's performance.
Yield
The yield for the Equity Growth and Income Fund, Utility Fund, and
Corporate Bond Fund for the thirty-day period ended December 31, 1994,
was 3.14%, 4.74%, and 10.43%, respectively. The U.S. Government Bond
Fund did not calculate a thirty-day yield for the period ended December
31, 1994.
The yield for the Equity Growth and Income Fund, Utility Fund, U.S.
Government Bond Fund, Corporate Bond Fund and International Stock Fund
is determined 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 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 a Fund because of
certain adjustments required by the Securities and Exchange Commission
and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. Also the yield does not reflect the
charges and expenses of an insurance contract. You should review the
performance figures for your contract, which figures reflect the
applicable charges and expenses of the contract. Such performance
figures will accompany any advertisement of a Fund's performance.
The Prime Money Fund calculates its yield daily, based upon the seven
days ending on the day of the calculation, called the "base period."
This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned
from the original one share and all dividends declared on the
original and any purchased shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The yield for the seven-day period ended December 31, 1994, for the
Prime Money Fund was 4.16%.
Effective Yield
The Prime Money Fund's effective yield is computed by compounding the
unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yield for the seven-day period ended December 31, 1994,
for the Prime Money Fund was 4.25%.
Effective yield does not reflect the charges and expense of a variable
annuity 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 a Fund's performance.
Performance Comparisons
Each Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in Fund expenses; and
o the relative amount of the Fund's cash flow.
A Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share (except with respect to Prime
Money Fund) 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 Funds use in advertising may include:
o 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.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks, a
composite index of common stocks in industrial, 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.
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Trust
may quote its Lipper ranking in various fund categories in
advertising and sales literature.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include: nonconvertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed-rate, non-convertible
domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers , Inc., the index calculates
total returns for one month, three month, twelve month, and ten
year periods and year-to-date.
o Lehman Brothers Government/Corporate (Long-Term) Index is composed
of the same types of issues as defined above. However, the average
maturity of the bonds included in this index approximates 22
years.
o Lehman Brothers Government Index is an unmanaged index comprised
of all publicly issued, non-convertible domestic debt of the U.S.
government, or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S.
government. Only notes and bonds with a minimum outstanding
principal of $1 million and a minimum maturity of one year are
included.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
o Bank Rate Monitor National Index, Miami Beach, Florida, is a
financial reporting service which publishes weekly average rates
of 50 leading bank and thrift institution money market deposit
accounts. The rates published in the index are an average of the
personal account rates offered on the Wednesday prior to the date
of publication by ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. Account
minimums range upward from $2,500 in each institution, and
compounding methods vary. If more than one rate is offered, the
lowest rate is used. Rates are subject to change at any time
specified by the institution.
o Money, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day
compound (effective) yield. From time to time, the Fund will
quote its Money ranking in advertising and sales literature.
o Standard & Poor's Utility Index is an unmanaged index of common
stocks from forty different utilities. This index indicates daily
changes in the price of the stocks. The index also provides
figures for changes in price from the beginning of the year to
date, and for a twelve month period.
o Dow Jones Utility Index is an unmanaged index comprised of fifteen
utility stocks that tracks changes in price daily and over a six
month period. The index also provides the highs and lows for each
of the past five years.
o Morgan Stanley Europe, Australia, and Far East (EAFE) Index is a
market capitalization weighted foreign securities index, which is
widely used to measure the performance of European, Australian,
New Zealand and Far Eastern stock markets.
The index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its securities
daily in both U.S. dollars and local currency and calculates total
returns monthly. EAFE U.S. dollar total return is a net dividend
figure less Luxembourg withholding tax. The EAFE is monitored by
Capital International, S.A., Geneva, Switzerland.
o Salomon Brothers World Equity Index Ex U.S. is a capitalization-
weighted index comprised of equities from 22 countries excluding
the United States.
o FT Actuaries World - Ex U.S. index is comprised of 1,740 stocks,
excluding U.S. stocks, jointly compiled by the Financial Times
Ltd., Goldman, Sachs & Co., and NatWest Securities Ltd. in
conjunction with the Institute of Actuaries and the Faculty of
Actuaries.
Advertisements and other sales literature for the Funds 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 Funds based on monthly, quarterly, or yearly, as
applicable, reinvestment of dividends over a specific period of time.
From time to time as it deems appropriate, the Funds may advertise their
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 instrument average.
4011006B (4/95)
