INTERNATIONAL STOCK FUND
(A PORTFOLIO OF INSURANCE MANAGEMENT SERIES)
PROSPECTUS
This Prospectus offers shares of International Stock Fund (the "Fund"),
which is a diversified investment portfolio in Insurance Management Series
(the "Trust"), an open-end management investment company. The Fund's
investment objective is to obtain a total return on its assets. Shares
of the Fund may be sold only to separate accounts of insurance companies
to serve as the investment medium for variable life insurance policies and
variable annuity contracts issued by the insurance companies.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus contains the information you should read and know before
you invest in the Fund through the variable life insurance policies and
variable annuity contracts offered by insurance companies which provide
for investment in the Fund. Keep this Prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated
April 30, 1995, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is
incorporated by reference into this Prospectus. You may request a copy of
the Statement of Additional Information free of charge by calling 1-800-
235-4669. To obtain other information or to make inquiries about the Fund,
contact the Fund at the address listed in the back of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FUND SHARES ARE AVAILABLE EXCLUSIVELY AS A FUNDING VEHICLE FOR LIFE
INSURANCE COMPANIES WRITING VARIABLE LIFE INSURANCE POLICIES AND VARIABLE
ANNUITY CONTRACTS. THIS PROSPECTUS SHOULD BE ACCOMPANIED BY THE
PROSPECTUSES FOR SUCH CONTRACTS.
Prospectus dated April 30, 1995
GENERAL INFORMATION 2
INVESTMENT INFORMATION 2
Investment Objective 2
Investment Policies 2
Investment Limitations 8
NET ASSET VALUE 9
INVESTING IN THE FUND 9
Purchases and Redemptions 9
What Shares Cost 9
Dividends 10
FUND INFORMATION 10
Management of the Fund 10
Distribution of Fund Shares 11
Administration of the Fund 11
Brokerage Transactions 11
Expenses of the Fund 12
SHAREHOLDER INFORMATION 12
Voting Rights 12
TAX INFORMATION 12
Federal Tax 12
State and Local Taxes 13
PERFORMANCE INFORMATION 13
ADDRESSES 14
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated September 15, 1993. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial
interest in separate portfolios of securities, including the Fund.
Shares of the Fund are sold only to insurance companies as funding
vehicles for variable insurance policies and variable annuity contracts
issued by the insurance companies. Shares of the Fund are sold at net
asset value as described in the section entitled "What Shares Cost."
Shares of the Fund are redeemed at net asset value.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The Fund's investment objective is to obtain a total return on its assets.
The investment objective cannot be changed without the approval of the
Fund's shareholders. While there is no assurance that the Fund will
achieve its investment objective, it attempts to do so by following the
investment policies described in this Prospectus.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund will attempt to achieve its objective by
investing at least 65% of its assets (and under normal market conditions
substantially all of its assets) in equity securities of issuers located
in at least three different countries outside of the United States. The
Fund's investment approach is based on the premise that investing in such
non-U.S. securities provides three potential benefits over investing
solely in U.S. securities: (1) the opportunity to invest in foreign
issuers believed to have superior growth potential; (2) the opportunity to
invest in foreign countries with economic policies or business cycles
different from those of the U.S.; and (3) the opportunity to reduce
portfolio volatility to the extent that securities markets inside and
outside the U.S. do not move in harmony. The Fund may purchase sponsored
or unsponsored American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs"), and European Depositary Receipts ("EDRs"); corporate
and government fixed income securities of issuers outside of the U.S.;
convertible securities; and options and financial futures contracts. In
addition, the Fund may enter into forward commitments, repurchase
agreements, and foreign currency transactions; and maintain reserves in
foreign or U.S. money market instruments.
Unless otherwise indicated, the investment policies may be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change to these policies becomes effective.
DEPOSITARY RECEIPTS. The Fund may purchase sponsored or unsponsored
ADRs, GDRs, and EDRs (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or
trust companies, and evidence ownership of underlying securities issued
by either a foreign or a U.S. corporation. Generally, Depositary
Receipts in registered form are designed for use in the U.S. securities
market and Depositary Receipts in bearer form are designed for use in
securities markets outside the U.S. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying
securities into which they may be converted. Ownership of unsponsored
Depositary Receipts may not entitle the Fund to financial or other
reports from the issuer of the underlying security, to which it would
be entitled as the owner of sponsored Depositary Receipts.
FIXED INCOME SECURITIES. At the date of this Prospectus, the Fund has
committed its assets primarily to dividend-paying equity securities of
established companies that appear to have growth potential. However, as
a temporary defensive position, the Fund may shift its emphasis to
fixed income securities, warrants, or other obligations of foreign
companies or governments, if they appear to offer potential higher
return. Fixed income securities include preferred stock, bonds, notes,
or other debt securities which are investment grade or higher, as
described below. The prices of fixed income securities fluctuate
inversely to the direction of interest rates.
The debt securities in which the Fund will invest will possess a
minimum credit rating of BBB as assigned by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's"),
or, if unrated, will be judged by the Fund's adviser to be of
comparable quality. Because the average quality of the Fund's portfolio
investments should remain constantly between AAA and BBB, the Fund may
avoid the adverse consequences that may arise for some debt securities
in difficult economic circumstances. Downgraded securities will be
evaluated on a case by case basis by the adviser. The adviser will
determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold. A description of the
ratings categories is contained in the Appendix to the Statement of
Additional Information.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities
that are rated, at the time of purchase, investment grade by a
nationally recoginzed statistical rating organization ("NRSRO") or, if
unrated, of comparable quality as determined by the adviser.
Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified
time period. Convertible securities may take the form of convertible
bonds, convertible preferred stock or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several
of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of
fixed income securities until they have been converted but also react
to movements in the underlying equity securities. The holder is
entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used
in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along
with warrants, which entitle the holder to buy the common stock, they
function as convertible bonds, except that the warrants generally will
expire before the bonds' maturity. Convertible securities are senior to
equity securities and, therefore, have a claim to assets of the
corporation prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated
to similar nonconvertible securities of the same company. The interest
income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than
common stocks, but lower than nonconvertible securities of similar
quality. A Fund will exchange or convert the convertible securities
held in its portfolio into shares of the underlying common stocks when,
in the adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its
investment objective. Otherwise, the Fund will hold or trade the
convertible securities. In selecting convertible securities for the
Fund, the adviser evaluates the investment characteristics of the
convertible security as a fixed income instrument, and the investment
potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible
security, the adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
OPTIONS AND FINANCIAL FUTURES CONTRACTS. The Fund may purchase put and
call options, financial futures contracts, and options on financial
futures contracts. In addition, the Fund may write (sell) put and call
options with respect to securities in the Fund's portfolio.
FORWARD COMMITMENTS. Forward commitments are contracts to purchase
securities for a fixed price at a date beyond customary settlement
time. The Fund may enter into these contracts if liquid securities in
amounts sufficient to meet the purchase price are segregated on the
Fund's records at the trade date and maintained until the transaction
has been settled. Risk is involved if the value of the security
declines before settlement. Although the Fund enters into forward
commitments with the intention of acquiring the security, it may
dispose of the commitment prior to settlement and realize a short-term
profit or loss.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them
at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Fund, the
Fund could receive less than the repurchase price on any sale of such
securities.
MONEY MARKET INSTRUMENTS. The Fund may invest in foreign and U.S. money
market instruments, including interest-bearing call deposits with
banks, government obligations, certificates of deposit, banker's
acceptances, commercial paper, short-term corporate debt securities,
and repurchase agreements. The commercial paper in which the Fund
invests will be rated A-1 by S&P or P-1 by Moody's. These investments
may be used to temporarily invest cash received from the sale of Fund
shares, to establish and maintain reserves for temporary defensive
purposes, or to take advantage of market opportunities. Investments in
the World Bank, Asian Development Bank, or Inter-American Development
Bank are not anticipated.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete
these transactions may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may
pay more or less than the market value of the securities on the settlement
date. The Fund may dispose of a commitment prior to settlement if the
adviser deems it appropriate to do so. In addition, the Fund may enter
into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize short-
term profits or losses upon the sale of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. As a matter of investment practice,
the Fund may invest up to 15% of its total assets in restricted
securities. This restriction is not applicable to commercial paper issued
under Section 4(2) of the Securities Act of 1933. Restricted securities
are any securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restriction on
resale under federal securities law. To the extent restricted securities
are deemed to be illiquid, the Fund will limit their purchase, including
non-negotiable time deposits, repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter options,
and certain restricted securities determined by the Trustees not to be
liquid, to 15% of the net assets of the Fund.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
the Fund may lend its portfolio securities on a short-term or long-term
basis, or both, to broker/dealers, banks, or other institutional borrowers
of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the adviser has
determined are creditworthy under guidelines established by the Trustees
and will receive collateral at all times equal to at least 100% of the
value of the securities loaned. There is the risk that when lending
portfolio securities, the securities may not be available to the Fund on a
timely basis and the Fund, may, therefore, lose the opportunity to sell
the securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or
cash basis at prevailing rates or through forward foreign currency
exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Such changes could unfavorably affect the
value of Fund assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as measured in
U.S. dollars. Although foreign currency exchanges may be used by the Fund
to protect against a decline in the value of one or more currencies, such
efforts may also limit any potential gain that might result from a
relative increase in the value of such currencies and might, in certain
cases, result in losses to the Fund. Further, the Fund may be affected
either unfavorably or favorably by fluctuations in the relative rates of
exchange between the currencies of different nations. Cross-hedging
transactions by the Fund involve the risk of imperfect correlation between
changes in the values of the currencies to which such transactions relate
and changes in the value of the currency or other asset or liability that
is the subject of the hedge.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES. A forward foreign currency exchange contract ("forward
contract") is an obligation to purchase or sell an amount of a particular
currency at a specific price and on a future date agreed upon by the
parties.
Generally, no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated on the Fund's
records and are maintained until the contract has been settled. The Fund
will not enter into a forward contract with a term of more than one year.
The Fund will generally enter into a forward contract to provide the
proper currency to settle a securities transaction at the time the
transaction occurs ("trade date"). The period between the trade date and
settlement date will vary between 24 hours and 30 days, depending upon
local custom.
The Fund may also protect against the decline of a particular foreign
currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of this type of
short-term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the
securities involved. Although the adviser will consider the likelihood of
changes in currency values when making investment decisions, the adviser
believes that it is important to be able to enter into forward contracts
when it believes the interests of the Fund will be served. The Fund will
not enter into forward contracts for hedging purposes in a particular
currency in an amount in excess of the Fund's assets denominated in that
currency. No more than 30% of the Fund's assets will be committed to
forward contracts for hedging purposes at any time. (This restriction does
not include forward contracts entered into to settle securities
transactions.)
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in
the U.S. dollar cost of such securities to be acquired. As in the case of
other kinds of options, however, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the
event of rate movements adverse to the Fund's position, it may forfeit the
entire amount of the premium plus related transaction costs. Options on
foreign currencies to be written or purchased by the Fund are traded on
U.S. and foreign exchanges or over-the-counter.
RISKS ASSOCIATED WITH FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FINANCIAL
FUTURES CONTRACTS. When the Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate with the prices of the
securities in the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the portfolio securities
to market changes. In addition, the Fund's adviser could be incorrect in
its expectations about the direction or extent of market factors such as
interest or currency exchange rate movements. In these events, the Fund
may lose money on the futures contract or option. Also, it is not certain
that a secondary market for positions in futures contracts or for options
will exist at all times. Although the Fund's adviser will consider
liquidity before entering into such transactions, there is no assurance
that a liquid secondary market on an exchange or otherwise will exist for
any particular futures contract or option at any particular time. The
Fund's ability to establish and close out futures and options positions
depends on this secondary market.
RISKS ASSOCIATED WITH NON-U.S. SECURITIES. Investing in non-U.S.
securities carries substantial risks in addition to those associated with
domestic investments. In an attempt to reduce some of these risks, the
Fund diversifies its investments broadly among foreign countries,
including both developed and developing countries. At least three
different countries will always be represented.
The Fund occasionally takes advantage of the unusual opportunities for
higher returns available from investing in developing countries. These
investments, however, carry considerably more volatility and risk because
they are associated with less mature economies and less stable political
systems.
CURRENCY RISKS. Because the Fund may purchase securities denominated in
currencies other than the U.S. dollar, changes in foreign currency
exchange rates could affect the Fund's net asset value; the value of
interest earned; gains and losses realized on the sale of securities;
and net investment income and capital gain, if any, to be distributed
to shareholders by the Fund. If the value of a foreign currency rises
against the U.S. dollar, the value of the Fund assets denominated in
that currency will increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of Fund assets
denominated in that currency will decrease.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental
interpretation, speculation and other economic and political
conditions. Although the Fund values its assets daily in U.S. dollars,
the Fund will not convert its holdings of foreign currencies to U.S.
dollars daily. When the Fund converts its holdings to another currency,
it may incur conversion costs. Foreign exchange dealers may realize a
profit on the difference between the price at which they buy and sell
currencies.
FOREIGN COMPANIES. Other differences between investing in non-U.S. and
U.S. securities include:
o less publicly available information about foreign companies;
o the lack of uniform financial accounting standards applicable to
foreign companies;
o less readily available market quotations on foreign companies;
o differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;
o differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgements;
o generally lower foreign stock market volume;
o the likelihood that foreign securities may be less liquid or more
volatile;
o foreign brokerage commissions may be higher;
o unreliable mail service between countries; and
o political or financial changes which adversely affect investments in
some countries.
U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such
as the Fund. Investors are advised that when such policies are
instituted, the Fund will abide by them.
SHORT SALES. The Fund intends to sell securities short from time to
time, subject to certain restrictions. A short sale occurs when a
borrowed security is sold in anticipation of a decline in its price. If
the decline occurs, shares equal in number to those sold short can be
purchased at the lower price. If the price increases, the higher price
must be paid. The purchased shares are then returned to the original
lender. Risk arises because no loss limit can be placed on the
transaction. When the Fund enters into a short sale, assets equal to
the market price of the securities sold short or any lesser price at
which the Fund can obtain such securities, are segregated on the Fund's
records and maintained until the Fund meets its obligations under the
short sale.
DEVELOPING/EMERGING MARKETS. The economies of individual emerging
countries may differ favorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency and
balance of payments position. Further, the economies of developing
countries generally are heavily dependent on international trade and,
accordingly, have been, and may continue to be, adversely affected by
trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been,
and may continue to be, adversely affected by economic conditions in
the countries with which they trade.
Prior governmental approval for foreign investments may be required
under certain circumstances in some emerging countries, and the extent
of foreign investment in certain debt securities and domestic companies
may be subject to limitation in other emerging countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies in emerging countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval
in some emerging countries. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental
registration or approval for such repatriation. Any investment subject
to such repatriation controls will be considered illiquid if it appears
reasonably likely that this process will take more than seven days.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political
changes, governmental regulation, social instability or diplomatic
developments (including war) which could affect adversely the economies
of such countries or the value of the Fund's investments in those
countries. In addition, it may be difficult to obtain and enforce a
judgment in a court outside of the U.S.
INVESTMENT LIMITATIONS
The Fund will not:
o 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;
o sell securities short except under strict limitations;
o 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
o 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:
o invest more than 5% of its assets in warrants;
o 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);
o invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;
o 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
o purchase put options on securities unless the securities or an
offsetting call option is held in the Fund's portfolio.
VARIABLE ASSET REGULATIONS. The Fund is also subject to variable contract
asset regulations prescribed by the U.S. Treasury Department under Section
817(h) of the Internal Revenue Code. After a one year start-up period, the
regulations generally require that, as of the end of each calendar quarter
or within 30 days thereafter, no more than 55% of the total assets of the
Fund may be represented by any one investment, no more than 70% of the
total assets of the Fund may be represented by any two investments, no
more than 80% of the total assets of the Fund may be represented by any
three investments, and no more than 90% of the total assets of the Fund
may be represented by any four investments. In applying these
diversification rules, all securities of the same issuer, all interests in
the same real property project, and all interests in the same commodity
are each treated as a single investment. In the case of government
securities, each government agency or instrumentality shall be treated as
a separate issuer. If the Fund fails to achieve the diversification
required by the regulations, unless relief is obtained from the Internal
Revenue Service, the contracts invested in the Fund will not be treated as
annuity, endowment, or life insurance contracts.
The Fund will be operated at all times so as to comply with the foregoing
diversification requirements.
STATE INSURANCE REGULATIONS. The Fund is intended to be a funding vehicle
for variable annuity contracts and variable life insurance policies
offered by certain insurance companies. The contracts will seek to be
offered in as many jurisdictions as possible. Certain states have
regulations concerning, among other things, the concentration of
investments, sales and purchases of futures contracts, and short sales of
securities. If applicable, the Fund may be limited in its ability to
engage in such investments and to manage its portfolio with desired
flexibility. The Fund will operate in material compliance with the
applicable insurance laws and regulations of each jurisdiction in which
contracts will be offered by the insurance companies which invest in the
Fund.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the
purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Fund's investment adviser believes it is appropriate to
do so in light of the Fund's investment objective, without regard to the
length of time a particular security may have been held. It is not
anticipated that the portfolio trading engaged in by the Fund will result
in its annual rate of portfolio turnover exceeding 200%. A portfolio
turnover rate of 100% would occur, for example, if all the securities in
the Fund's portfolio were replaced once in a period of one year. The
Fund's rate of portfolio turnover may exceed that of certain other mutual
funds with the same investment objective. A higher rate of portfolio
turnover involves correspondingly greater brokerage commissions and other
expenses which must be borne directly by the Fund and, thus, indirectly by
its shareholders. In addition, a high rate of portfolio turnover may
result in the realization of larger amounts of capital gains which, when
distributed to the Fund's shareholders, are taxable to them.
Nevertheless, transactions for the Fund's portfolio will be based only
upon investment considerations and will not be limited by any other
considerations when the Fund's investment adviser deems it appropriate to
make changes in the Fund's portfolio.
NET ASSET VALUE
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 life insurance policies and variable
annuity contracts. The use of Fund shares as investments for both variable
life insurance policies and variable annuity contracts is referred to as
"mixed funding." The use of Fund shares as investments by separate
accounts of unaffiliated life insurance companies is referred to as
"shared funding."
The Fund intends to engage in mixed funding and shared funding in the
future. Although the Fund does not currently foresee any disadvantage to
contract owners due to differences in redemption rates, tax treatment, or
other considerations, resulting from mixed funding or shared funding, the
Trustees of the Fund will closely monitor the operation of mixed funding
and shared funding and will consider appropriate action to avoid material
conflicts and take appropriate action in response to any material
conflicts which occur. Such action could result in one or more
participating insurance companies withdrawing their investment in the
Fund.
Shares of the Fund are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.
WHAT SHARES COST
Shares of the Fund are sold and redeemed at the net asset value calculated
at 4:00 p.m. (Eastern time), Monday through Friday. The Fund reserves the
right to reject any purchase request.
Net asset value of shares of the Fund will not be calculated on: (i) days
on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially
affected; (ii) days on which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Purchase orders from separate accounts investing in the Fund which are
received by the insurance companies by 4:00 p.m. (Eastern time) will be
computed at the net asset value of the Fund determined on that day, as
long as such purchase orders are received by the Fund in proper form and
in accordance with applicable procedures by 8:00 a.m. (Eastern time) on
the next business day and as long as federal funds in the amount of such
orders are received by the Fund on the next business day. It is the
responsibility of each insurance company which invests in the Fund to
properly transmit purchase orders and federal funds in accordance with the
procedures described above.
DIVIDENDS
Dividends on shares of the Fund are declared and paid annually. Shares of
the Fund will begin earning dividends if owned on the applicable record
date. Dividends of the Fund are automatically reinvested in additional
shares of the Fund on payment dates at the ex-dividend date net asset
value.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The
Trustees are responsible for managing the business affairs of the Trust
and for exercising all of the Trust's powers except those reserved for the
shareholders. The Executive Committee of the Board of Trustees handles the
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the
Trust, investment decisions for the Fund are made by Federated Advisers,
the Fund's investment adviser, subject to direction by the Trustees. The
adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments,
for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment
advisory fee equal to 1.00% of the Fund's average daily net assets. The
adviser may voluntarily choose to waive a portion of its fee or
reimburse the Fund for certain operating expenses. The adviser can
terminate this voluntary waiver and reimbursement of expenses at any
time at its sole discretion.
ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under
the Investment Advisers Act of 1940. It is a subsidiary of Federated
Investors. All of the Class A (voting) shares of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue,
Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee
of Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve
as investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative
services to a number of investment companies. Total assets under
management or administration by these and other subsidiaries of
Federated Investors is approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc., develops and
manages mutual funds primarily for the financial industry. Federated
Investors' track record of competitive performance and its disciplined,
risk averse investment philosophy serve approximately 3,500 client
institutions nationwide. Through these same client institutions,
individual shareholders also have access to this same level of
investment expertise.
Randall S. Bauer has been the Fund's portfolio manager since the Fund
commenced operations. Mr. Bauer joined Federated Investors in 1989 as
an Assistant Vice President of the Fund's investment adviser. Mr. Bauer
was an Assistant Vice President of the International Banking Division
at Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is a
Chartered Financial Analyst and received his M.B.A. in Finance from
Pennsylvania State University.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund. Federated Securities Corp. is located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal distributor for a
number of investment companies. Federated Securities Corp. is a subsidiary
of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary
of Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Administrative Services provides these at an
annual rate which relates to the average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors ("Federated Funds")
as specified below:
Average Aggregate Daily
Administrative Fee Net Assets of the Federated
Funds
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 net assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a
portion of its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the
Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is the
transfer agent for shares of the Fund and dividend disbursing agent for
the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Boston, Massachusetts.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
utilize those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can be
obtained elsewhere. In selecting among firms believed to meet these
criteria, the adviser may give consideration to those firms which have
sold or are selling shares of the other funds distributed by Federated
Securities Corp. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of Trust
expenses. These expenses may include, but are not limited to, the cost of:
organizing the Trust and continuing its existence; Trustees' fees;
investment advisory and administrative services; printing prospectuses and
other documents for contract holders; registering the Trust, the Fund, and
shares of the Fund; taxes and commissions; issuing, purchasing,
repurchasing, and redeeming shares; custodians, transfer agents, dividend
disbursing agents, contract holders servicing agents, and registrars;
printing, mailing, auditing, accounting, and legal expenses; reports to
contract holders and governmental agencies; meetings of Trustees and
contract holders and proxy solicitations therefor; insurance; association
membership dues; and such nonrecurring and extraordinary items as may
arise. However, the investment adviser may voluntarily reimburse some
expenses.
SHAREHOLDER INFORMATION
VOTING RIGHTS
The insurance company separate accounts, as shareholders of the Fund, will
vote the Fund shares held in their separate accounts at meetings of the
shareholders. Voting will be in accordance with instructions received from
contract owners of the separate accounts, as more fully outlined in the
prospectus of the separate account.
Each share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of each
portfolio in the Trust have equal voting rights except that only shares of
the Fund are entitled to vote on matters affecting only the Fund. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of
Trustees in certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the
outstanding shares of all series of the Trust.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to
such companies.
The Fund will be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains) and losses realized
by the Trust's other portfolios will not be combined for tax purposes with
those realized by the Fund.
The Fund intends to comply with the variable asset diversification
regulations which are described earlier in this Prospectus. If the Fund
fails to comply with these regulations, contracts invested in the Fund
shall not be treated as annuity, endowment, or life insurance contracts
under the Internal Revenue Code.
Contract owners should review the applicable contract prospectus for
information concerning the federal income tax treatment of their contracts
and distributions from the Fund to the separate accounts.
STATE AND LOCAL TAXES
Contract owners are urged to consult their own tax advisers regarding the
status of their contracts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time the Fund advertises total return and yield. Total return
represents the change, over a specified period of time, in the value of an
investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage. The yield of the Fund is
calculated by dividing the net investment income per share (as defined by
the Securities and Exchange Commission) earned by the Fund over a thirty-
day period by the offering price per share of the Fund on the last day of
the period. This number is then annualized using semi-annual compounding.
The yield does not necessarily reflect income actually earned by the Fund
and, therefore, may not correlate to the dividends or other distributions
paid to shareholders. Performance information will not reflect the
charges and expenses of a variable annuity or variable life insurance
contract. Because shares of the Fund can only be purchased by a separate
account of an insurance company offering such a contract, you should
review the performance figures of the contract in which you are invested,
which performance figures will accompany any advertisement of the Fund's
performance.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
ADDRESSES
Insurance Management Series
International Stock 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
INTERNATIONAL STOCK FUND
PROSPECTUS
A Diversified Portfolio of Insurance Management
Series, An Open-End, Management Investment
Company
April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
458043 60 1
G01078-01 (4/95)
International Stock Fund
A Portfolio of Insurance Management Series
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus for International Stock Fund (the "Fund"), a portfolio of
Insurance Management Series (the "Trust"), dated April 30,
1995. This Statement is not a prospectus itself. To receive a copy of the
prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of Federated
Investors
Investment Objective and Policies 1
Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements1
Lending of Portfolio Securities 1
Restricted and Illiquid Securities 1
Futures and Options Transactions 2
Foreign Currency Hedging Transactions4
Risks 5
Warrants 5
Investment Limitations 6
Insurance Management Series Management8
Fund Ownership 12
Trustees Compensation 13
Investment Advisory Services 14
Adviser to the Fund 14
Advisory Fees 14
Other Related Services 14
Administrative Services 14
Transfer Agent and Dividend Disbursing
Agent 14
Brokerage Transactions 14
Purchasing Shares 15
Determining Net Asset Value 15
Determining Market Value of
Securities 15
Trading in Foreign Securities
15
Massachusetts Partnership Law 16
Tax Status 16
The Fund's Tax Status 16
Foreign Taxes 16
Shareholders' Tax Status 16
Total Return 16
Yield 17
Performance Comparisons 17
Appendix 18
Investment Objective and Policies
The Fund's investment objective is to obtain a total return on its assets.
Types of Investments
The Fund invests in a diversified portfolio of equity securities issued by non-
U.S. issuers. The Fund will invest at least 65%, and under normal market
conditions, substantially all of its total assets, in equity securities of
issuers located in at least three different countries outside of the United
States. The Fund may also purchase sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and European Depositary
Receipts ("EDRs"); purchase investment grade corporate and government fixed
income securities of issuers outside the U.S.; enter into forward commitments,
repurchase agreements, and foreign currency transactions; and maintain reserves
in foreign or U.S. money market instruments.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. In
the event that a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in effect
for custody of the Fund's portfolio securities subject to repurchase agreements,
a court of competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund will only enter into
repurchase agreements with banks and other recognized financial institutions,
such as broker/dealers, which are deemed by the Fund's adviser or sub-adviser to
be creditworthy, pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
Restricted and Illiquid Securities
The Fund may invest in commercial paper in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by t he investor must be in an exempt
transaction Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The ability of the Trustees to determine the
liquidity of certain restricted securities is permitted under a Securities and
Exchange Commission Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive, safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws. The
Rule provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule . The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all restricted
securities (eligible for resale under the Rule) to the Trustees. The Trustees
consider the following criteria in determining the liquidity of certain
restricted securities:
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 the Fund invests in certain restricted securities determined
by the Trustees to be liquid, such investments could have the effect of
increasing the level of Fund illiquidity to the extent that the buyers in the
secondary market for such securities (whether in resales under the Rule or other
exempt transactions) become, for a time, uninterested in purchasing these
securities.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling futures contracts and options on futures contracts, and buying put
and call options on portfolio securities and securities indices. The Fund may
also write covered put and call options on portfolio securities to attempt to
increase its current income or to hedge a portion of its portfolio investments.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position on a futures contract may be closed
out over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series. The Fund will not engage in
futures transactions for speculative purposes.
Futures Contracts
The Fund may purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. Although some financial
futures contracts call for making or taking delivery of the underlying
securities, in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is accomplished
by purchasing or selling an identical offsetting futures contract. Other
financial futures contracts by their terms call for cash settlements.
The Fund also may purchase and sell stock index futures contracts with
respect to any stock index traded on a recognized stock exchange or board
of trade to hedge against changes in prices. Stock index futures contracts
are based on indices that reflect the market value of common stock of the
firms included in the indices. An index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount
of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the
index contract was originally written. No physical delivery of the
underlying securities in the index is made. Instead, settlement in cash
must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the
stock index at the expiration of the contract.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash, U.S.
government securities or highly-liquid debt securities with its custodian
(or the broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not
involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been
satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking
to market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions. The Fund is also required to deposit and maintain
margin when it writes call options on futures contracts.
To the extent required to comply with Commodity Futures Trading Commission
("CFTC") Regulation 4.5 and thereby avoid status as a "commodity pool
operator," the Fund will not enter into a futures contract, or purchase an
option thereon, if immediately thereafter the initial margin deposits for
futures contracts held by it, plus premiums paid by it for open options on
futures contracts, would exceed 5% of the market value of the Fund's total
assets, after taking into account the unrealized profits and losses on
those contracts it has entered into; and, provided further, that in the
case of an option that is in-the-money at the time of purchase, the in-the-
money amount may be excluded in computing such 5%. Second, the Fund will
not enter into these contracts for speculative purposes; rather, these
transactions are entered into only for bona fide hedging purposes, or
other permissible purposes pursuant to regulations promulgated by the
CFTC. Third, since the Fund does not constitute a commodity pool, it will
not market itself as such, nor serve as a vehicle for trading in the
commodities futures or commodity options markets. Finally, because the
Fund will submit to the CFTC special calls for information, the Fund will
not register as a commodities pool operator.
Put Options on Financial and Stock Index Futures Contracts
The Fund may purchase listed put options on financial and stock index
futures contracts to protect portfolio securities against decreases in
value resulting from market factors, such as an anticipated increase in
interest rates or stock prices. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contracts entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the second option will be large enough to offset both the premium paid by
the Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
When the Fund sells a put on a futures contract, it receives a cash
premium in exchange for granting to the purchaser of the put the right to
receive from the Fund, at the strike price, a short position in such
futures contract, even though the strike price upon exercise of the option
is greater than the value of the futures position received by such holder.
If the value of the underlying futures position is not such that exercise
of the option would be profitable to the option holder, the option will
generally expire without being exercised. It will generally be the policy
of the Fund, in order to avoid the exercise of an option sold by it, to
cancel its obligation under the option by entering into a closing purchase
transaction, if available, unless it is determined to be in the Fund's
interest to deliver the underlying futures position. A closing purchase
transaction consists of the purchase by the Fund of an option having the
same term as the option sold by the Fund, and has the effect of canceling
the Fund's position as a seller. The premium which the Fund will pay in
executing a closing purchase transaction may be higher than the premium
received when the option was sold, depending in large part upon the
relative price of the underlying futures position at the time of each
transaction.
Call Options on Financial and Stock Index Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed and over-the-counter call options on financial and stock index
futures contracts to hedge its portfolio. When the Fund writes a call
option on a futures contract, it is undertaking the obligation of assuming
a short futures position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option is
exercised. As stock prices fall or market interest rates rise, causing the
prices of futures to go down, the Fund's obligation under a call option on
a future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase.
In other words, as the underlying futures price falls below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
When the Fund purchases a call on a financial futures contract, it
receives in exchange for the payment of a cash premium the right, but not
the obligation, to enter into the underlying futures contract at a strike
price determined at the time the call was purchased, regardless of the
comparative market value of such futures position at the time the option
is exercised. The holder of a call option has the right to receive a long
(or buyer's) position in the underlying futures contract.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts. If
this limitation is exceeded at any time, the Fund will take prompt action
to close out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
Purchasing Put Options on Portfolio Securities and Stock Indices
The Fund may purchase put options on portfolio securities and stock
indices to protect against price movements in the Fund's portfolio
securities. A put option gives the Fund, in return for a premium, the
right to sell the underlying security to the writer (seller) at a
specified price during the term of the option.
Writing Covered Call Options on Portfolio Securities and Stock Indices
The Fund may also write covered call options to generate income and
thereby protect against price movements in the Fund's portfolio
securities. As writer of a call option, the Fund has the obligation upon
exercise of the option during the option period to deliver the underlying
security upon payment of the exercise price or, in the case of a
securities index, a cash payment equal to the difference between the
closing price of the index and the exercise price of the option. The Fund
may only sell call options either on securities held in its portfolio or
on securities which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any additional
consideration).
Foreign Currency Hedging Transactions
In order to hedge against foreign currency exchange rate risks, the Fund may
enter into forward foreign currency exchange contracts and foreign currency
futures contracts, as well as purchase put or call options on foreign
currencies, as described below. The Fund may also conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the Fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
ollar amount. This second investment practice is generally refered to as "cross-
hedging." Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, the Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked to market on a daily
basis. While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such event,
the Fund's ability to utilize forward contracts in the manner set forth above
may be restricted. Forward contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not engaged in such contracts.
The Fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the Fund will be traded on
U.S. and foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the adviser to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
Risks
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the securities or foreign currency subject to the
futures contracts may not correlate perfectly with the prices of the securities
or currency in the Fund's portfolio. This may cause the futures contract and any
related options to react differently to market changes than the portfolio
securities or foreign currency. In addition, the adviser could be incorrect in
its expectations about the direction or extent of market factors such as stock
price movements or foreign currency exchange rate fluctuations. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the adviser will consider
liquidity before entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market. The inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge its portfolio.
To minimize risks, the Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for related
options would exceed 5% of the value of the Fund's total assets after taking
into account the unrealized profits and losses on those contracts it has entered
into; and, provided further, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded in computing
such 5%. When the Fund purchases futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures contracts
(less any related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to collateralize
the position and thereby insure that the use of such futures contract is
unleveraged. When the Fund sells futures contracts, it will either own or have
the right to receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.
Warrants
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock.
Investment Limitations
Diversification of Investments
With respect to 75% of the value of its total assets, the Fund will not
purchase securities of any one issuer (other than securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer, or if it would
own more than 10% of the outstanding voting securities of any one issuer.
Acquiring Securities
The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer.
Concentration of Investments
The Fund will not invest 25% or more of its total assets in securities of
issuers having their principal business activities in the same industry.
Borrowing
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts up to one-
third of the value of its total assets, including the amount borrowed.
This borrowing provision is not for investment leverage but solely to
facilitate management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio securities would be
inconvenient or disadvantageous. The Fund will not purchase securities
while outstanding borrowings exceed 5% of the value of its total assets.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate assets, except when
necessary for permissible borrowings. Neither the deposit of underlying
securities or other assets in escrow in connection with the writing of put
or call options or the purchase of securities on a when-issued basis, nor
margin deposits for the purchase and sale of financial futures contracts
and related options are deemed to be a pledge.
Buying on Margin
The Fund will not purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions, except
that the Fund may make margin payments in connection with its use of
financial futures contracts or related options and transactions.
Issuing Senior Securities
The Fund will not issue senior securities except in connection with
borrowing money directly or through reverse repurchase agreements or as
required by forward commitments to purchase securities or currencies.
Underwriting
The Fund will not underwrite or participate in the marketing of securities
of other issuers, except as it may be deemed to be an underwriter under
federal securities law in connection with the disposition of its portfolio
securities.
Investing in Real Estate
The Fund will not invest in real estate, although it may invest in
securities secured by real estate or interests in real estate or issued by
companies, including real estate investment trusts, which invest in real
estate or interests therein.
Investing in Commodities
The Fund will not purchase or sell commodities or commodity contracts,
except that the Fund may purchase and sell financial futures contracts and
options on financial futures contracts, provided that the sum of its
initial margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts,
may not exceed 5% of the fair market value of the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts. Further, the Fund may engage in foreign currency transactions
and purchase or sell forward contracts with respect to foreign currencies
and related options.
Lending Cash or Securities
The Fund will not lend any assets except portfolio securities. This shall
not prevent the purchase or holding of bonds, debentures, notes,
certificates of indebtedness, or other debt securities of an issuer,
repurchase agreements or other transactions which are permitted by the
Fund's investment objective and policies or its Declaration of Trust.
Selling Short
The Fund will not sell securities short unless (1) it owns, or has a right
to acquire, an equal amount of such securities, or (2) it has segregated
an amount of its other assets equal to the lesser of the market value of
the securities sold short or the amount required to acquire such
securities. The segregated amount will not exceed 10% of the Fund's net
assets. While in a short position, the Fund will retain the securities,
rights, or segregated assets.
To comply with registration requirements in certain states, the Fund (1)
will limit short sales of securities of any class of any one issuer to the
lesser of 2% of the Fund's net assets or 2% of the securities of that
class, (2) will make short sales only on securities listed on recognized
stock exchanges. The latter restrictions, however, do not apply to short
sales of securities the Fund holds or has a right to acquire without the
payment of any further consideration, and (3) will not invest more than 5%
of its total assets in restricted securities. (If state requirements
change, these restrictions may be revised without shareholder
notification.)
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Except as noted, shareholders will be
notified before any material change in these limitations becomes effective.
Purchasing Securities to Exercise Control
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
Investing in Warrants
The Fund will not invest more than 5% of its assets in warrants, including
those acquired in units or attached to other securities. To comply with
certain state restrictions, the Fund will limit its investment in such
warrants not listed on recognized stock exchanges to 2% of its total
assets. (If state restrictions change, this latter restriction may be
revised without notice to shareholders.) For purposes of this investment
restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment companies,
except by purchase in the open market involving only customary brokerage
commissions and as a result of which not more than 10% of the value of
its total assets would be invested in such securities, or except as part
of a merger, consolidation or other acquistion.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
Investing in Minerals
The Fund will not invest in interests in oil, gas, or other mineral
exploration or development programs, other than debentures or equity stock
interests.
Investing in Restricted Securities
The Fund will not invest more than 15% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933, except
for commercial paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including securities not determined by the Trustees
to be liquid, repurchase agreements with maturities longer than seven days
after notice, and certain over-the-counter options.
Dealing in Puts and Calls
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or the Fund is entitled to them in
deliverable form without further payment or the Fund has segregated cash
in the amount of any further payments. The Fund will not purchase put
options on securities unless the securities or an offsetting call option
is held in the Fund's portfolio. The Fund may also purchase, hold or sell
(i) contracts for future delivery of securities or currencies and (ii)
warrants granted by the issuer of the underlying securities.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser or sub-
adviser owning individually more than 1/2 of 1% of the issuer's securities
together own more than 5% of the issuer's securities.
Arbitrage Transactions
To comply with certain state restrictions, the Fund will not enter into
transactions for the purpose of engaging in arbitrage. If state
requirements change, this restriction may be revised without shareholder
notification.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund has no present intent to borrow money or pledge securities in excess of
5% of the value of its total assets in the coming fiscal year.
Insurance Management Series Management
Officers and Trustees are listed with their addresses, present positions with
Insurance Management Series, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue,
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Koehuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty; Director, Eat'N
Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Henny, Koehuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice President and Secretary
of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of Trustees
between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Cash Management Trust; Automated Government Money Trust;
California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated
Government Trust; Federated Growth Trust; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First
Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S.
Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility
Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insight Institutional Series, Inc.;
Insurance Management Series; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity
Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty Term Trust, Inc.--1999; Liberty U.S. Government
Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed
Series Trust; The Medalist Funds; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New
York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of April 4, 1995 there were no shareholders of record who
owned 5% or more of the outstanding shares of the Fund.
Trustees Compensation
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue
Trustee and Chairman $ 0
$0 for the Trust and
68 other investment companies in the Fund Complex
Thoms G. Bigley
Trustee $ 252 $20,688 for the Trust and
49 other investment companies in the Fund Complex
John T. Conroy, Jr.
Trustee $ 276 $117,202 for the Trust and
64 other investment companies in the Fund Complex
William J. Copeland
Trustee $ 276 $117,202 for the Trust and
64 other investment companies in the Fund Complex
J. Christopher Donahue
Trustee and President $ 0
$0 for the Trust and
14 other investment companies in the Fund Complex
James E. Dowd
Trustee $ 276 $117,202 for the Trust and
64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr.
Trustee $ 276 $117,202 for the Trust and
64 other investment companies in the Fund Complex
Peter E. Madden
Trustee $ 100 $90,563 for the Trust and
64 other investment companies in the Fund Complex
Gregor F. Meyer
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund Complex
John E. Murray, Jr.
Trustee $0 $0 for the Trust and
68 other investment companies in the Fund Complex
Wesley W. Posvar
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund Complex
Marjorie P. Smuts
Trustee $ 252 $106,460 for the Trust and
64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended December 31, 1994.
#The aggregate compensation is provided for the Trust which is comprised of 6
portfolios.
+The information is provided for the last calendar year.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund, the Trust, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitation
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fees, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per
year of the next $70 million of average net assets, and 1-1/2% per year of
the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fees paid will be reduced by the amounts of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amounts to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amounts of the investment advisory fees.
This arrangement is not part of the advisory contract agreement and may be
amended or rescinded in the future.
Other Related Services
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund and receives an administrative
fee as described in the prospectus. Dr. Henry J. Gailliot, an officer of
Federated Advisers, the Adviser to the Fund, holds approximately 20% of the
outstanding common stock and serves as a director of Commercial Data Services,
Inc., a company which provides computer processing services to Federated
Administrative Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based on the size,
type and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
paid for this service is based on the level of the Fund's average net assets for
the period plus out-of-pocket expenses.
Brokerage Transactions
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
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. The Adviser determines in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising certain other accounts. To the
extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses.
The Adviser may engage in other non-U.S. transactions that may have adverse
effects on the market for securities in the Fund's portfolio. The Adviser is not
obligated to obtain any material non-public ("inside") information about any
securities issuer, or to base purchase or sale recommendations on such
information.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value without a sales charge on days the New York Stock
Exchange is open for business. The procedure for purchasing shares is explained
in the prospectus under "Purchases and Redemptions" and "What Shares Cost."
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market or fair values of the Fund's portfolio securities are determined as
follows:
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 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.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider: institutional trading in
similar groups of securities; yield; quality; coupon rate; maturity; type of
issue; trading characteristics; and other market data.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
Massachusetts Partnership Law
Under certain circumstances, shareholders of the Fund may be held liable as
partners under Massachusetts law for obligations of the Fund. To protect
shareholders of the Fund, the Fund has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Fund. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign on behalf of the Fund.
In the unlikely event a shareholder of the Fund is held personally liable for
the Trust's obligations on behalf of the Fund, the Trust is required to use the
property of the Fund to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder of
the Fund for any act or obligation of the Trust on behalf of the Fund.
Therefore, financial loss resulting from liability as a shareholder of the Fund
will occur only if the Trust itself cannot meet its obligations to indemnify
shareholders and pay judgments against them from the assets of the Fund.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
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 Fund may invest in the stock of certain foreign corporations which
would constitute a Passive Foreign Investment Company (PFIC). Federal income
taxes may be imposed on the Fund upon disposition of PFIC investments.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
Shareholders' Tax Status
The Fund intends to comply with the variable asset diversification regulations
which are described in the prospectus and in this Statement of Additional
Information. If the Fund fails to comply with these regulations, contracts
invested in the Fund shall not be treated as annuity, endowment or life
insurance contracts under the Internal Revenue Code, as amended.
Contract owners should review the contract prospectus for information concerning
the federal income tax treatment of their contracts and distributions from the
Fund to the separate accounts.
Total Return
The average annual total return for shares of the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable value
is computed by multiplying the number of shares owned at the end of the period
by the offering price per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the annual reinvestment of
all dividends and distributions. You should review the performance figures for
your insurance contract, which figures reflect the applicable charges and
expenses of the contract. Such performance figures will accompany any
advertisement of the Fund's performance.
Yield
The Fund's yield is determined by dividing the net investment income per share
(as defined by the SEC) earned by the Fund over a thirty-day period by the
offering price per share of the Fund on the last day of the period. This value
is then annualized using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated each
month over a twelve-month period and is reinvested every six months. The yield
does not necessarily reflect income actually earned by the Fund because of
certain adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders. You should review the
performance figures for your insurance contract, which figures reflect the
applicable charges and expenses of the contract. Such performance figures will
accompany any advertisement of the Fund's performance.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any indices
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
o Lipper Analytical Services, Inc., for example, makes comparative
calculations for one-month, three-month, one-year, and five-year periods
which assume the reinvestment of all capital gains distributions and income
dividends.
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 sales literature for the Fund may quote total returns which
are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
annual reinvestment of dividends over a specified period of time.
From time to time as it deems appropriate the Fund may advertise its performance
using charts, graphs, and descriptions, compared to federally insured bank
products, including certificates of deposit and time deposits and to money
market fund using the Lipper Analytical Services money market instruments
average.
Appendix
Standard and Poor's Ratings Group Bond Rating Definitions
AAA-Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB-Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B-Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC-Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal.
CC-The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C-The rating C typically is applied to debt subordinated to senior debt which is
assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI-The rating CI is reserved for income bonds on which no interest is being
paid.
D-Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's Investors Service, Inc. Corporate Bond Ratings
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba-Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated C represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA-Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit quality.
The obligator's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and, therefore, impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB-Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this call are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
CCC-Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probably over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD,DD, and D-Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Standard & Poor's Ratings Group Commercial Paper Rating
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree
Moody's Investors Service, Inc. Commercial Paper Rating
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch Investors Service, Inc. Short-Term Debt Rating
F-1+ - Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 - Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated F-
1+.
F-2 - Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.
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