1933 Act File No. 33-69268
1940 Act File No. 811-8042
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ...............................
Post-Effective Amendment No. 21 ................................... X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 22 .............................................. X
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FEDERATED INSURANCE SERIES
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds, 5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
_ immediately upon filing pursuant to paragraph (b) on pursuant to paragraph
(b) 60 days after filing pursuant to paragraph (a) (i) on __________________
pursuant to paragraph (a) (i)
X 75 days after filing pursuant to paragraph (a)(ii) on _________________
pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Copies To:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
PROSPECTUS
FEDERATED SMALL CAP STRATEGIES FUND II
A Portfolio of Federated Insurance Series
A mutual fund seeking capital appreciation by investing primarily in equity
securities of small cap companies.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and 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.
CONTENTS
What are the Fund's Investment
Strategies? What are the Principal
Securities in Which the Fund
Invests? What are the Specific Risks
of Investing in the Fund?
What Do Shares Cost?
How is the Fund Sold?
How to Purchase and Redeem Shares
Account and Share Information
Who Manages the Fund?
Financial Information
april __, 1999
<PAGE>
RISK/RETURN SUMMARY
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide capital appreciation. While there
is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the strategies and policies described in this
prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies that fall within the market
capitalization range of the S&P 600 Small Cap Index. The Adviser invests in
companies that offer growth prospects or in companies whose stock is
undervalued.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
The value of equity securities in the Fund's portfolio will go up and down.
These fluctuations could be a sustained trend or a drastic movement. The Fund's
portfolio will reflect changes in prices of individual portfolio stocks or
general changes in stock valuations. Consequently, the Fund's share price may
decline and you could lose money. Other risks of investing in the Fund include:
Liquidity Risks, Risks Related to Company Size, Sector Risk, and Risk of Foreign
Investing.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.
WHAT ARE THE FUND'S INVESTMENT STRATEGIES?
The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies that fall within the market
capitalization range of the S&P 600 Small Cap Index (Index). As of October 21,
1998 this range was $18.5 million to $3.2 billion. Market capitalization is
determined by multiplying the number of outstanding shares by the current market
price per share.
The Adviser invests in companies that offer growth prospects or in companies
whose stock is undervalued. Using its own quantitative process, the Adviser
rates the future performance potential of companies. The Adviser evaluates each
company's earnings quality in light of their current valuation to narrow the
list of attractive companies. The Adviser then evaluates product positioning,
management quality and sustainability of current growth trends of those
companies. Using this type of fundamental analysis, the Adviser selects the most
promising companies for the Fund's portfolio.
Companies with similar characteristics may be grouped together in broad
categories called sectors. In determining the amount to invest in a security,
the Adviser limits the Fund's exposure to each business sector that comprises
the Index. The Fund's allocation to a sector will not be less than 50% or more
than 200% of the Index's allocation to that sector. The Fund ordinarily will
hold between 80 and 300 companies in its portfolio.
The Fund may also seek capital appreciation by buying securities in initial
public offerings. The Fund will participate in such offerings without regard to
the issuer's market capitalization. The Adviser may select initial public
offerings based on its fundamental analysis of the issuer.
The Fund may attempt to manage market risk by buying and selling financial
futures and options. This may include the purchase of index futures contracts as
a substitute for direct investments in stocks. It may also include the purchase
and sale of options to protect against general declines in small capitalization
stocks economically.
PORTFOLIO TURNOVER
The Fund actively trades its portfolio securities in an attempt to achieve its
investment objective. Active trading will cause the Fund to have an increased
portfolio turnover rate, which is likely to generate shorter-term gains (losses)
for its shareholders, which are taxed at a higher rate than longer-term gains
(losses). Actively trading portfolio securities increases the Fund's trading
costs and may have an adverse impact the Fund's performance.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash, cash items, and shorter-term, higher quality debt
securities and similar obligations. It may do this to minimize potential losses
and maintain liquidity to meet shareholder redemptions during adverse market
conditions. This may cause the Fund to give up greater investment returns to
maintain the safety of principal, that is, the original amount invested by
shareholders.
WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common
stockholders receive the residual value of the issuer's earnings and assets
after the issuer pays its creditors and any preferred stockholders. As a result,
changes in an issuer's earnings directly influence the value of its common
stock.
AMERICAN DEPOSITARY RECEIPTS
American Depositary Receipts represent interests in underlying securities issued
by a foreign company, but traded in another market than the underlying security.
The foreign securities underlying American Depositary Receipts (ADRs) are traded
in the U.S. ADRs provide a way to buy shares of foreign-based companies in the
U.S. rather than in overseas markets. ADRs are also traded in U.S. dollars,
eliminating the need for foreign exchange transactions. Depositary Receipts
involve many of the same risks of investing directly in foreign securities,
including Country Risk and Currency Risk.
WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?
STOCK MARKET RISKS
Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. The value of equity securities in the Fund's
portfolio will go up and down. These fluctuations could be a sustained trend or
a drastic movement. The Fund's portfolio will reflect changes in prices of
individual portfolio stocks or general changes in stock valuations.
Consequently, the Fund's share price may decline and you could lose money.
The Fund's investment adviser attempts to manage market risk of investing in
individual securities by limiting the amount the Fund invests in each stock.
LIQUIDITY RISKS
Equity securities that are not widely held may trade less frequently than more
widely held securities. This limits trading opportunity, making it more
difficult to sell or buy the securities at a favorable price or time. In
response, the Fund may have to lower the price, sell other securities, or give
up an investment opportunity, any of which could have a negative effect on its
performance. Infrequent trading may also lead to greater price volatility.
RISK RELATED TO COMPANY SIZE
Generally, the smaller the market capitalization of a company, the fewer the
number of shares traded daily, the less liquid its stock and the more volatile
its price. Market capitalization is determined by multiplying the number of
outstanding shares by the current market price per share.
In addition, investing in small capitalization companies entails greater risk
because these companies may have unproven track records, limited product or
service base, limited access to capital and may be more likely to fail than
larger, more established companies.
SECTOR RISK
Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain sector
may perform differently than other sectors or as the market as a whole. As the
adviser allocates more of the Fund's portfolio holdings to a particular sector,
the Fund's performance will be more susceptible to any economic, business or
other developments which generally affect that sector.
RISK OF FOREIGN INVESTING
Exchange rates for currency fluctuate daily. The combination of currency risk
and market risks tends to make securities traded in foreign markets more
volatile than securities traded exclusively in the U.S.
Foreign securities pose additional risks because foreign economic or political
conditions may be less favorable than those of the United States. Foreign
financial markets may also have fewer investor protections. Securities in
foreign markets may also be subject to taxation policies that reduce returns for
U.S. investors.
Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.
WHAT DO SHARES COST?
Shares can be purchased or redeemed by participating insurance companies any day
the New York Stock Exchange (NYSE) is open. Transaction requests received in
proper form are processed at the next calculated net asset value (NAV). NAV is
determined at the end of regular trading (normally 4:00 p.m. Eastern time) each
day the NYSE is open.
HOW IS THE FUND SOLD?
The Fund's Distributor markets the Shares described in this prospectus to
insurance companies as funding vehicles for variable annuity contracts and
variable life insurance policies issued by the insurance companies.
When the Distributor receives marketing fees, it may pay some or all of them to
investment professionals. The Distributor and its affiliates may pay out of
their assets other amounts (including items of material value) to investment
professionals for marketing and servicing Shares. The Distributor is a
subsidiary of Federated Investors, Inc. (Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Shares. Because these Shares pay marketing fees
on an ongoing basis, your investment cost may be higher over time than other
shares with different sales charges and marketing fees. The Fund is not
currently paying any 12b-1 fees under the Rule 12b-1 Plan. Should the Fund begin
to pay these fees, shareholders will be notified.
HOW TO PURCHASE AND REDEEM SHARES
Shares are used solely as the investment vehicle for separate accounts of
participating insurance companies offering variable annuity contracts and
variable life insurance policies. The general public has access to the Fund only
by purchasing a variable annuity contract or variable life insurance policy
(thus becoming a contract owner).
Shares are not sold directly to the general public.
Purchase orders must be received by your participating insurance company by 4:00
p.m. (Eastern time). The order will be processed at the NAV calculated on that
day if the Fund receives from the participating insurance company:
o orders in proper form by 8:00 a.m. (Eastern time) on the next business day;
and
o federal funds on the business day following the day the Fund received the
order.
Participating insurance companies are responsible for properly transmitting
purchase orders and federal funds to the Fund.
ACCOUNT AND SHARE INFORMATION
DIVIDENDS
The Fund declares and pays any dividends annually.
Shares of the Fund will begin earning dividends if owned on the record date.
Dividends of the Fund are automatically reinvested in additional shares.
TAX INFORMATION
The Fund intends to comply with variable asset diversification regulations. If
the Fund fails to comply with these regulations, contracts invested in the Fund
will 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.
Contract owners are urged to consult their own tax advisers regarding the status
of their contracts under state and local tax laws.
WHO MANAGES THE FUND?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Advisers. The Adviser manages the Fund's assets, including
buying and selling portfolio securities. The Adviser's address is Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Fund's portfolio managers are:
Aash M. Shah has been the Fund's portfolio manager since inception. Mr.
Shah joined Federated Investors in 1993 and has been a Portfolio Manager and a
Vice President of the Fund's investment adviser since January 1997. Mr. Shah was
a Portfolio Manager and served as an Assistant Vice President of the investment
adviser from 1995 to 1996, and as an Investment Analyst from 1993 to 1995. Mr.
Shah received his Masters in Industrial Administration from Carnegie Mellon
University with a concentration in finance and accounting. Mr. Shah is a
Chartered Financial Analyst.
Keith J. Sabol has been the Fund's portfolio manager since inception. Mr.
Sabol joined Federated Investors in 1994 and has been a Portfolio Manager since
1996 and a Vice President of the Fund's investment adviser since 1998. Mr. Sabol
was an Investment Analyst, and then Equity Research Coordinator for the Fund's
adviser from 1994 to 1996. ^ Mr. Sabol is a Chartered Financial Analyst; he
earned his M.S. in Industrial Administration from Carnegie Mellon University.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which total approximately $110 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with 1,900
employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.75% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999. The Year 2000 problem may cause systems to process information incorrectly
and could disrupt businesses that rely on computers, like the Fund.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications. The Fund's service providers are
making changes to their computer systems to fix any Year 2000 problems. In
addition, they are working to gather information from third-party providers to
determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase.
The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.
<PAGE>
FINANCIAL INFORMATION
The Fund's fiscal year end is December 31. As this is the Fund's first fiscal
year, financial information is not yet available.
FEDERATED SMALL CAP STRATEGIES FUND II
A Portfolio of Federated Insurance Series
A Statement of Additional Information (SAI) dated April __, 1999 is incorporated
by reference into this prospectus. To obtain the SAI without charge call the
Fund at 1-800-341-7400. To obtain other information, call your investment
professional or the Fund.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
INVESTMENT COMPANY ACT FILE NO. 811-8042
CUSIP 000000000
000000-00 (4/99)
STATEMENT OF ADDITIONAL INFORMATION
FEDERATED SMALL CAP STRATEGIES FUND II
A Portfolio of Federated Insurance Series
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Growth Strategies Fund II
(Fund), dated April __, 1999. This SAI incorporates by reference the Fund's
Annual Report. Obtain the prospectus or the Annual Report without charge by
calling 1-800-341-7400.
april __, 1999
CONTENTS
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Addresses
CUSIP_______
__________ (4/99)
<PAGE>
HOW IS THE FUND ORGANIZED?
The Fund is a diversified portfolio of Federated Insurance Series (Trust). The
Trust is an open-end, management investment company that was established under
the laws of the Commonwealth of Massachusetts on September 15, 1993. The Trust
may offer separate series of shares representing interests in separate
portfolios of securities. The Trust changed its name from Insurance Management
Series to Federated Insurance Series on November 14, 1995. The Fund's investment
adviser is Federated Advisers (Adviser).
SECURITIES IN WHICH THE FUND INVESTS
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
EQUITY SECURITIES
Equity securities represent a share of an issuer's earnings and assets, after
the issuer pays its liabilities. The Fund cannot predict the income it will
receive from equity securities because issuers generally have discretion as to
the payment of any dividends or distributions. However, equity securities offer
greater potential for appreciation than many other types of securities, because
their value increases directly with the value of the issuer's business. The
following describes the types of equity securities in which the Fund invests.
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings
directly influence the value of its common stock. PREFERRED STOCKS Preferred
stocks have the right to receive specified dividends or distributions before
the issuer makes payments on its common stock. Some preferred stocks also
participate in dividends and distributions paid on common stock. Preferred
stocks may also permit the issuer to redeem the stock. The Fund may also
treat such
redeemable preferred stock as a fixed income security.
REAL ESTATE INVESTMENT TRUSTS (REITS)
REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax
if they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial
real estate market.
WARRANTS
Warrants give the Fund the option to buy the issuer's equity securities at a
specified price (the exercise price) at a specified future date (the
expiration date). The Fund may buy the designated securities by paying the
exercise price before the expiration date. Warrants may become worthless if
the price of the stock does not rise above the exercise price by the
expiration date. This increases the market risks of warrants as compared to
the underlying security. Rights are the same as warrants, except companies
typically issue rights to existing stockholders.
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
The following describes the types of fixed income securities in which the Fund
invests.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The
United States supports some GSEs with its full, faith and credit. Other GSEs
receive support through federal subsidies, loans or other benefits. A few
GSEs have no explicit financial support, but are regarded as having implied
support because the federal government sponsors their activities. Agency
securities are generally regarded as having low credit risks, but not as low
as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does
not reduce the market and prepayment risks of these mortgage backed
securities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types
of corporate debt securities. The Fund may also purchase interests in bank
loans to companies. The credit risks of corporate debt securities vary
widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust
preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer
any payment that would reduce its capital below regulatory requirements.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for
current expenditures. Most issuers constantly reissue their commercial
paper and use the proceeds (or bank loans) to repay maturing paper. If
the issuer cannot continue to obtain liquidity in this fashion, its
commercial paper may default. The short maturity of commercial paper
reduces both the market and credit risks as compared to other debt
securities of the same issuer.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit
and banker's acceptances. Yankee instruments are denominated in U.S.
dollars and issued by U.S. branches of foreign banks. Eurodollar
instruments are denominated in U.S. dollars and issued by non-U.S. branches
of U.S. or foreign banks.
DEMAND INSTRUMENTS
Demand instruments are corporate debt securities that the issuer must
repay upon demand. Other demand instruments require a third party, such
as a dealer or bank, to repurchase the security for its face value upon
demand. The Fund treats demand instruments as short-term securities,
even though their stated maturity may extend beyond one year.
<PAGE>
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities that the Fund has the option
to exchange for equity securities at a specified conversion price. The option
allows the Fund to realize additional returns if the market price of the equity
securities exceeds the conversion price. For example, the Fund may hold fixed
income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed income securities.
Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.
The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to market and
currency risks, and may also expose the Fund to liquidity and leverage risks.
OTC contracts also expose the Fund to credit risks in the event that a
counterparty defaults on the contract.
The Fund may trade in the following types of derivative contracts.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified
price, date, and time. Entering into a contract to buy an underlying asset
is commonly referred to as buying a contract or holding a long position in
the asset. Entering into a contract to sell an underlying asset is commonly
referred to as selling a contract or holding a short position in the asset.
Futures contracts are considered to be commodity contracts. Futures
contracts traded OTC are frequently referred to as forward contracts.
<PAGE>
OPTIONS
Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call
option gives the holder (buyer) the right to buy the underlying asset from
the seller (writer) of the option. A put option gives the holder the right
to sell the underlying asset to the writer of the option. The writer of the
option receives a payment, or premium, from the buyer, which the writer
keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
O Buy call options on portfolio securities, indexes and futures in
anticipation of an increase in the value of the underlying asset.; and
O Buy put options on portfolio securities, indexes and futures in anticipation
of a decrease in the value of the underlying asset.
The Fund may also write call options on portfolio securities, indexes and
futures to generate income from premiums, and in anticipation of a decrease
or only limited increase in the value of the underlying asset. If a call
written by the Fund is exercised, the Fund foregoes any possible profit from
an increase in the market price of the underlying asset over the exercise
price plus the premium received.
The Fund may also write put options on portfolio securities, indexes and
futures to generate income from premiums, and in anticipation of an increase
or only limited decrease in the value of the underlying asset. In writing
puts, there is a risk that the Fund may be required to take delivery of the
underlying asset when its current market price is lower than the exercise
price.
When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.
FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United States.
The Fund considers an issuer to be based outside the United States if:
o it is organized under the laws of, or has a principal office located in,
another country;
o the principal trading market for its securities is in another country; or
o it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.
Foreign securities are primarily denominated in foreign currencies. Along with
the risks normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign investing. Trading
in certain foreign markets is also subject to liquidity risks.
DEPOSITARY RECEIPTS
Depositary receipts represent interests in underlying securities issued by a
foreign company. Depositary receipts are not traded in the same market as
the underlying security. The foreign securities underlying American
Depositary Receipts (ADRs) are traded in the United States. ADRs provide a
way to buy shares of foreign-based companies in the United States rather
than in overseas markets. ADRs are also traded in U.S. dollars, eliminating
the need for foreign exchange transactions. The foreign securities
underlying European Depositary Receipts (EDRs), Global Depositary Receipts
(GDRs), and International Depositary Receipts (IDRs), are traded globally or
outside the United States. Depositary receipts involve many of the same
risks of investing directly in foreign securities, including currency risks
and risks of foreign investing.
FOREIGN EXCHANGE CONTRACTS
In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In
a spot trade, the Fund agrees to exchange one currency for another at the
current exchange rate. The Fund may also enter into derivative contracts in
which a foreign currency is an underlying asset. The exchange rate for
currency derivative contracts may be higher or lower than the spot exchange
rate. Use of these derivative contracts may increase or decrease the Fund's
exposure to currency risks.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples of these include, but are not limited to, the
International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Investment Bank and the Inter-American
Development Bank.
Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's full faith and credit.
Further, foreign government securities include mortgage-related securities
issued or guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually
agreed upon time and price. The repurchase price exceeds the sale price,
reflecting the Fund's return on the transaction. This return is unrelated to
the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the
Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor
the value of the underlying security each day to ensure that the value of
the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment
and delivery of the securities scheduled for a future time. During the
period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. The Fund records the
transaction when it agrees to buy the securities and reflects their value in
determining the price of its shares. Settlement dates may be a month or more
after entering into these transactions so that the market values of the
securities bought may vary from the purchase prices. Therefore, delayed
delivery transactions create market risks for the Fund. Delayed delivery
transactions also involve credit risks in the event of a counterparty
default. These transactions create leverage risks.
SECURITIES LENDING
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from
the borrower as collateral. The borrower must furnish additional collateral
if the market value of the loaned securities increases. Also, the borrower
must pay the Fund the equivalent of any dividends or interest received on
the loaned securities.
The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to
the borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower.
The Fund will not have the right to vote on securities while they are on
loan, but it will terminate a loan in anticipation of any important vote.
The Fund may pay administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash
collateral to a securities lending agent or broker.
Securities lending activities are subject to market risks and credit risks.
These transactions create leverage risks.
<PAGE>
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash. It
should be noted that investment companies incur certain expenses, such as
management fees, and, therefore, any investment by the Fund in shares of other
investment companies may be subject to such duplicate expenses.
The Fund may invest in mortgage-backed securities primarily by investing in
another mutual fund (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of the
adviser. This other mutual fund is managed independently of the Fund and may
incur administrative expenses. Therefore, any such investment by the Fund may be
subject to duplicate expenses. However, the adviser believes that the benefits
and efficiencies of this approach should outweigh the potential additional
expenses. The Fund may also invest in such securities directly.
INVESTMENT RISKS
There are many factors which may effect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
LEVERAGE RISKS
o Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.
BOND MARKET RISKS
o Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices
of fixed income securities fall.
o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of
a fixed income security to changes in interest rates.
CREDIT RISKS
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.
o Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.
o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating
is lowered, or the security is perceived to have an increased credit risk.
An increase in the spread will cause the price of the security to decline.
o Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to
lose the benefit of the transaction or prevent the Fund from selling or
buying other securities to implement its investment strategy.
CALL RISKS
o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market price.
An increase in the likelihood of a call may reduce the security's price.
o If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.
LIQUIDITY RISKS
o Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment
grade or are not widely held. These features may make it more difficult to
sell or buy a security at a favorable price or time. Consequently, the Fund
may have to accept a lower price to sell a security, sell other securities
to raise cash or give up an investment opportunity, any of which could have
a negative effect on the Fund's performance.
Infrequent trading of securities may also lead to an increase in their price
volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security when it wants to. If this happens, the Fund will be
required to continue to hold the security and the Fund could incur losses.
o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
o Securities rated below investment grade, also known as junk bonds, generally
entail greater market, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic downturns
and financial setbacks may affect their prices more negatively, and their
trading market may be more limited.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying stock index futures
contracts, put options on stock index futures, put options on financial
futures and portfolio securities, and writing covered call options, but
may obtain such short-term credits as may be necessary for clearance of
purchases and sales of portfolio securities. The deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed. The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of the Fund's total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options, and
segregation or collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options
on stock index futures, put options on financial futures, stock index
futures contracts, and put options on portfolio securities, and may
write covered call options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer. For these
purposes, the Fund takes all common stock and all preferred stock of an
issuer each as a single class, regardless of priorities, series,
designations, ot other differences.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate demand
notes, bonds, debentures, notes, certificates of indebtedness, or other
debt securities, entering into repurchase agreements, or engaging in
other transactions where permitted by the Fund's investment objective,
policies, and limitations.
The above investment limitations cannot be changed unless authorized by the
"vote of a majority of its outstanding voting securities," as defined by the
Investment Company Act. The following investment limitations, however, may be
changed by the Board without shareholder approval (except that no investment
limitation of the Fund shall prevent the Fund from investing substantially all
of its assets (except for assets which are not considered "investment
securities" under the Investment Company Act of 1940 or assets exempted by the
SEC) in an open-end investment company with substantially the same investment
objectives). Shareholders will be notified before any material changes in these
limitations becomes effective.
INVESTING IN RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are
any securities in which the Fund may invest pursuant to its investment
objective and policies but which are subject to restrictions on resale
under federal securities law. Under criteria established by the
Trustees, certain restricted securities are determined to be liquid. To
the extent that restricted securities are not determined to be liquid
the Fund will limit its purchase, together with other illiquid
securities, to 15% of its net assets.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
The Fund has no present intent to borrow money, pledge securities, or invest in
reverse repurchase agreements in excess of 5% of the value of its total assets
in the coming fiscal year. In addition, the Fund expects to lend not more than
5% of its total assets in the coming fiscal year.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price in the market in
which they are primarily traded (either a national securities exchange or
the over-the-counter market), if available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
o for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;
o futures contracts and options are valued at market values established by the
exchanges on which they are traded at the close of trading on such exchanges.
Options traded in the over-the-counter market are valued according to the
mean between the last bid and the last asked price for the option as provided
by an investment dealer or other financial institution that deals in the
option. The Board may determine in good faith that another method of valuing
such investments is necessary to appraise their fair market value;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as
determined in good faith by the Board; and
o for all other securities, at fair value as determined in good faith by the
Board.
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, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing its NAV, 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 NYSE. Certain foreign
currency exchange rates may also be determined at the latest rate prior to the
closing of the NYSE. 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 NYSE. 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 Fund's Board, although the actual
calculation may be done by others.
WHAT DO SHARES COST?
The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund.
<PAGE>
MIXED FUNDING AND SHARED FUNDING
Shares used as investments for both variable annuity contracts and variable life
insurance policies is called "mixed funding." Shares used as investments by
separate accounts of unaffiliated life insurance companies is called "shared
funding."
The Fund does engage in mixed funding and shared funding. Although the Fund does
not currently foresee any disadvantage to contract owners due to differences in
redemption rates, tax treatment, or other considerations resulting from mixed
funding or shared funding, the Trustees will closely monitor the operation of
mixed funding and shared funding and will consider appropriate action to avoid
material conflicts and take appropriate action in response to any material
conflicts which occur. Such action could result in one or more participating
insurance companies withdrawing their investment in the Fund.
HOW IS THE FUND SOLD?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.
RULE 12B-1 PLAN
As a compensation type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of bank, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. Also, the
Fund's service providers that receive asset-based fees also benefit from stable
or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-related or
shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
SUBACCOUNTING SERVICES
Certain participating insurance companies may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Participating insurance companies holding Shares in a fiduciary,
agency, custodial, or similar capacity may charge or pass through subaccounting
fees as part of or in addition to normal trust or agency account fees. They may
also charge fees for other services that may be related to the ownership of
Shares. This information should, therefore, be read together with any agreement
between the customer and the participating insurance company about the services
provided, the fees charged for those services, and any restrictions and
limitations imposed.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
ACCOUNT AND SHARE 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 the Trust have
equal voting rights, except that in matters affecting only a particular Fund,
only Shares of that Fund are entitled to vote.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Trust's outstanding shares
of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.
FOREIGN INVESTMENTS
If the Fund purchases foreign securities, their investment income 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. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.
Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the coupon income generated by the
portfolio, whereas tax basis income includes gains or losses attributable to
currency fluctuation. Due to differences in the book and tax treatment of fixed
income securities denominated in foreign currencies, it is difficult to project
currency effects on an interim basis. Therefore, to the extent that currency
fluctuations cannot be anticipated, a portion of distributions to shareholders
could later be designated as a return of capital, rather than income, for income
tax purposes, which may be of particular concern to simple trusts.
If the Fund invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to Federal income taxes upon disposition of PFIC investments.
If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Code may
limit a shareholder's ability to claim a foreign tax credit. Shareholders who
elect to deduct their portion of the Fund's foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax returns.
WHO MANAGES AND PROVIDES SERVICES TO THE FUND?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birthdate, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of nine
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser.
An asterisk (*) denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940. The following symbol (#) denotes
a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.
<TABLE>
<CAPTION>
NAME
BIRTHDATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITION WITH TRUST PRINCIPAL OCCUPATIONS FROM TRUST FROM TRUST AND
FOR PAST 5 YEARS ----------- FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer and Director or $0 $0 for the
Birthdate: July 28, 1924 Trustee of the Federated Fund Complex; Trust and
Federated Investors Chairman and Director, Federated Investors, 54 other
Tower Inc.; Chairman and Trustee, Federated investment
1001 Liberty Avenue Advisers, Federated Management, and companies
Pittsburgh, PA Federated Research; Chairman and Director, in the Fund
TRUSTEE AND CHARIMAN Federated Research Corp., and Federated Complex
Global Research Corp.; Chairman, Passport
Research, Ltd.
- -------------------------
THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: February 3, Complex; Director, Member of Executive the
1934 Committee, Children's Hospital of Trust and
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst 54 other
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, investment
TRUSTEE Inc.; Director, Member of Executive companies
Committee, University of Pittsburgh. in the Fund
Complex
- -------------------------
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
Birthdate: June 23, 1937 Complex; President, Investment Properties the
Wood/IPC Commercial Corporation; Senior Vice President, Trust and 54
Dept. John R. Wood and Associates, Inc., other
John R. Wood Realtors; Partner or Trustee in private investment
Associates, Inc. real estate ventures in Southwest Florida; companies
Realtors formerly: President, Naples Property in the Fund
3255 Tamiami Trial Management, Inc. and Northgate Village Complex
North Naples, FL Development Corporation.
TRUSTEE
- -------------------------
NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund $1,591.19 $47,958.02 f or
Birthdate: September 3, Complex; formerly: Partner, Andersen the
1939 Worldwide SC. Trust and 29
175 Woodshire Drive other
Pittsburgh, PA investment
TRUSTEE companies
in the Fund
Complex
- -------------------------
WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
Birthdate: July 4, 1918 Complex; Director and Member of the the
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; Trust and 54
Pittsburgh, PA formerly: Vice Chairman and Director, PNC other
TRUSTEE Bank, N.A., and PNC Bank Corp.; Director, investment
Ryan Homes, Inc. companies
in the Fund
Previous Postions: Director, United Complex
Refinery; Director, Forbes Fund; Chairman,
Pittsburgh Foundation; Chairman, Pittsburgh
Civic Light Opera.
- -------------------------
J. CHRISTOPHER DONAHUE*+ President or Executive Vice President of $0 $0 for the
Birthdate: April 11, the Federated Fund Complex; Director or Trust and 16
1949 Trustee of some of the Funds in the other
Federated Investors Federated Fund Complex; President and investment
Tower Director, Federated Investors, Inc.; companies
1001 Liberty Avenue President and Trustee, Federated Advisers, in the Fund
Pittsburgh, PA Federated Management, and Federated Complex
TRUSTEE AND PRESIDENT Research; President and Director, Federated
Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.
- -------------------------
JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
Birthdate: May 18, 1922 Complex; Attorney-at-law; Director, The the
571 Hayward Mill Road Emerging Germany Fund, Inc. Trust and 54
Concord, MA other
TRUSTEE Previous Postions: President, Boston Stock investment
Exchange, Inc.; Regional Administrator, companies
United States Securities and Exchange in the Fund
Commission. Complex
- -------------------------
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: October 11, Complex; Professor of Medicine, University the
1932 of Pittsburgh; Medical Director, University [Trust/Corporation]
3471 Fifth Avenue of Pittsburgh Medical Center - Downtown; and 54 other
Suite 1111 Hematologist, Oncologist, and Internist, investment
Pittsburgh, PA University of Pittsburgh Medical Center; companies
TRUSTEE Member, National Board of Trustees, in the Fund
Leukemia Society of America. Complex
- -------------------------
EDWARD L. FLAHERTY, Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
JR., ESQ. # Complex; Attorney, of Counsel, Miller, the
Birthdate: June 18, 1924 Ament, Henny & Kochuba; Director Emeritus, Trust and 54
Miller, Ament, Henny & Eat'N Park Restaurants, Inc.; formerly: other
Kochuba Counsel, Horizon Financial, F.A., Western investment
205 Ross Street Region; Partner, Meyer and Flaherty. companies
Pittsburgh, PA in the Fund
TRUSTEE Complex
- -------------------------
PETER E. MADDEN Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: March 16, Complex; formerly: Representative, the
1942 Commonwealth of Massachusetts General Trust and 54
One Royal Palm Way Court; President, State Street Bank and other
100 Royal Palm Way Trust Company and State Street Corporation. investment
Palm Beach, FL companies
TRUSTEE Previous Postions: Director, VISA USA and in the Fund
VISA International; Chairman and Director, Complex
Massachusetts Bankers Association;
Director, Depository Trust Corporation.
- -------------------------
JOHN E. MURRAY, JR., Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
J.D., S.J.D. Complex; President, Law Professor, Duquesne the
Birthdate: December 20, University; Consulting Partner, Mollica & Trust and 54
1932 Murray. other
President, Duquesne investment
University Previous Postions: Dean and Professor of companies
Pittsburgh, PA Law, University of Pittsburgh School of in the Fund
TRUSTEE Law; Dean and Professor of Law, Villanova Complex
University School of Law.
- -------------------------
WESLEY W. POSVAR Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: September Complex; President, World Society of the
14, 1925 Ekistics (metropolitan planning), Athens; Trust and 54
1202 Cathedral of Professor, International Politics; other
Learning Management Consultant; Trustee, Carnegie investment
University of Pittsburgh Endowment for International Peace, RAND companies
Pittsbugh, PA Corporation, Online Computer Library in the Fund
TRUSTEE Center, Inc., National Defense University Complex
and U.S. Space Foundation; President
Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency Management
Advisory Board; Trustee, Czech Management
Center, Prague.
Previous Postions: Professor, United States
Military Academy; Professor, United States
Air Force Academy.
- -------------------------
MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: June 21, 1935 Complex; Public the
4905 Bayard Street Relations/Marketing/Conference Planning. Trust and 54
Pittsburgh, PA other
TRUSTEE Previous Postions: National Spokesperson, investment
Aluminum Company of America; business owner. companies
in the Fund
Complex
- -------------------------
JOHN S. WALSH Director or Trustee of some of the $0 $0 for the
Birthdate: November 28, Federated Funds; President and Director, Trust and
1957 Heat Wagon, Inc.; President and Director, 23 other
2007 Sherwood Drive Manufacturers Products, Inc.; President, investment
Valparaiso, IN Portable Heater Parts, a division of companies
TRUSTEE Manufacturers Products, Inc.; Director, in the Fund
Walsh & Kelly, Inc.; formerly: Vice Complex
President, Walsh & Kelly, Inc.
- -------------------------
<PAGE>
EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birthdate: October 22, the Federated Fund Complex; President, Trust and 1
1930 Executive Vice President and Treasurer of other
Federated Investors some of the Funds in the Federated Fund investment
Tower Complex; Vice Chairman, Federated company
1001 Liberty Avenue Investors, Inc.; Vice President, Federated in the Fund
Pittsburgh, PA Advisers, Federated Management, Federated Complex
EXECUTIVE VICE PRESIDENT Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
- -------------------------
JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birthdate: October 26, the Federated Fund Complex; Executive Vice Trust and 54
1938 President, Secretary, and Director, other
Federated Investors Federated Investors, Inc.; Trustee, investment
Tower Federated Advisers, Federated Management, companies
1001 Liberty Avenue and Federated Research; Director, Federated in the Fund
Pittsburgh, PA Research Corp. and Federated Global Complex
EXECUTIVE VICE Research Corp.; Director, Federated
PRESIDENT AND SECRETARY Services Company; Director, Federated
Securities Corp.
- -------------------------
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; $0 $0 for the
Birthdate: June 17, Vice President - Funds Financial Services Trust and
1954 Division, Federated Investors, Inc.; 54 other
Federated Investors Formerly: various management positions investment
Tower within Funds Financial Services Division of companies
1001 Liberty Avenue Federated Investors, Inc. in the Fund
Pittsburgh, PA Complex
TREASURER
- -------------------------
RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birthdate: May 17, 1923 Funds in the Federated Fund Complex; Trust and
Federated Investors Director or Trustee of some of the Funds in 6 other
Tower the Federated Fund Complex; Executive Vice investment
1001 Liberty Avenue President, Federated Investors, Inc.; companies
Pittsburgh, PA Chairman and Director, Federated Securities in the Fund
VICE PRESIDENT Corp. Complex
- -------------------------
HENRY A. FRANTZEN Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: November 28, various other Funds in the Federated Fund Trust and 3
1942 Complex; Executive Vice President, other
Federated Investors Federated Investment Counseling, Federated investment
Tower Global Investment Management Corp., companies in
1001 Liberty Avenue Federated Advisers, Federated Management, the Fund Complex
Pittsburgh, PA Federated Research, and Passport Research,
CHIEF INVESTMENT OFFICER Ltd.; Registered Representative, Federated
Securities Corp.; Vice President, Federated
Investors, Inc.; Formerly: Executive Vice
President, Federated Investment Counseling
Institutional Portfolio Management Services
Division; Chief Investment Officer/Manager,
International Equities, Brown Brothers Harriman &
Co.; Managing Director, BBH Investment Management
Limited.
- -------------------------
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: March 3, 1949 various other Funds in the Federated Fund Trust and
Federated Investors Complex; Executive Vice President, 41 other
Tower Federated Investment Counseling, Federated investment
1001 Liberty Avenue Global Research Corp., Federated Advisers, companies
Pittsburgh, PA Federated Management, Federated Research, in the Fund
CHIEF INVESTMENT OFFICER and Passport Research, Ltd.; Registered Complex
Representative, Federated Securities Corp.;
Portfolio Manager, Federated Administrative
Services; Vice President, Federated Investors,
Inc.; Formerly: Executive Vice President and Senior
Vice President, Federated Investment Counseling
Institutional Portfolio Management Services
Division; Senior Vice President, Federated Research
Corp., Federated Advisers, Federated Management,
Federated Research, and Passport Research, Ltd.
- -------------------------
J. THOMAS MADDEN Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: October 22, various other Funds in the Federated Fund Trust and
1945 Complex; Executive Vice President, 12 other
Federated Investors Federated Investment Counseling, Federated investment
Tower Global Research Corp., Federated Advisers, companies
1001 Liberty Avenue Federated Management, Federated Research, in the Fund
Pittsburgh, PA and Passport Research, Ltd.; Vice Complex
CHIEF INVESTMENT OFFICER President, Federated Investors, Inc.;
Formerly: Executive Vice President and
Senior Vice President, Federated Investment
Counseling Institutional Portfolio
Management Services Division; Senior Vice
President, Federated Research Corp.,
Federated Advisers, Federated Management,
Federated Research, and Passport Research,
Ltd.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, President and Trustee
of the Trust.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly-owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
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 Fund Shares offered by the Distributor.
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. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). 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 Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
RESEARCH SERVICES
Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
MAXIMUM ADMINISTRATIVE AVERAGE AGGREGATE DAILY NET ASSETS OF THE FEDERATED
FEE FUNDS
0.150 of 1% on the first $250 million
- -------------------------
0.125 of 1% on the next $250 million
- -------------------------
0.100 of 1% on the next $250 million
- -------------------------
0.075 of 1% on 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 Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP is the independent public accountant for the Fund.
HOW DOES THE FUND MEASURE PERFORMANCE?
The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.
Unless otherwise stated, any quoted Share performance reflects the effect of
non-recurring charges, such as maximum sales charges, which, if excluded, would
increase the total return and yield. The performance of Shares depends upon such
variables as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences in the
Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
<PAGE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares 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 NAV 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 charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.
When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time, rather than
annualizing the total return.
YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a thirty-day period; by (ii) the maximum
offering price per Share on the last day of the period. This number 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 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Funds; and
o information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "short-term
investment grade debt funds" category in advertising and sales literature.
o LIPPER SMALL COMPANY GROWTH FUND AVERAGE is an average of the total returns
for 312 growth funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.
o LIPPER SMALL COMPANY GROWTH FUND INDEX is an average of the net
asset-valuated total returns for the top 30 small company growth funds
tracked by Lipper Analytical Services, Inc., an independent mutual fund
rating service.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
o WILSHIRE 5000 EQUITY INDEXES--consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available, and can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (S&P 500),
an unmanaged composite index of common stocks in industrial,
transportation, and financial and public utility companies, can be used to
gauge general market performance and to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the S&P 500 assumes reinvestments of all dividends paid by stocks
listed on its index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in the Standard &
Poor's figures.
o S&P 600 SMALL CAP is an unmanaged capitalization weighted index that
measures the performance of selected U.S. stocks with a small market
capitalization.
o STRATEGIC INSIGHT SMALL COMPANY GROWTH FUNDS INDEX consists of mutual funds
that invest in well-established companies primarily for long-term capital
gains rather than current income.
o STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING, ranks fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all capital gains distributions and
income dividends and takes into account any change in net asset value over
a specified period of time. From time to time, the Fund will quote its
Strategic Insight ranking in advertising and sales literature.
o RUSSELL 2000 SMALL STOCK INDEX is an unmanaged capitalization weighted
index consisting of 2,000 small capitalization common stocks. Investments
cannot be made in an index.
o VALUE LINE COMPOSITE INDEX consists of approximately 1,700 common equity
securities. It is based on a geometric average of relative price changes of
the component stocks and does not include income.
o VALUE LINE MUTUAL FUND SURVEY, published by Value Line Publishing, Inc.,
analyzes price, yield, risk, and total return for equity and fixed income
mutual funds. The highest rating is One, and ratings are effective for two
weeks.
o MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes price,
yield, risk, and total return for equity and fixed income funds.
o CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc.,
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o FINANCIAL PUBLICATIONS: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money Magazines, among
others--provide performance statistics over specified time periods.
WHO IS FEDERATED INVESTORS, INC.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state-of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 279 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset-backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated manages 9
mortgage-backed, 5 government/ agency and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion and $41.6 billion,
respectively. Federated trades approximately $425 million in U.S. government and
mortgage-backed securities daily and places approximately $25 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $43.2 billion in government funds within
these maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -William D. Dawson, III; and global equities and fixed
income - Henry A. Frantzen. The Chief Investment Officers are Executive Vice
Presidents of the Federated
advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Sales Division, Federated Securities Corp.
<PAGE>
INVESTMENT RATINGS
APPENDIX
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term, vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. 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. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B-rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 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.
MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as gilt
edged. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. 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 class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
o Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
o Well established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
<PAGE>
ADDRESSES
FEDERATED SMALL CAP STRATEGIES FUND II
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110-1617
PROSPECTUS
FEDERATED STRATEGIC INCOME FUND II
A Portfolio of Federated Insurance Series
A mutual fund seeking a high level of current income by investing in three
categories of fixed income securities: domestic investment grade, domestic
non-investment grade corporate and foreign.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and 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.
CONTENTS
What are the Fund's Investment
Strategies? What are the Principal
Securities in Which the Fund
Invests? What are the Specific Risks
of Investing in the Fund?
What Do Shares Cost?
How is the Fund Sold?
How to Purchase and Redeem Shares
Account and Share Information
Who Manages the Fund?
Financial Information
april __, 1999
<PAGE>
RISK/RETURN SUMMARY
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek a high level of current income. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the strategies and policies described in this
prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund allocates the portfolio among three categories of fixed income
securities: domestic investment grade (including U.S. government, mortgage
backed and corporate), domestic non-investment grade corporate and foreign.
Based upon historical returns, the Adviser expects the three categories of
investments to have different returns and risks under similar market conditions.
The Adviser relies on the differences in the expected performance of each
category to manage risks by allocating the Fund's portfolio among the three
categories. The Adviser also seeks to enhance the Fund's performance by
allocating more of its portfolio to the category that the Adviser expects to
offer the best balance between risk and return. While the Fund's portfolio
usually includes securities from all three categories, the Fund limits the
amount it may invest in a single category to 50% of assets.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
o a change in prevailing interest rates,
o defaults or an increase in the risk of defaults on portfolio securities,
o early redemptions or prepayments of portfolio securities, and
o fluctuations in the exchange rate between the U.S. dollar and foreign
currencies.
Fixed income securities rated below investment grade, also known as junk bonds,
generally entail greater risks than investment grade fixed income securities. An
investment in the Fund involves additional risks such as liquidity risks, sector
risks, currency risks, and risks of foreign investing.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.
WHAT ARE THE FUND'S INVESTMENT STRATEGIES?
The Fund allocates the portfolio among three categories of fixed income
securities: investment grade (including U.S. government, mortgage backed and
corporate), domestic non-investment grade corporate and foreign. In allocating
the Fund's portfolio among the three categories, the Adviser begins by analyzing
a variety of economic and market indicators, such as:
o the current level of global interest rates and the likely direction of
changes in interest rates,
o the current state of the global economy and the outlook for future economic
activity, and
o the historical returns of each category.
Based on this analysis, the Adviser compares the anticipated effects on the
performance and risks of each category of securities. The Adviser relies on the
differences in the expected performance of each category to manage risks by
allocating the Fund's portfolio among the three categories. The Adviser also
seeks to enhance the Fund's performance by allocating more of its portfolio to
the category that the Adviser expects to offer the best balance between risk and
return. While the Fund's portfolio usually includes securities from all three
categories, the Fund limits the amount it may invest in a single category to 50%
of assets.
The selection of portfolio securities involves an approach that is specific to
each category of fixed income securities. With regard to the selection of
domestic investment grade fixed income securities, the Adviser analyzes expected
trends in corporate earnings to determine the proper mix between U.S. government
securities, mortgage backed and corporate. The Adviser manages the U.S.
government securities domestic investment grade portion of the category by
analyzing the dollar weighted average duration. Duration measures the price
sensitivity of a group of fixed income securities to changes in interest rates.
The Adviser generally shortens the U.S. government securities' average duration
when it expects interest rates to rise and extends the duration when it expects
interest rates to fall. The Adviser selects U.S. government securities used to
lengthen or shorten the portfolio's duration by comparing the returns currently
offered by different investments to their historical and expected returns.
The Fund may invest in mortgage backed securities primarily by investing in
another mutual fund (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of the
Adviser. This other mutual fund is managed independently of the Fund and may
incur administrative expenses. Therefore, any such investment by the Fund may be
subject to duplicate expenses. However, the Adviser believes that the benefits
and efficiencies of this approach should outweigh the potential additional
expenses. The Fund may also invest in such securities directly.
In selecting U.S. government mortgage backed securities, the analysis involves a
duration evaluation similar to that of the U.S. government securities portion.
The analysis also focuses on the expected cash flows from the pool of mortgage
obligations supporting the security. To assess the relative returns and risks of
these securities, the Adviser analyzes how the timing, amount, and division of
cash flows from the pool might change in response to changing economic and
market conditions.
The Adviser uses corporate earnings analysis to determine which business sectors
and credit ratings to look for when investing the domestic corporate securities
portion of the category. In selecting a domestic corporate fixed income
security, the Adviser analyzes the business, competitive position, and financial
condition of the issuer to assess whether the security's risk is commensurate
with its potential return.
The Fund will invest in domestic non-investment grade corporate fixed income
securities primarily by investing in another mutual fund (which is not available
for general investment by the public) advised by an affiliate of the Adviser.
The other mutual fund is managed independently of the Fund and may incur
administrative expenses. Therefore, any such investment by the Fund may be
subject to duplicate expenses. However, the Adviser believes that the benefits
and efficiencies of this approach should outweigh the potential additional
expenses. The Fund may also invest directly in non-investment grade corporate
securities. Although the selection of domestic non-investment grade corporate
securities involves the same factors as investment grade securities, the Adviser
gives greater emphasis to its analysis of the issuer.
With regard to the foreign fixed income securities allocation, the Fund invests
in foreign government and corporate debt obligations. The securities may be
denominated in foreign currency or in U.S. dollars. The Adviser looks primarily
for securities offering higher interest rates. The Adviser attempts to manage
the risks of these securities in two ways: first, by investing the foreign
security portion of the portfolio in a large number of securities from a wide
range of foreign countries, and second, by allocating this portion of the
portfolio among countries whose markets, based on historical analysis, respond
differently to changes in the global economy.
In implementing this strategy, the Adviser also invests a portion of the foreign
securities allocation in emerging market countries. Many emerging market
countries issue securities rated below investment grade. The Fund may invest up
to 80% of its foreign securities portfolio in emerging markets, with the balance
invested in developed markets.
The Adviser weighs several factors in selecting investments for the portfolio.
First, the Adviser analyzes a country's general economic condition and outlook,
including its interest rates, foreign exchange rates and current account
balance. The Adviser then analyzes the country's financial condition, including
its credit ratings, government budget, tax base, outstanding public debt and the
amount of public debt held outside the country. In connection with this
analysis, the Adviser also considers how developments in other countries in the
region or the world might affect these factors. Using its analysis, the Adviser
tries to identify countries with favorable characteristics, such as a
strengthening economy, favorable inflation rate, sound budget policy or strong
public commitment to repay government debt. The Adviser then analyzes the
business, competitive position, and financial condition of the issuer to assess
whether the security's risk is commensurate with its potential return.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash, cash items, and shorter-term, higher quality debt
securities and similar obligations. It may do this to minimize potential losses
and maintain liquidity to meet shareholder redemptions during adverse market
conditions. This may cause the Fund to give up greater investment returns to
maintain the safety of principal, that is, the original amount invested by
shareholders.
WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
The following describes the types of fixed income securities in which the Fund
invests.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The
United States supports some GSEs with its full, faith and credit. Other GSEs
receive support through federal subsidies, loans or other benefits. A few
GSEs have no explicit financial support, but are regarded as having implied
support because the federal government sponsors their activities. Agency
securities are generally regarded as having low credit risks, but not as low
as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does
not reduce the market and prepayment risks of these mortgage backed
securities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types
of corporate debt securities. The Fund may also purchase interests in bank
loans to companies. The credit risks of corporate debt securities vary
widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust
preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer
any payment that would reduce its capital below regulatory requirements.
<PAGE>
MORTGAGE BACKED SECURITIES
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer
deducts its fees and expenses and passes the balance of the payments onto
the certificate holders once a month. Holders of pass-through certificates
receive a pro rata share of all payments and pre-payments from the
underlying mortgages. As a result, the holders assume all the prepayment
risks of the underlying mortgages.
The Fund may invest in mortgage-backed securities primarily by investing in
another mutual fund (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of
the Adviser. This other mutual fund is managed independently of the Fund and
may incur administrative expenses. Therefore, any such investment by the
Fund may be subject to duplicate expenses. However, the Adviser believes
that the benefits and efficiencies of this approach should outweigh the
potential additional expenses. The Fund may also invest in such securities
directly.
FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United States.
The Fund considers an issuer to be based outside the United States if:
o it is organized under the laws of, or has a principal office located in,
another country;
o the principal trading market for its securities is in another country; or
o it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.
Foreign securities are often denominated in foreign currencies. Along with the
risks normally associated with domestic fixed income securities, foreign
securities are subject to currency risks and risks of foreign investing.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities that the Fund has the option
to exchange for equity securities at a specified conversion price. The option
allows the Fund to realize additional returns if the market price of the equity
securities exceeds the conversion price. For example, the Fund may hold fixed
income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed income securities.
Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.
The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security after the issuer defaults. In some cases
the company providing credit enhancement makes all payments directly to the
security holders and receives reimbursement from the issuer. Normally, the
credit enhancer has greater financial resources and liquidity than the issuer.
For this reason, the Adviser may evaluate the credit risk of a fixed income
security based solely upon its credit enhancement.
<PAGE>
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determinate whether a security is investment grade based upon
the credit ratings given by one or more nationally recognized rating services.
For example, Standard and Poor's, a rating service, assigns ratings to
investment grade securities (AAA, AA, A, and BBB) based on their assessment of
the likelihood of the issuer's inability to pay interest or principal (default)
when due on each security. Lower credit ratings correspond to higher credit
risk. If a security has not received a rating, the Fund must rely entirely upon
the Adviser's credit assessment that the security is comparable to investment
grade.
WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?
BOND MARKET RISKS
o Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices
of fixed income securities fall.
O Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of
a fixed income security to changes in interest rates.
CREDIT RISKS
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.
o Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.
o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating
is lowered, or the security is perceived to have an increased credit risk.
An increase in the spread will cause the price of the security to decline.
o Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to
lose the benefit of the transaction or prevent the Fund from selling or
buying other securities to implement its investment strategy.
CALL AND PREPAYMENT RISKS
o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market price.
An increase in the likelihood of a call may reduce the security's price.
o If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.
o Generally, homeowners have the option to prepay their mortgages at any time
without penalty. Homeowners frequently refinance high interest rate
mortgages when mortgage rates fall. This results in the prepayment of
mortgage backed securities with higher interest rates. Conversely,
prepayments due to refinancings decrease when mortgage rates increase. This
extends the life of mortgage backed securities with lower interest rates. As
a result, increases in prepayments of high interest rate mortgage backed
securities, or decreases in prepayments of lower interest rate mortgage
backed securities, may reduce their yield and price. This relationship
between interest rates and mortgage prepayments makes the price of mortgage
backed securities more volatile than most other types of fixed income
securities with comparable credit risks.
LIQUIDITY RISKS
o Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment
grade or are not widely held. These features may make it more difficult to
sell or buy a security at a favorable price or time. Consequently, the Fund
may have to accept a lower price to sell a security, sell other securities
to raise cash or give up an investment opportunity, any of which could have
a negative effect on the Fund's performance.
Infrequent trading of securities may also lead to an increase in their price
volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security when it wants to. If this happens, the Fund will be
required to continue to hold the security and the Fund could incur losses.
SECTOR RISKS
o A substantial part of the Fund's portfolio may be comprised of securities
issued or credit enhanced by companies in similar businesses, or with other
similar characteristics. As a result, the Fund will be more susceptible to
any economic, business, political, or other developments which generally
affect these issuers.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
o Securities rated below investment grade, also known as junk bonds, generally
entail greater market, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic downturns
and financial setbacks may affect their prices more negatively, and their
trading market may be more limited. The Fund has no minimum rating
requirement for such securities.
CURRENCY RISKS
o Exchange rates for currencies fluctuate daily. The combination of currency
risk and market risks tends to make securities traded in foreign markets
more volatile than securities traded exclusively in the U.S.
o The adviser attempts to manage currency risk by limiting the amount the Fund
invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in the
value of the U.S. dollar relative to other currencies.
RISKS OF FOREIGN INVESTING
o Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United States.
Securities in foreign markets may also be subject to taxation policies that
reduce returns for U.S. investors.
o Foreign countries may have restrictions on foreign ownership or may impose
exchange controls, capital flow reductions or repatriation restrictions
which could adversely affect the Fund's investments.
o Foreign financial markets may have fewer investor protections than domestic
markets. For instance, there may be less publicly available information
about foreign companies and foreign countries may lack uniform accounting,
auditing and financial reporting standards or regulatory requirements
comparable to those applicable to U.S. companies.
o Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.
WHAT DO SHARES COST?
Shares can be purchased or redeemed by participating insurance companies any day
the New York Stock Exchange (NYSE) is open. Transaction requests received in
proper form are processed at the next calculated net asset value (NAV). NAV is
determined at the end of regular trading (normally 4:00 p.m. Eastern time) each
day the NYSE is open.
<PAGE>
HOW IS THE FUND SOLD?
The Fund's Distributor markets the Shares described in this prospectus to
insurance companies as funding vehicles for variable annuity contracts and
variable life insurance policies issued by the insurance companies.
When the Distributor receives marketing fees, it may pay some or all of them to
investment professionals. The Distributor and its affiliates may pay out of
their assets other amounts (including items of material value) to investment
professionals for marketing and servicing Shares. The Distributor is a
subsidiary of Federated Investors, Inc. (Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Shares. Because these Shares pay marketing fees
on an ongoing basis, your investment cost may be higher over time than other
shares with different sales charges and marketing fees. The Fund is not
currently paying any 12b-1 fees under the Rule 12b-1 Plan. Should the Fund begin
to pay these fees, shareholders will be notified.
HOW TO PURCHASE AND REDEEM SHARES
Shares are used solely as the investment vehicle for separate accounts of
participating insurance companies offering variable annuity contracts and
variable life insurance policies. The general public has access to the Fund only
by purchasing a variable annuity contract or variable life insurance policy
(thus becoming a contract owner).
Shares are not sold directly to the general public.
Purchase orders must be received by your participating insurance company by 4:00
p.m. (Eastern time). The order will be processed at the NAV calculated on that
day if the Fund receives from the participating insurance company:
o orders in proper form by 8:00 a.m. (Eastern time) on the next business day;
and
o federal funds on the business day following the day the Fund received the
order.
Participating insurance companies are responsible for properly transmitting
purchase orders and federal funds to the Fund.
ACCOUNT AND SHARE INFORMATION
DIVIDENDS
The Fund declares and pays any dividends annually.
Shares of the Fund will begin earning dividends if owned on the record date.
Dividends of the Fund are automatically reinvested in additional shares.
TAX INFORMATION
The Fund intends to comply with variable asset diversification regulations. If
the Fund fails to comply with these regulations, contracts invested in the Fund
will 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.
Contract owners are urged to consult their own tax Advisers regarding the status
of their contracts under state and local tax laws.
WHO MANAGES THE FUND?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Advisers. The Adviser manages the Fund's assets, including
buying and selling portfolio securities. The Adviser's address is Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser has delegated daily management of some of the Fund assets to the
Sub-Adviser, Federated Global Investment Management Corp. (formerly, Federated
Global Research Corp.), who is paid by the Adviser and not the Fund, based on
the portion of foreign securities the Sub-Adviser manages.
The Fund's portfolio managers are:
Joseph M. Balestrino has been the Fund's portfolio manager since inception.
Mr. Balestrino joined Federated Investors in 1986 and has been a Senior
Portfolio Manager and Senior Vice President of the Fund's Adviser since 1998. He
was a Portfolio Manager and a Vice President of the Fund's investment adviser
from 1995 to 1998. Mr. Balestrino served as a Portfolio Manager and an Assistant
Vice President of the investment adviser from 1993 to 1995. Mr. Balestrino is a
Chartered Financial Analyst and received his Master's Degree in Urban and
Regional Planning from the University of Pittsburgh.
Mark E. Durbiano has been the Fund's portfolio manager since inception. Mr.
Durbiano joined Federated Investors in 1982 and has been a Senior Portfolio
Manager and a Senior Vice President of the Fund's investment adviser since 1996.
From 1988 through 1995, Mr. Durbiano was a Portfolio Manager and a Vice
President of the Fund's investment adviser. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
Kathleen M. Foody-Malus has been the Fund's portfolio manager since
inception. Ms. Foody-Malus joined Federated Investors in 1983 and has been a
Senior Portfolio Manager since 1996 and a Vice President of the Fund's
investment adviser since 1993. She was a Portfolio Manager and a Vice President
of the Fund's investment adviser from 1993 to 1996. Ms. Foody-Malus received her
M.B.A. in Accounting/Finance from the University of Pittsburgh.
Henry A. Frantzen has served in this capacity since inception. Mr. Frantzen
joined Federated Investors, Inc., or its predecessor in 1995 as an Executive
Vice President of Federated Global Investment Management Corp. Mr. Frantzen is
the Chief Investment Officer for the Global and International funds in the
Federated Fund Complex. Mr. Frantzen served as Chief Investment Officer of
international equities at Brown Brothers Harriman & Co. from 1992 until 1995.
Drew J. Collins has been the Fund's portfolio manager since inception. Mr.
Collins joined Federated Investors in 1995 as a Senior Portfolio Manager and a
Senior Vice President of the Fund's Sub-Adviser. Mr. Collins served as Vice
President/Portfolio Manager of international equity portfolios at Arnhold and
Bleichroeder, Inc. from 1994 to 1995. He served as an Assistant Vice
President/Portfolio Manager for international equities at the College Retirement
Equities Fund from 1986 to 1994. Mr. Collins is a Chartered Financial Analyst
and received his M.B.A. in finance from the Wharton School of The University of
Pennsylvania.
Robert M. Kowit has been the Fund's portfolio manager since inception. Mr.
Kowit joined Federated Investors in 1995 as a Senior Portfolio Manager and a
Vice President of the Fund's Adviser. Mr. Kowit served as a Managing Partner of
Copernicus Global Asset Management from January 1995 through October 1995. From
1990 to 1994, he served as Senior Vice President/Portfolio Manager of
International Fixed Income and Foreign Exchange for John Hancock Advisers. Mr.
Kowit received his M.B.A. from Iona College with a concentration in finance.
Micheal W. Casey, Ph.D. has been the Fund's portfolio manager since
inception. Mr. Casey joined Federated Investors in 1996 as a Senior Investment
Analyst and an Assistant Vice President. Mr. Casey currently serves as a
Portfolio Manager and has been a Vice President of the Adviser since 1998. Mr.
Casey served as an International Economist and Portfolio Strategist for Maria
Fiorini Ramirez Inc. from 1990 to 1996. Mr. Casey earned a Ph.D. concentrating
in economics from The New School for Social Research and
a M.Sc. from the London School of Economics.
The Adviser, the Sub-Adviser and other subsidiaries of Federated advise
approximately 175 mutual funds and separate accounts, which total approximately
$110 billion in assets as of December 31, 1998. Federated was established in
1955 and is one of the largest mutual fund investment managers in the United
States with 1,900 employees. More than 4,000 investment professionals make
Federated Funds available to their customers.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.85% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999. The Year 2000 problem may cause systems to process information incorrectly
and could disrupt businesses that rely on computers, like the Fund.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase.
The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.
<PAGE>
FINANCIAL INFORMATION
The Fund's fiscal year end is December 31. As this is the Fund's first fiscal
year, financial information is not yet available.
<PAGE>
FEDERATED STRATEGIC INCOME FUND II
A Portfolio of Federated Insurance Series
A Statement of Additional Information (SAI) dated April __, 1999 is incorporated
by reference into this prospectus. To obtain the SAI without charge call the
Fund at 1-800-341-7400. To obtain other information, call your investment
professional or the Fund.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
INVESTMENT COMPANY ACT FILE NO. 811-8042
CUSIP 000000000
000000-00 (4/99)
STATEMENT OF ADDITIONAL INFORMATION
FEDERATED STRATEGIC INCOME FUND II
A Portfolio of Federated Insurance Series
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Growth Strategies Fund II
(Fund), dated April __, 1999. This SAI incorporates by reference the Fund's
Annual Report. Obtain the prospectus or the Annual Report without charge by
calling 1-800-341-7400.
april __, 1999
CONTENTS
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Addresses
CUSIP_______
__________ (4/99)
<PAGE>
HOW IS THE FUND ORGANIZED?
The Fund is a diversified portfolio of Federated Insurance Series (Trust). The
Trust is an open-end, management investment company that was established under
the laws of the Commonwealth of Massachusetts on September 15, 1993. The Trust
may offer separate series of shares representing interests in separate
portfolios of securities. The Trust changed its name from Insurance Management
Series to Federated Insurance Series on November 14, 1995. The Fund's investment
adviser is Federated Advisers (Adviser) and the sub-adviser is Federated Global
Investment Management Corp. (Sub-Adviser).
SECURITIES IN WHICH THE FUND INVESTS
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
NON-PRINCIPAL INVESTMENT STRATEGY
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a derivative
contract that would normally increase in value under the same circumstances. The
Fund may attempt to lower the cost of hedging by entering into transactions that
provide only limited protection, including transactions that (1) hedge only a
portion of its portfolio, (2) use derivatives contracts that cover a narrow
range of circumstances or (3) involve the sale of derivatives contracts with
different terms. Consequently, hedging transactions will not eliminate risk even
if they work as intended. In addition, hedging strategies are not always
successful, and could result in increased expenses and losses to the Fund.
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
The following describes the types of fixed income securities in which the Fund
invests.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The
United States supports some GSEs with its full, faith and credit. Other GSEs
receive support through federal subsidies, loans or other benefits. A few
GSEs have no explicit financial support, but are regarded as having implied
support because the federal government sponsors their activities. Agency
securities are generally regarded as having low credit risks, but not as low
as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does
not reduce the market and prepayment risks of these mortgage backed
securities.
<PAGE>
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types
of corporate debt securities. The Fund may also purchase interests in bank
loans to companies. The credit risks of corporate debt securities vary
widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities. Some subordinated securities, such as trust
preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer
any payment that would reduce its capital below regulatory requirements.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for
current expenditures. Most issuers constantly reissue their commercial
paper and use the proceeds (or bank loans) to repay maturing paper. If
the issuer cannot continue to obtain liquidity in this fashion, its
commercial paper may default. The short maturity of commercial paper
reduces both the market and credit risks as compared to other debt
securities of the same issuer.
DEMAND INSTRUMENTS
Demand instruments are corporate debt securities that the issuer must
repay upon demand. Other demand instruments require a third party, such
as a dealer or bank, to repurchase the security for its face value upon
demand. The Fund treats demand instruments as short-term securities,
even though their stated maturity may extend beyond one year.
MUNICIPAL SECURITIES
Municipal securities are issued by states, counties, cities and other
political subdivisions and authorities. Although many municipal securities
are exempt from federal income tax, the Fund intends to invest in taxable
and tax-exempt municipal securities.
MORTGAGE BACKED SECURITIES
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer
deducts its fees and expenses and passes the balance of the payments onto
the certificate holders once a month. Holders of pass-through certificates
receive a pro rata share of all payments and pre-payments from the
underlying mortgages. As a result, the holders assume all the prepayment
risks of the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs, including interests in real estate mortgage investment conduits
(REMICs), allocate payments and prepayments from an underlying
pass-through certificate among holders of different classes of mortgage
backed securities. This creates different prepayment and market risks
for each CMO class.
SEQUENTIAL CMOS
In a sequential pay CMO, one class of CMOs receives all principal
payments and prepayments. The next class of CMOs receives all
principal payments after the first class is paid off. This process
repeats for each sequential class of CMO. As a result, each class of
sequential pay CMOs reduces the prepayment risks of subsequent
classes.
<PAGE>
PACS, TACS AND COMPANION CLASSES
More sophisticated CMOs include planned amortization classes (PACs)
and targeted amortization classes (TACs). PACs and TACs are issued
with companion classes. PACs and TACs receive principal payments and
prepayments at a specified rate. The companion classes receive
principal payments and prepayments in excess of the specified rate.
In addition, PACs will receive the companion classes' share of
principal payments, if necessary, to cover a shortfall in the
prepayment rate.
This helps PACs and TACs to control prepayment risks by increasing
the risks to their companion classes.
IOS AND POS
CMOs may allocate interest payments to one class (Interest Only or
IOs) and principal payments to another class (Principal Only or POs).
POs increase in value when prepayment rates increase. In contrast,
IOs decrease in value when prepayments increase, because the
underlying mortgages generate less interest payments. However, IOs
tend to increase in value when interest rates rise (and prepayments
decrease), making IOs a useful hedge against market risks.
FLOATERS AND INVERSE FLOATERS
Another variant allocates interest payments between two classes of
CMOs. One class (Floaters) receives a share of interest payments
based upon a market index such as LIBOR. The other class (Inverse
Floaters) receives any remaining interest payments from the
underlying mortgages. Floater classes receive more interest (and
Inverse Floater classes receive correspondingly less interest) as
interest rates rise. This shifts prepayment and market risks from the
Floater to the Inverse Floater class, reducing the price volatility
of the Floater class and increasing the price volatility of the
Inverse Floater class.
Z CLASSES AND RESIDUAL CLASSES
CMOs must allocate all payments received from the underlying
mortgages to some class. To capture any unallocated payments, CMOs
generally have an accrual (Z) class. Z classes do not receive any
payments from the underlying mortgages until all other CMO classes
have been paid off. Once this happens, holders of Z class CMOs
receive all payments and prepayments. Similarly, REMICs have residual
interests that receive any mortgage payments not allocated to another
REMIC class.
The degree of increased or decreased prepayment risks depends upon
the structure of the CMOs. However, the actual returns on any type of
mortgage backed security depend upon the performance of the
underlying pool of mortgages, which no one can predict and will vary
among pools.
ASSET BACKED SECURITIES
Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial
debts with maturities of less than ten years. However, almost any type
of fixed income assets (including other fixed income securities) may be
used to create an asset backed security. Asset backed securities may
take the form of commercial paper, notes, or pass through certificates.
Asset backed securities have prepayment risks. Like CMOs, asset backed
securities may be structured like Floaters, Inverse Floaters, IOs and
POs.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final
maturity unlike debt securities that provide periodic payments of
interest (referred to as a coupon payment). Investors buy zero coupon
securities at a price below the amount payable at maturity. The
difference between the purchase price and the amount paid at maturity
represents interest on the zero coupon security. An investor must wait
until maturity to receive interest and principal, which increases the
market and credit risks of a zero coupon security.
There are many forms of zero coupon securities. Some are issued at a
discount and are referred to as zero coupon or capital appreciation
bonds. Others are created from interest bearing bonds by separating the
right to receive the bond's coupon payments from the right to receive
the bond's principal due at maturity, a process known as coupon
stripping. Treasury STRIPs, IOs and POs are the most common forms of
stripped zero coupon securities. In addition, some securities give the
issuer the option to deliver additional securities in place of cash
interest payments, thereby increasing the amount payable at maturity.
These are referred to as pay-in-kind or PIK securities.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks.
Bank instruments include bank accounts, time deposits, certificates of
deposit and banker's acceptances. Yankee instruments are denominated
in U.S. dollars and issued by U.S. branches of foreign banks.
Eurodollar instruments are denominated in U.S. dollars and issued by
non-U.S. branches of U.S. or foreign banks.
INSURANCE CONTRACTS
Insurance contracts include guaranteed investment contracts, funding
agreements and annuities. The Fund treats these contracts as fixed income
securities.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees
to pay amounts due on a fixed income security after the issuer defaults.
In some cases the company providing credit enhancement makes all
payments directly to the security holders and receives reimbursement
from the issuer. Normally, the credit enhancer has greater financial
resources and liquidity than the issuer. For this reason, the Adviser
may evaluate the credit risk of a fixed income security based solely
upon its credit enhancement.
Common types of credit enhancement include guarantees, letters of
credit, bond insurance and surety bonds. Credit enhancement also
includes arrangements where securities or other liquid assets secure
payment of a fixed income security. Following a default, these assets
may be sold and the proceeds paid to security's holders. Either form of
credit enhancement reduces credit risks by providing another source of
payment for a fixed income security.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities that the Fund has the option
to exchange for equity securities at a specified conversion price. The option
allows the Fund to realize additional returns if the market price of the equity
securities exceeds the conversion price. For example, the Fund may hold fixed
income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed income securities.
Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.
The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.
EQUITY SECURITIES
Generally, less than 10% of the value of the Fund's total assets may be invested
in equity securities. The Fund may exceed this limitation for temporary
defensive purposes or if unusual market conditions occur. Equity securities
represent a share of an issuer's earnings and assets, after the issuer pays its
liabilities. Investors cannot predict the income they will receive from equity
securities because issuers generally have discretion as to the payment of any
dividends or distributions. However, equity securities offer greater potential
for appreciation than many other types of securities, because their value
increases directly with the value of the issuer's business.
The following describes the types of equity securities in which the Fund
invests.
COMMON STOCKS
Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings
directly influence the value of its common stock.
PREFERRED STOCKS
Preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and distributions paid on
common stock. Preferred stocks may also permit the issuer to redeem the
stock. The Fund may also treat such redeemable preferred stock as a fixed
income security.
WARRANTS
The Fund may invest up to 5% of its assets in warrants. Warrants give the
Fund the option to buy the issuer's equity securities at a specified price
(the exercise price) at a specified future date (the expiration date). The
Fund may buy the designated securities by paying the exercise price before
the expiration date. Warrants may become worthless if the price of the stock
does not rise above the exercise price by the expiration date. This
increases the market risks of warrants as compared to the underlying
security. Rights are the same as warrants, except companies typically issue
rights to existing stockholders.
FOREIGN SECURITIES
Foreign securities are securities of issuers based outside the United States.
The Fund considers an issuer to be based outside the United States if:
o it is organized under the laws of, or has a principal office located in,
another country;
o the principal trading market for its securities is in another country; or
o it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.
Foreign securities are primarily denominated in foreign currencies. Along with
the risks normally associated with domestic securities of the same type, foreign
securities are subject currency risks and risks of foreign investing. Trading in
certain foreign markets is also subject to liquidity risks.
BRADY BONDS
Brady bonds are U.S. dollar denominated debt obligations that foreign
governments issue in exchange for commercial bank loans. The International
Monetary Fund typically negotiates the exchange to cure or avoid a default
by restructuring the terms of the bank loans. The principal amount of some
Brady bonds is collateralized by zero coupon U.S. Treasury securities which
have the same maturity as the Brady bonds. However, neither the U.S.
government not the International Monetary Fund has guaranteed the repayment
of any Brady Bond.
FOREIGN EXCHANGE CONTRACTS
In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In
a spot trade, the Fund agrees to exchange one currency for another at the
current exchange rate. The Fund may also enter into derivative contracts in
which a foreign currency is an underlying asset. The exchange rate for
currency derivative contracts may be higher or lower than the spot exchange
rate. Use of these derivative contracts may increase or decrease the Fund's
exposure to currency risks.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples of these include, but are not limited to, the
International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Investment Bank and the Inter-American
Development Bank.
Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's full faith and credit.
Further, foreign government securities include mortgage-related securities
issued or guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to market and
currency risks, and may also expose the Fund to liquidity and leverage risks.
OTC contracts also expose the Fund to credit risks in the event that a
counterparty defaults on the contract.
The Fund may trade in the following types of derivative contracts.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified
price, date, and time. Entering into a contract to buy an underlying asset
is commonly referred to as buying a contract or holding a long position in
the asset. Entering into a contract to sell an underlying asset is commonly
referred to as selling a contract or holding a short position in the asset.
Futures contracts are considered to be commodity contracts. Futures
contracts traded OTC are frequently referred to as forward contracts.
OPTIONS
Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call
option gives the holder (buyer) the right to buy the underlying asset from
the seller (writer) of the option. A put option gives the holder the right
to sell the underlying asset to the writer of the option. The writer of the
option receives a payment, or premium, from the buyer, which the writer
keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
O Buy put options on portfolio securities, securities indices, and listed
put options on futures contracts in anticipation of a decrease in the
value of the underlying asset;
O Write covered call options on portfolio securities and listed call
options on futures contracts to generate income from premiums, and in
anticipation of a decrease or only limited increase in the value of the
underlying asset. If a call written by the Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying asset over the exercise price plus the premium received;
O Write secured put options on portfolio securities (to generate income
from premiums, and in anticipation of an increase or only limited
decrease in the value of the underlying asset). In writing puts, there
is a risk that the Fund may be required to take delivery of the
underlying asset when its current market price is lower than the
exercise price;
O When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts; and
O Buy or write options to close out existing options positions.
The Fund may also write call options on financial futures contracts to
generate income from premiums, and in anticipation of a decrease or only
limited increase in the value of the underlying asset. If a call written by
the Fund is exercised, the Fund foregoes any possible profit from an
increase in the market price of the underlying asset over the exercise price
plus the premium received.
The Fund may also write put options on financial futures contracts to
generate income from premiums, and in anticipation of an increase or only
limited decrease in the value of the underlying asset. In writing puts,
there is a risk that the Fund may be required to take delivery of the
underlying asset when its current market price is lower than the exercise
price.
When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.
HYBRID INSTRUMENTS
Hybrid instruments combine elements of derivative contracts with those of
another security (typically a fixed income security). All or a portion of the
interest or principal payable on a hybrid security is determined by reference to
changes in the price of an underlying asset or by reference to another benchmark
(such as interest rates, currency exchange rates or indices). Hybrid instruments
also include convertible securities with conversion terms related to an
underlying asset or benchmark.
The risks of investing in hybrid instruments reflect a combination of the risks
of investing in securities, options, futures and currencies, and depend upon the
terms of the instrument. Thus, an investment in a hybrid instrument may entail
significant risks in addition to those associated with traditional fixed income
or convertible securities. Hybrid instruments are also potentially more volatile
and carry greater market risks than traditional instruments. Moreover, depending
on the structure of the particular hybrid, it may expose the Fund to leverage
risks or carry liquidity risks.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually
agreed upon time and price. The repurchase price exceeds the sale price,
reflecting the Fund's return on the transaction. This return is unrelated to
the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the
Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor
the value of the underlying security each day to ensure that the value of
the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is
the seller (rather than the buyer) of the securities, and agrees to
repurchase them at an agreed upon time and price. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund. Reverse
repurchase agreements are subject to credit risks. In addition, reverse
repurchase agreements create leverage risks because the Fund must repurchase
the underlying security at a higher price, regardless of the market value of
the security at the time of repurchase.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash. It
should be noted that investment companies incur certain expenses, such as
management fees, and, therefore, any investment by the Fund in shares of other
investment companies may be subject to such duplicate expenses.
The Fund may invest in mortgage-backed securities primarily by investing in
another mutual fund (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of the
adviser. This other mutual fund is managed independently of the Fund and may
incur administrative expenses. Therefore, any such investment by the Fund may be
subject to duplicate expenses. However, the adviser believes that the benefits
and efficiencies of this approach should outweigh the potential additional
expenses. The Fund may also invest in such securities directly.
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create market
risks for the Fund. Delayed delivery transactions also involve credit risks in
the event of a counterparty default. These transactions create leverage risks.
TO BE ANNOUNCED SECURITIES (TBAS)
As with other when-issued transactions, a seller agrees to issue a TBA security
at a future date. However, the seller does not specify the particular securities
to be delivered. Instead, the Fund agrees to accept any security that meets
specified terms. For example, in a TBA mortgage-backed transaction, the Fund and
the seller would agree upon the issuer, interest rate and terms of the
underlying mortgages. However, the seller would not identify the specific
underlying mortgages until it issues the security. TBA mortgage-backed
securities increase market risks because the underlying mortgages may be less
favorable than anticipated by the Fund.
DOLLAR ROLLS
Dollar rolls are transactions where the Fund sells mortgage- backed securities
with a commitment to buy similar, but not identical, mortgage-backed securities
on a future date at a lower price. Normally, one or both securities involved are
TBA mortgage-backed securities. Dollar rolls are subject to market risks and
credit risks.
SECURITIES LENDING
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the
market value of the loaned securities increases. Also, the borrower must pay the
Fund the equivalent of any dividends or interest received on the loaned
securities.
The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower. The
Fund will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund may pay
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.
Securities lending activities are subject to market risks and credit risks.
These transactions create leverage risks.
ASSET COVERAGE
In order to secure its obligations in connection with derivatives contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations entering into an offsetting derivative contract or terminating
a special transaction. This may cause the Fund to miss favorable trading
opportunities or to realize losses on derivative contracts or special
transactions.
INVESTMENT RISKS
There are many factors which may effect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
STOCK MARKET RISKS
o The value of equity securities in the Fund's portfolio will rise and fall.
These fluctuations could be a sustained trend or a drastic movement. The
Fund's portfolio will reflect changes in prices of individual portfolio
stocks or general changes in stock valuations. Consequently, the Fund's
share price may decline and you could lose money.
o The Adviser attempts to manage market risk by limiting the amount the Fund
invests in each company's equity securities. However, diversification will
not protect the Fund against widespread or prolonged declines in the stock
market.
EURO RISKS
o The Fund may make significant investments in securities denominated in the
Euro, the new single currency of the European Monetary Union (EMU).
Therefore, the exchange rate between the Euro and the U.S. dollar will have
a significant impact on the value of the Fund's investments.
o With the advent of the Euro, the participating countries in the EMU can no
longer follow independent monetary policies. This may limit these countries'
ability to respond to economic downturns or political upheavals, and
consequently reduce the value of their foreign government securities.
LIQUIDITY RISKS
o Trading opportunities are more limited for fixed income securities that
have not received any credit ratings, have received ratings below
investment grade or are not widely held. These features may make it more
difficult to sell or buy a security at a favorable price or time.
Consequently, the Fund may have to accept a lower price to sell a security,
sell other securities to raise cash or give up an investment opportunity,
any of which could have a negative effect on the Fund's performance.
Infrequent trading of securities may also lead to an increase in their price
volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security when it wants to. If this happens, the Fund will be
required to continue to hold the security and the Fund could incur losses.
o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
o Securities rated below investment grade, also known as junk bonds, generally
entail greater market, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic downturns
and financial setbacks may affect their prices more negatively, and their
trading market may be more limited.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with the purchase and sale of
options, financial futures and options on financial futures, but may
obtain such short-term credits as may be necessary for clearance of
transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of the Fund's total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion of
the reverse repurchase agreements, the Fund will restrict the purchase
of portfolio instruments to money market instruments maturing on or
before the expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the time
of the borrowing. Margin deposits for the purchase and sale of options,
financial futures contracts and related options are not deemed to be a
pledge.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, except that the Fund may
purchase and sell financial futures contracts and related options.
Further, the Fund may engage in transactions in foreign currencies and
may purchase and sell options on foreign currencies and indices for
hedging purposes.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities of any one issuer (other
than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by U.S. government securities) if
as a result more than 5% of the value of its total assets would be
invested in the securities of that issuer or the Fund would own more
than 10% of the outstanding voting securities of that issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry or in government securities of any one foreign country,
except it may invest 25% or more of the value of its total assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent
the Fund from purchasing or holding U.S. government obligations, money
market instruments, variable rate demand notes, bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by the Fund's investment objective, policies, and limitations.
The above investment limitations cannot be changed unless authorized by the
"vote of a majority of its outstanding voting securities," as defined by the
Investment Company Act. The following investment limitations, however, may be
changed by the Board without shareholder approval (except that no investment
limitation of the Fund shall prevent the Fund from investing substantially all
of its assets (except for assets which are not considered "investment
securities" under the Investment Company Act of 1940 or assets exempted by the
SEC) in an open-end investment company with substantially the same investment
objectives). Shareholders will be notified before any material changes in these
limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits with maturities over seven days, interest rate swaps, caps and
floors determined by the investment adviser to be illiquid, and certain
securities not determined to be liquid under guidelines established by
the Trustees.
DEALING IN PUTS AND CALLS
The Fund may not write or purchase options, except that the Fund may
write covered call options and secured put options on up to 25% of its
nets assets and may purchase put and call options, provided that no more
than 5% of the fair market value of its net assets may be invested in
premiums on such options.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
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.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price in the market in
which they are primarily traded (either a national securities exchange or
the over-the-counter market), if available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
o for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;
o futures contracts and options are valued at market values established by
the exchanges on which they are traded at the close of trading on such
exchanges. Options traded in the over-the-counter market are valued
according to the mean between the last bid and the last asked price for the
option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that
another method of valuing such investments is necessary to appraise their
fair market value;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that
short-term obligations with remaining maturities of less than 60 days at
the time of purchase may be valued at amortized cost or at fair market
value as determined in good faith by the Board; and
o for all other securities, at fair value as determined in good faith by the
Board.
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, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing its NAV, 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 NYSE. Certain foreign
currency exchange rates may also be determined at the latest rate prior to the
closing of the NYSE. 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 NYSE. 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 Fund's Board, although the actual
calculation may be done by others.
WHAT DO SHARES COST?
The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund.
MIXED FUNDING AND SHARED FUNDING
Shares used as investments for both variable annuity contracts and variable life
insurance policies is called "mixed funding." Shares used as investments by
separate accounts of unaffiliated life insurance companies is called "shared
funding."
The Fund does engage in mixed funding and shared funding. Although the Fund does
not currently foresee any disadvantage to contract owners due to differences in
redemption rates, tax treatment, or other considerations resulting from mixed
funding or shared funding, the Trustees will closely monitor the operation of
mixed funding and shared funding and will consider appropriate action to avoid
material conflicts and take appropriate action in response to any material
conflicts which occur. Such action could result in one or more participating
insurance companies withdrawing their investment in the Fund.
HOW IS THE FUND SOLD?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.
RULE 12B-1 PLAN
As a compensation type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of bank, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. Also, the
Fund's service providers that receive asset-based fees also benefit from stable
or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-related or
shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
SUBACCOUNTING SERVICES
Certain participating insurance companies may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Participating insurance companies holding Shares in a fiduciary,
agency, custodial, or similar capacity may charge or pass through subaccounting
fees as part of or in addition to normal trust or agency account fees. They may
also charge fees for other services that may be related to the ownership of
Shares. This information should, therefore, be read together with any agreement
between the customer and the participating insurance company about the services
provided, the fees charged for those services, and any restrictions and
limitations imposed.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
ACCOUNT AND SHARE 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 the Trust have
equal voting rights, except that in matters affecting only a particular Fund,
only Shares of that Fund are entitled to vote.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Trust's outstanding shares
of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.
FOREIGN INVESTMENTS
If the Fund purchases foreign securities, their investment income 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. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.
Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the coupon income generated by the
portfolio, whereas tax basis income includes gains or losses attributable to
currency fluctuation. Due to differences in the book and tax treatment of fixed
income securities denominated in foreign currencies, it is difficult to project
currency effects on an interim basis. Therefore, to the extent that currency
fluctuations cannot be anticipated, a portion of distributions to shareholders
could later be designated as a return of capital, rather than income, for income
tax purposes, which may be of particular concern to simple trusts.
If the Fund invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to Federal income taxes upon disposition of PFIC investments.
If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Code may
limit a shareholder's ability to claim a foreign tax credit. Shareholders who
elect to deduct their portion of the Fund's foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax returns.
WHO MANAGES AND PROVIDES SERVICES TO THE FUND?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birthdate, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of nine
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser.
An asterisk (*) denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940. The following symbol (#) denotes
a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.
<TABLE>
<CAPTION>
NAME
BIRTHDATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITION WITH TRUST PRINCIPAL OCCUPATIONS FROM TRUST FROM TRUST AND
FOR PAST 5 YEARS ----------- FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer and Director or $0 $0 for the
Birthdate: July 28, 1924 Trustee of the Federated Fund Complex; Trust and
Federated Investors Chairman and Director, Federated Investors, 54 other
Tower Inc.; Chairman and Trustee, Federated investment
1001 Liberty Avenue Advisers, Federated Management, and companies
Pittsburgh, PA Federated Research; Chairman and Director, in the Fund
TRUSTEE AND CHARIMAN Federated Research Corp., and Federated Complex
Global Research Corp.; Chairman, Passport
Research, Ltd.
- -------------------------
THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: February 3, Complex; Director, Member of Executive the
1934 Committee, Children's Hospital of Trust and
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst 54 other
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, investment
TRUSTEE Inc.; Director, Member of Executive companies
Committee, University of Pittsburgh. in the Fund
Complex
- -------------------------
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
Birthdate: June 23, 1937 Complex; President, Investment Properties the
Wood/IPC Commercial Corporation; Senior Vice President, Trust and 54
Dept. John R. Wood and Associates, Inc., other
John R. Wood Realtors; Partner or Trustee in private investment
Associates, Inc. real estate ventures in Southwest Florida; companies
Realtors formerly: President, Naples Property in the Fund
3255 Tamiami Trial Management, Inc. and Northgate Village Complex
North Naples, FL Development Corporation.
TRUSTEE
- -------------------------
NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund $1,591.19 $47,958.02 f or
Birthdate: September 3, Complex; formerly: Partner, Andersen the
1939 Worldwide SC. Trust and 29
175 Woodshire Drive other
Pittsburgh, PA investment
TRUSTEE companies
in the Fund
Complex
- -------------------------
WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
Birthdate: July 4, 1918 Complex; Director and Member of the the
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; Trust and 54
Pittsburgh, PA formerly: Vice Chairman and Director, PNC other
TRUSTEE Bank, N.A., and PNC Bank Corp.; Director, investment
Ryan Homes, Inc. companies
in the Fund
Previous Postions: Director, United Complex
Refinery; Director, Forbes Fund; Chairman,
Pittsburgh Foundation; Chairman, Pittsburgh
Civic Light Opera.
- -------------------------
J. CHRISTOPHER DONAHUE*+ President or Executive Vice President of $0 $0 for the
Birthdate: April 11, the Federated Fund Complex; Director or Trust and 16
1949 Trustee of some of the Funds in the other
Federated Investors Federated Fund Complex; President and investment
Tower Director, Federated Investors, Inc.; companies
1001 Liberty Avenue President and Trustee, Federated Advisers, in the Fund
Pittsburgh, PA Federated Management, and Federated Complex
TRUSTEE AND PRESIDENT Research; President and Director, Federated
Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.
- -------------------------
JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
Birthdate: May 18, 1922 Complex; Attorney-at-law; Director, The the
571 Hayward Mill Road Emerging Germany Fund, Inc. Trust and 54
Concord, MA other
TRUSTEE Previous Postions: President, Boston Stock investment
Exchange, Inc.; Regional Administrator, companies
United States Securities and Exchange in the Fund
Commission. Complex
- -------------------------
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: October 11, Complex; Professor of Medicine, University the
1932 of Pittsburgh; Medical Director, University [Trust/Corporation]
3471 Fifth Avenue of Pittsburgh Medical Center - Downtown; and 54 other
Suite 1111 Hematologist, Oncologist, and Internist, investment
Pittsburgh, PA University of Pittsburgh Medical Center; companies
TRUSTEE Member, National Board of Trustees, in the Fund
Leukemia Society of America. Complex
- -------------------------
EDWARD L. FLAHERTY, Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for
JR., ESQ. # Complex; Attorney, of Counsel, Miller, the
Birthdate: June 18, 1924 Ament, Henny & Kochuba; Director Emeritus, Trust and 54
Miller, Ament, Henny & Eat'N Park Restaurants, Inc.; formerly: other
Kochuba Counsel, Horizon Financial, F.A., Western investment
205 Ross Street Region; Partner, Meyer and Flaherty. companies
Pittsburgh, PA in the Fund
TRUSTEE Complex
- -------------------------
PETER E. MADDEN Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: March 16, Complex; formerly: Representative, the
1942 Commonwealth of Massachusetts General Trust and 54
One Royal Palm Way Court; President, State Street Bank and other
100 Royal Palm Way Trust Company and State Street Corporation. investment
Palm Beach, FL companies
TRUSTEE Previous Postions: Director, VISA USA and in the Fund
VISA International; Chairman and Director, Complex
Massachusetts Bankers Association;
Director, Depository Trust Corporation.
- -------------------------
JOHN E. MURRAY, JR., Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
J.D., S.J.D. Complex; President, Law Professor, Duquesne the
Birthdate: December 20, University; Consulting Partner, Mollica & Trust and 54
1932 Murray. other
President, Duquesne investment
University Previous Postions: Dean and Professor of companies
Pittsburgh, PA Law, University of Pittsburgh School of in the Fund
TRUSTEE Law; Dean and Professor of Law, Villanova Complex
University School of Law.
- -------------------------
WESLEY W. POSVAR Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: September Complex; President, World Society of the
14, 1925 Ekistics (metropolitan planning), Athens; Trust and 54
1202 Cathedral of Professor, International Politics; other
Learning Management Consultant; Trustee, Carnegie investment
University of Pittsburgh Endowment for International Peace, RAND companies
Pittsbugh, PA Corporation, Online Computer Library in the Fund
TRUSTEE Center, Inc., National Defense University Complex
and U.S. Space Foundation; President
Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency Management
Advisory Board; Trustee, Czech Management
Center, Prague.
Previous Postions: Professor, United States
Military Academy; Professor, United States
Air Force Academy.
- -------------------------
MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for
Birthdate: June 21, 1935 Complex; Public the
4905 Bayard Street Relations/Marketing/Conference Planning. Trust and 54
Pittsburgh, PA other
TRUSTEE Previous Postions: National Spokesperson, investment
Aluminum Company of America; business owner. companies
in the Fund
Complex
- -------------------------
JOHN S. WALSH Director or Trustee of some of the $0 $0 for the
Birthdate: November 28, Federated Funds; President and Director, Trust and
1957 Heat Wagon, Inc.; President and Director, 23 other
2007 Sherwood Drive Manufacturers Products, Inc.; President, investment
Valparaiso, IN Portable Heater Parts, a division of companies
TRUSTEE Manufacturers Products, Inc.; Director, in the Fund
Walsh & Kelly, Inc.; formerly: Vice Complex
President, Walsh & Kelly, Inc.
- -------------------------
<PAGE>
EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birthdate: October 22, the Federated Fund Complex; President, Trust and 1
1930 Executive Vice President and Treasurer of other
Federated Investors some of the Funds in the Federated Fund investment
Tower Complex; Vice Chairman, Federated company
1001 Liberty Avenue Investors, Inc.; Vice President, Federated in the Fund
Pittsburgh, PA Advisers, Federated Management, Federated Complex
EXECUTIVE VICE PRESIDENT Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
- -------------------------
JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birthdate: October 26, the Federated Fund Complex; Executive Vice Trust and 54
1938 President, Secretary, and Director, other
Federated Investors Federated Investors, Inc.; Trustee, investment
Tower Federated Advisers, Federated Management, companies
1001 Liberty Avenue and Federated Research; Director, Federated in the Fund
Pittsburgh, PA Research Corp. and Federated Global Complex
EXECUTIVE VICE Research Corp.; Director, Federated
PRESIDENT AND SECRETARY Services Company; Director, Federated
Securities Corp.
- -------------------------
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; $0 $0 for the
Birthdate: June 17, Vice President - Funds Financial Services Trust and
1954 Division, Federated Investors, Inc.; 54 other
Federated Investors Formerly: various management positions investment
Tower within Funds Financial Services Division of companies
1001 Liberty Avenue Federated Investors, Inc. in the Fund
Pittsburgh, PA Complex
TREASURER
- -------------------------
RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birthdate: May 17, 1923 Funds in the Federated Fund Complex; Trust and
Federated Investors Director or Trustee of some of the Funds in 6 other
Tower the Federated Fund Complex; Executive Vice investment
1001 Liberty Avenue President, Federated Investors, Inc.; companies
Pittsburgh, PA Chairman and Director, Federated Securities in the Fund
VICE PRESIDENT Corp. Complex
- -------------------------
HENRY A. FRANTZEN Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: November 28, various other Funds in the Federated Fund Trust and 3
1942 Complex; Executive Vice President, other
Federated Investors Federated Investment Counseling, Federated investment
Tower Global Investment Management Corp., companies in
1001 Liberty Avenue Federated Advisers, Federated Management, the Fund Complex
Pittsburgh, PA Federated Research, and Passport Research,
CHIEF INVESTMENT OFFICER Ltd.; Registered Representative, Federated
Securities Corp.; Vice President, Federated
Investors, Inc.; Formerly: Executive Vice
President, Federated Investment Counseling
Institutional Portfolio Management Services
Division; Chief Investment Officer/Manager,
International Equities, Brown Brothers Harriman &
Co.; Managing Director, BBH Investment Management
Limited.
- -------------------------
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: March 3, 1949 various other Funds in the Federated Fund Trust and
Federated Investors Complex; Executive Vice President, 41 other
Tower Federated Investment Counseling, Federated investment
1001 Liberty Avenue Global Research Corp., Federated Advisers, companies
Pittsburgh, PA Federated Management, Federated Research, in the Fund
CHIEF INVESTMENT OFFICER and Passport Research, Ltd.; Registered Complex
Representative, Federated Securities Corp.;
Portfolio Manager, Federated Administrative
Services; Vice President, Federated Investors,
Inc.; Formerly: Executive Vice President and Senior
Vice President, Federated Investment Counseling
Institutional Portfolio Management Services
Division; Senior Vice President, Federated Research
Corp., Federated Advisers, Federated Management,
Federated Research, and Passport Research, Ltd.
- -------------------------
J. THOMAS MADDEN Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: October 22, various other Funds in the Federated Fund Trust and
1945 Complex; Executive Vice President, 12 other
Federated Investors Federated Investment Counseling, Federated investment
Tower Global Research Corp., Federated Advisers, companies
1001 Liberty Avenue Federated Management, Federated Research, in the Fund
Pittsburgh, PA and Passport Research, Ltd.; Vice Complex
CHIEF INVESTMENT OFFICER President, Federated Investors, Inc.;
Formerly: Executive Vice President and
Senior Vice President, Federated Investment
Counseling Institutional Portfolio
Management Services Division; Senior Vice
President, Federated Research Corp.,
Federated Advisers, Federated Management,
Federated Research, and Passport Research,
Ltd.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, President and Trustee
of the Trust.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly-owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.
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 Fund Shares offered by the Distributor.
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. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). 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 Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
RESEARCH SERVICES
Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
MAXIMUM ADMINISTRATIVE AVERAGE AGGREGATE DAILY NET ASSETS OF THE FEDERATED
FEE FUNDS
0.150 of 1% on the first $250 million
- -------------------------
0.125 of 1% on the next $250 million
- -------------------------
0.100 of 1% on the next $250 million
- -------------------------
0.075 of 1% on 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 Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP is the independent public accountant for the Fund.
HOW DOES THE FUND MEASURE PERFORMANCE?
The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.
Unless otherwise stated, any quoted Share performance reflects the effect of
non-recurring charges, such as maximum sales charges, which, if excluded, would
increase the total return and yield. The performance of Shares depends upon such
variables as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences in the
Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares 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 NAV 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 charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.
When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time, rather than
annualizing the total return.
YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a thirty-day period; by (ii) the maximum
offering price per Share on the last day of the period. This number 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 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Funds; and
o information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:
FINANCIAL PUBLICATIONS
The WALL STREET JOURNAL, BUSINESS WEEK, CHANGING TIMES, FINANCIAL WORLD, FORBES,
FORTUNE and MONEY magazines, among others--provide performance statistics over
specified time periods.
INTERNATIONAL FINANCIAL STATISTICS
International Financial Statistics is produced by the International Monetary
Fund.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Lehman Brothers Government/Corporate Bond Index is comprised of approximately
5,000 issues which include non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S. government
and quasi- federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked by
Lehman Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.
LEHMAN BROTHERS HIGH YIELD INDEX
Lehman Brothers High Yield Index covers the universe of fixed- rate, publicly
issued, non-investment grade debt registered with the SEC. All bonds included in
the High Yield Index must be dollar-denominated and nonconvertible and have at
least one year remaining to maturity and an outstanding par value of at least
$100 million. Generally securities must be rated Ba1 or lower by Moody's
Investors Service, including defaulted issues. If no Moody's rating is
available, bonds must be rated BB+ or lower by S&P; and if no S&P rating is
available, bonds must be rated below investment grade by Fitch IBCA, Inc. A
small number of unrated bonds is included in the index; to be eligible they must
have previously held a high yield rating or have been associated with a high
yield issuer, and must trade accordingly.
LIPPER ANALYTICAL SERVICES, INC.
Lipper Analytical Services, Inc. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specified period of time.
MOODY'S INVESTORS SERVICE, INC., FITCH IBCA, INC., AND STANDARD & POOR'S
Moody's Investors Service, Inc., Fitch IBCA, Inc., and Standard & Poor's are
various publications.
MORNINGSTAR, INC.
Morningstar, Inc. is an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values, which rates more than 1,000 NASDAQ-listed mutual
funds of all types, according to their risk-adjusted returns. The maximum rating
is five stars, and ratings are effective for two weeks.
WHO IS FEDERATED INVESTORS, INC.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state-of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 279 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset-backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated manages 9
mortgage-backed, 5 government/ agency and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion and $41.6 billion,
respectively. Federated trades approximately $425 million in U.S. government and
mortgage-backed securities daily and places approximately $25 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $43.2 billion in government funds within
these maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -William D. Dawson, III; and global equities and fixed
income - Henry A. Frantzen. The Chief Investment Officers are Executive Vice
Presidents of the Federated
advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Sales Division, Federated Securities Corp.
<PAGE>
INVESTMENT RATINGS
APPENDIX
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term, vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. 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. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B-rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 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.
MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as gilt
edged. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. 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 class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
o Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
o Well established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
<PAGE>
ADDRESSES
FEDERATED STRATEGIC INCOME FUND II
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
SUB-ADVISER
Federated Global Investment Management Corp.
175 Water Street
New York, NY 10038-4965
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110-1617
PART C. OTHER INFORMATION.
Item 23. EXHIBITS:
(a) Conformed copy of Amended and Restated Declaration of
Trust of the Registrant (Amendment #1 to the
Declaration of Trust); (3)
(i) Conformed copy of Amendment #2 to the
Declaration of Trust; (17)
(ii) Conformed copy of Amendment #3 to the
Declaration of Trust; (17)
(iii) Conformed copy of Amendment #4 to the
Declaration of Trust; (17)
(iv) Conformed copy of Amendment #5 to the
Declaration of Trust; (10)
(v) Conformed copy of Amendment #6 to the
Declaration of Trust; (11)
(vi) Conformed copy of Amendment #7 to the
Declaration of Trust; (17)
(b) Copy of By-Laws; (2)
(i) Copy of Amendment No. 1 to the By-Laws; (19)
(ii)Copy of Amendment No. 2 to the By-Laws; (19)
(iii)Copy of Amendment No. 3 to the By-Laws;(19)
(c) (i) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated American
Leaders Fund II; (15)
(ii) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated Utility
Fund II; (15)
(iii) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated Fund for
U.S. Government Securities II; (15)
(iv) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated High
Income Bond Fund II; (15)
(v) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated Prime
Money Fund II; (15)
(vi) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated
International Equity Fund II; (4)
(vii) Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated Growth
Strategies Fund II; (15)
+ All exhibits have been filed electronically.
(2) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed April 29, 1994. (File Nos. 33-69268 and
811-8042).
(3) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed August 23, 1994. (File Nos. 33-69268 and
811-8042).
(4) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed January 19, 1995. (File Nos. 33-69268
and 811-8042).
(10) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed February 16, 1996. (File Nos. 33-69268
and 811-8042).
(11) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed March 28, 1996. (File Nos. 33-69268 and
811-8042).
(15) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed July 31, 1997. (File Nos. 33-69268 and
811-8042).
(17) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 18 on Form N-1A filed April 22, 1998. (File Nos. 33-69268 and
811-8042).
(19) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed February 18, 1999. (File Nos. 33-69268
and 811-8042).
(viii)Copy of Specimen Certificate for Shares of
Beneficial Interest of Federated Equity Income
Fund II; (15)
(d) Conformed copy of Investment Advisory Contract
between the Registrant and Federated Advisers;(3)
(i) Conformed copy of Exhibit A to Investment
Advisory Contract; (3)
(ii) Conformed copy of Exhibit B to Investment
Advisory Contract; (3)
(iii) Conformed copy of Exhibit C to Investment
Advisory Contract; (3)
(iv) Conformed copy of Exhibit D to Investment
Adivsory Contract; (3)
(v) Conformed copy of Exhibit E to Investment
Adivsory Contract; (3)
(vi) Conformed copy of Exhibit F to Investment
Advisory Contract; (6)
(vii) Conformed copy of Exhibit G to the Trust's
present investment advisory contract to add
Federated Growth Strategies Fund II
(formerly, Growth Stock Fund); (10)
(viii)Conformed copy of Exhibit H to the Trust's
present investment advisory contract to add Federated Equity
Income Fund II; (12) (d1) Conformed copy of Investment
Advisory
Contract between the Registrant and Federated Global Research Corp. with
respect to Federated International Equity
Fund II; (10)
(d2) Conformed copy of Sub-Advisory
Agreement between Federated Advisers and Federated
Global Research Corp. with respect to Federated
Utilty Fund II; (17)
(i) Conformed copy of Exhibit A to Investment
Advisory Contract; (10)
(e) Conformed copy of Distributor's Contract; (3)
(i) Conformed copy of Exhibit A to Distributor's
Contract; (3) (ii) Conformed copy of Exhibit B to
Distributor's Contract; (3) (iii) Conformed copy of
Exhibit C to Distributor's Contract; (3) (iv)
Conformed copy of Exhibit D to Distributor's
Contract; (3) (v) Conformed copy of Exhibit E to
Distributor's Contract; (3) (vi) Conformed copy of
Exhibit F to Distributor's Contract; (7) (vii)
Conformed copy of Exhibit G to Distributor's
Contract; (10) (viii)Conformed copy of Exhibit H to
Distributor's Contract; (12)
+ All exhibits have been filed electronically.
(3) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed August 23, 1994. (File Nos. 33-69268 and
811-8042).
(6) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed April 3, 1995. (File Nos. 33-69268 and
811-8042).
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 on Form N-1A filed April 21, 1995. (File Nos. 33-69268 and
811-8042).
(10) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed February 16, 1996. (File Nos. 33-69268
and 811-8042).
(12) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed February 10, 1997. (File Nos. 33-69268
and 811-8042).
(17) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 18 on Form N-1A filed April 22, 1998. (File Nos. 33-69268 and
811-8042).
(f) Not Applicable;
(g) Conformed copy of Custodian Contract; (7)
(i) Conformed copy of Domestic Custody Fee
Schedule; (17)
(h) (i) Conformed copy of Amended and Restated
Agreement for Fund Accounting Services,
Aministrative Services, Transfer Agency
Services, and Custody Services
Procurement; (19)
(ii) Conformed copy of Amended and Restated
Shareholder Services Agreement; (16) (i) Conformed copy of
Opinion and Consent of Counsel as to legality of shares
being registered; (2)
(j)Consent of Independent Auditors; (17)
(k)Not Applicable;
(l) Conformed copy of Initial Capital Understanding;(2)
(m) Conformed Copy of Distribution Plan of the
Registrant; (12)
(n) Copy of Financial Data Schedules; (to be filed by
amendment)
(o) Not applicable
(p) Conformed copy of Power of Attorney; (18)
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT:
None
Item 25. INDEMNIFICATION: (1)
Item 26. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser, see
the section entitled "Who Manages the Fund" in Part A. The affiliations
with the Registrant of four of the Trustees and one of the Officers of
the investment adviser are included in Part B of this Registration
Statement under "Who Manages and Provides Services to the Fund." The
remaining Trustee of the investment adviser, his position with the
investment adviser, and, in parentheses, his principal occupation is:
Mark D. Olson (Partner, Wilson, Halbrook & Bayard), 107 W. Market
Street, Georgetown, Delaware 19947.
+ All exhibits have been filed electronically.
(2) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed April 29, 1994. (File Nos. 33-69268 and
811-8042).
(12) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed February 10, 1997. (File Nos. 33-69268
and 811-8042).
(16) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed March 9, 1998. (File Nos. 33-69268 and
811-8042).
(17) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 18 on Form N-1A filed April 22, 1998. (File Nos. 33-69268 and
811-8042).
(18) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 on Form N-1A filed February 5, 1999. (File Nos. 33-69268
and 811-8042).
(19) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed February 18, 1999. (File Nos. 33- 69268
and 811-8042).
<PAGE>
The remaining Officers of the investment adviser are:
Executive Vice Presidents:
William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents:
Joseph M. Balestrino
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
Sandra L. McInerney
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Vice Presidents:
Todd A. Abraham
J. Scott Albrecht
Arthur J. Barry
Randall S. Bauer
David A. Briggs
Micheal W. Casey
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
- ---------------------------------------------
(1) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 10, 1993. (File Nos.
33-69268 and 811-8042).
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Richard J. Lazarchic
Steven Lehman
Marian R. Marinack
Keith J. Sabol
Frank Semack
Aash M. Shah
Christopher Smith
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Marc Halperin
Assistant Vice Presidents:
Nancy J. Belz
Robert E. Cauley
Lee R. Cunningham, II
B. Anthony Delserone, Jr.
Paul S. Drotch
Salvatore A. Esposito
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
John C. Kerber
Grant K. McKay
Natalie F. Metz
Joseph M. Natoli
John Sheehy
Michael W. Sirianni
Leonardo A. Vila
Lori A. Wolff
Gary Farwell
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries:
Thomas R. Donahue
Richard B. Fisher
Christine I. Newcamp
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the investment adviser is
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779. These individuals are also officers of a majority of the investment
advisers to the investment companies in the Federated Fund Complex described in
Part B of this Registration Statement.
ITEM 27. PRINCIPAL UNDERWRITERS:
(a) Federated Securities Corp. the Distributor for shares of the
Registrant, acts as principal underwriter for the following open-end
investment companies, including the Registrant:
Automated Government Money Trust; Cash Trust Series II; Cash Trust Series, Inc.;
CCB Funds; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable
Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Core Trust; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Insurance Series;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock and
Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated
Total Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; Fixed Income Securities, Inc.; ; Hibernia Funds;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Obligations Trust II; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Regions Funds; RIGGS Funds; SouthTrust Funds; Tax-Free
Instruments Trust; The Planters Funds; The Wachovia Funds; The Wachovia
Municipal FundsTrust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Vision Group of
Funds, Inc.; World Investment Series, Inc.; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; DG Investor Series; High Yield Cash Trust; Investment Series
Trust; Star Funds; Targeted Duration Trust; The Virtus Funds; Trust for
Financial Institutions;
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.
<TABLE>
<CAPTION>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
<S> <C> <C>
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
1001 Liberty Avenue Operating Officer, Asst.
Pittsburgh, PA 15222-3779 Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, President
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Ernest G. Anderson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David J. Callahan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Marc C. Danile Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Raymond Hanley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
Charlene H. Jennings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael W. Koenig Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael R. Manning Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Alec H. Neilly Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Colin B. Starks Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Beth C. Dell Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David L. Immonen Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Renee L. Martin Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Robert M. Rossi Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Matthew S. Hardin Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Leslie K. Ross Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(c) Not applicable
</TABLE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS:
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and Rules 31a-1 through 31a-3
promulgated thereunder are maintained at one of the following
locations:
REGISTRANT Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
FEDERATED SHAREHOLDER P.O. Box 8600
SERVICES COMPANY Boston, MA 02266-8600
Transfer Agent, Dividend
Disbursing Agent and
Portfolio Recordkeeper
FEDERATED SERVICES Federated Investors Tower
COMPANY 1001 Liberty Avenue
Administrator Pittsburgh, PA 15222-3779
FEDERATED ADVISERS Federated Investors Tower
Investment Adviser 1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
FEDERATED GLOBAL RESEARCH 175 Water Street
CORP. New York, NY 10038-4965
Investment Adviser
STATE STREET BANK AND P.O. Box 8600
---------------------
TRUST COMPANY Boston, MA 02266-8600
Custodian
Item 29. MANAGEMENT SERVICES: Not applicable.
Item 30. UNDERTAKINGS:
Registrant hereby undertakes to comply with the provisions of Section
16(c) of the 1940 Act with respect to the removal of Trustees and the
calling of special shareholder meetings by shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered, a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED INSURANCE SERIES,
certifies that it has duly caused this Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Pittsburgh and Commonwealth of Pennsylvania, on the 19th day of
February, 1999.
FEDERATED INSURANCE SERIES
BY: /s/ Matthew S. Hardin
Matthew S. Hardin, Assistant Secretary
Attorney in Fact for John F. Donahue
February 19, 1999
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Matthew S. Hardin
Matthew S. Hardin Attorney In Fact February 19, 1999
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
J. Christopher Donahue* President and Trustee
Richard J. Thomas* Treasurer
(Principal Financial and
Accounting Officer)
Henry A. Frantzen* Chief Investment Officer
William D. Dawson, III* Chief Investment Officer
J. Thomas Madden* Chief Investment Officer
Thomas G. Bigley* Trustee
Nicholas P. Constantakis* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
John E. Murray, Jr.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
John S. Walsh* Trustee
* By Power of Attorney
