1933 Act File No. 33-50773
1940 Act File No. 811-7115
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ....................
Post-Effective Amendment No. 13 .................... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 15 .................................... X
FEDERATED TOTAL RETURN SERIES, INC.
(formerly, Insight Institutional Series, Inc.)
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(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)
X on November 28, 1997 pursuant to paragraph (b)(1)(v)
60 days after filing pursuant to paragraph (a) (i) on _________________
pursuant to paragraph (a) (i) 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
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of Federated Total Return
Series, Inc. (formerly,Insight Institutional Series, Inc.), which consists of
four portfolios: (1) Federated Total Return Bond Fund (formerly, Federated
Government Total Return Fund), (2) Federated Limited Duration Fund (formerly,
Federated Total Return Limited Duration Fund), (3) Federated Government Fund,
and (4) Federated Limited Duration Government Fund is comprised of the
following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
<TABLE>
<CAPTION>
<S> <C> <C>
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page....................(1-4) Cover Page.
Item 2. Synopsis......................(1-4) Summary of Fund Expenses.
Item 3. Condensed Financial
Information (1-4) Performance Information.
Item 4. General Description of
Registrant...................(1-4) General Information; (1-4) Investment Information; (1-4)
Investment Objective; (1-4)
Investment Policies; (1-4) Investment Limitations; (1-4)
Hub and Spoke Option.
Item 5. Management of the Fund........(1-4) Fund Information; (1-4) Management of the Corporation;
(1-4) Distribution of Institutional/
Institutional Service Shares; (1-4) Administration of the Fund;
(1-4) Expenses of the Fund and
Institutional/Institutional Service Shares.
Item 6. Capital Stock and Other
Securities...................(1-4) Dividends and Distributions; (1-4) Shareholder Information;
(1-4) Voting Rights; (1-4) Tax
Information; (1-4) Federal Income Tax; (1-4) State and Local Taxes;
(1-4) Other Classes of Shares.
Item 7. Purchase of Securities Being
Offered......................(1-4) Net Asset Value; (1-4) Investing in Institutional/
Institutional Service Shares; (1-4) Share
Purchases; (1-4) Minimum Investment Required; (1-4) What Shares
Cost; (1-4) Exchanging Securities
for Fund Shares; (1-4) Certificates and Confirmations.
Item 8. Redemption or Repurchase......(1-4) Redeeming Institutional/ Institutional Service Shares;
(1-4) Telephone Redemption; (1-4)
Written Requests; (1-4) Accounts with Low Balances.
Item 9. Pending Legal Proceedings.....None.
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page....................(1-4) Cover Page.
Item 11. Table of Contents.............(1-4) Table of Contents.
Item 12. General Information and
History......................(1-4) General Information About the Fund; (1-4) About Federated
Investors.
Item 13. Investment Objectives and
Policies.....................(1-4) Investment Objective and Policies; (1-4) Investment
Limitations.
Item 14. Management of the Fund (1-4) Federated Total Return Series, Inc. Management; (1-4)
Directors Compensation.
Item 15. Control Persons and Principal
Holders of Securities (1-4) Fund Ownership.
Item 16. Investment Advisory and Other
Services.....................(1-4) Investment Advisory Services; (1-4) Distribution Plan and
Shareholder Services; (1-4) Other
Services.
Item 17. Brokerage Allocation..........(1-4) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered...(1-4) Purchasing Shares; (1-4) Determining Net Asset Value;
(1-4) Redeeming Shares.
Item 20. Tax Status....................(1-4) Tax Status.
Item 21. Underwriters Not Applicable.
Item 22. Calculation of Performance
Data.........................(1-4) Total Return; (1-4) Yield; (1-4) Performance Comparisons.
Item 23. Financial Statements (1-3) Filed in Part A; (4) To be filed by Amendment.
</TABLE>
Federated Total Return Bond Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the "Fund") offered by this prospectus
represent interests in a diversified investment portfolio of Federated Total
Return Series, Inc. (the "Corporation"), an open-end, management investment
company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities, focusing on investment grade debt securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference. The Fund has also filed a Statement of Additional Information
dated November 30, 1997, with the Securities and Exchange Commission ("SEC").
The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the Fund,
contact the Fund at the address listed on the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1 Financial Highlights--Institutional Shares 2 General
Information 3 Investment Information 3 Investment Objective 3 Investment
Policies 3 Investment Limitations 12 Hub and Spoke(R) Option 12 Net Asset Value
12 Investing in Institutional Shares 12 Share Purchases 12 Minimum Investment
Required 13 What Shares Cost 13 Exchanging Securities for Fund Shares 13
Confirmations and Account Statements 13 Dividends and Distributions 13
Redeeming Institutional Shares 14 Telephone Redemption 14 Written Requests 14
Accounts with Low Balances 14 Fund Information 14 Management of the Fund 14
Distribution of Institutional Shares 16 Administration of the Fund 16
Shareholder Information 16 Voting Rights 16 Tax Information 17 Federal Income
Tax 17 State and Local Taxes 17 Performance Information 17 Other Classes of
Shares 17 Financial Highlights--Institutional Service Shares 18 Financial
Statements 19 Report of Ernst & Young LLP, Independent Auditors 29 Appendix 30
SUMMARY OF FUND EXPENSES
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Institutional Shares
Shareholder Transaction Expenses
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
Annual Operating Expenses
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.00%
12b-1 Fee None
Total Other Expenses (after expense reimbursement) 0.35%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses(3) 0.35%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%.
(2) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1998. If
Institutional Shares were paying or accruing the shareholder services fee,
Institutional Shares would be able to pay up to 0.25% of its average daily net
assets for the shareholder services fee. See "Fund Information."
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total operating
expenses were 0.01% for the fiscal year ended September 30, 1997 and would have
been 4.40% absent the voluntary waiver of the management fee and the voluntary
reimbursement of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Institutional Shares" and "Fund
Information." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
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EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $ 4
3 years $11
5 years $20
10 years $44
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.72
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.04
LESS DISTRIBUTIONS
Distributions from net investment income (0.72)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.52%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.01%
Net investment income 7.15%
Expense waiver/reimbursement(c) 4.39%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $16,700
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." and the name of the Fund was changed from "Insight U.S. Government Fund"
to "Federated Government Total Return Fund." On May 15, 1996, the name of the
Fund was changed from "Federated Government Total Return Fund" to "Federated
Total Return Bond Fund." The Articles of Incorporation permit the Corporation to
offer separate portfolios and classes of shares. As of the date of this
prospectus, the Board of Directors (the "Directors") has established two classes
of shares for Federated Total Return Bond Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to Institutional
Shares of Federated Total Return Bond Fund.
Institutional Shares ("Shares") of the Fund are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of investment grade debt securities. A minimum initial
investment of $100,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of investment grade debt securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A,
or BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. Unless indicated otherwise, the
investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective. ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of investment grade debt securities. The Fund may also invest in
convertible securities. The Fund may also invest in derivative instruments of
such securities (including instruments with demand features or credit
enhancement and stripped mortgage-backed securities), as well as money market
instruments and cash.
The securities in which the Fund invests principally are:
* asset-backed securities;
* domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
* obligations issued or guaranteed as to payment of principal and
interest by the U.S. government, or its agencies or instrumentalities;
* mortgage-backed securities;
* municipal securities;
* commercial paper which matures in 270 days or less; * time deposits
(including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured banks
or which have at least $100 million in capital; and
* repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS
The Fund invests in corporate and foreign government/agency debt obligations,
including bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities, including fixed rate
securities with short-term characteristics. Fixed rate securities with
short-term characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the securities may
make them callable within a short period of time. A fixed rate security with
short-term characteristics would include a fixed income security priced close to
call or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates, the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand notes
allow the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features."
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities, which generally include
direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations (including mortgage-backed securities, bonds, notes and
discount notes) issued or guaranteed by the following U.S. government agencies
or instrumentalities: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association; Government National Mortgage Association;
and Student Loan Marketing Association. These securities are backed by: the full
faith and credit of the U.S. Treasury; the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal
National Mortgage Association; Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property. There are currently four basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Government National Mortgage Association ("Ginnie
Mae"), the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; (iii) those issued by private issuers that represent an
interest in or are collateralized by whole loans or mortgage-backed securities
without a government guarantee but usually having some form of private credit
enhancement; and (iv) privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund may invest in certain CMOs which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) securities which are collateralized by pools of mortgages in
which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (iii) other
securities in which the proceeds of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal are received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rapidly rising interest rates, mortgage-backed securities may also
have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
FOREIGN SECURITIES
The Fund may invest in foreign securities. Foreign securities do not include
American Depository Receipts, but do include foreign securities not publicly
traded in the United States. Investments in foreign securities involve special
risks that differ from those associated with investments in domestic securities.
The Fund may invest more than 10% in foreign securities.
RISKS
The risks associated with investments in foreign securities relate to political
and economic developments abroad, as well as those that result from the
differences between the regulation of domestic securities and issuers and
foreign securities and issuers. These risks may include, but are not limited to,
expropriation, confiscatory taxation, currency fluctuations, withholding taxes
on interest, limitations on the use or transfer of assets, political or social
instability, ability to obtain or enforce court judgments abroad and adverse
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as growth of
gross national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS
Foreign securities may be denominated in foreign currencies. Therefore, the
value in U.S. dollars of the Fund's assets and income may be affected by changes
in exchange rates and regulations. Although the Fund values its assets daily in
U.S. dollars, it will not convert its holdings of foreign currencies to U.S.
dollars daily. When the Fund converts its holdings to another currency, it may
incur conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in connection
with its investments in foreign securities. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may want to establish the U.S. dollar cost or proceeds, as
the case may be. By entering into a forward contract in U.S. dollars for the
purchase or sale of the amount of foreign currency involved in an underlying
security transaction, the Fund attempts to protect itself against a possible
loss between trade and settlement dates resulting from an adverse change in the
relationship between the U.S. dollar and such foreign currency. However, this
tends to limit potential gains which might result from a positive change in such
currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency or denominated in a
currency or currencies that the adviser believes will reflect a high degree of
correlation with the currency with regard to price movements. The Fund generally
will not enter into forward foreign currency exchange contracts with a term
longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased - the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which can or
otherwise limit returns to the convertible security holder, such as DECS
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security.), LYONS (Liquid Yield Option Notes which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock
which are an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES (Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating below
investment grade after the Fund has purchased it. See "High Yield Debt
Obligations." BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution that
has capital, surplus and undivided profits over $100 million or is insured by
the BIF or the SAIF. Bank instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs"). The banks issuing these instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping and the public availability of
information.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit-enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will treat credit
enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial and foreign currency futures contracts
to hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the instruments subject to the futures contracts may not
correlate perfectly with the prices of the instruments in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio's holdings to market changes. In addition, the Fund's
investment adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events, the
Fund may lose money on the futures contract or option. It is not certain that a
secondary market for positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary market on an exchange or otherwise will exist for any particular
futures contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS
The Fund may invest up to but not including 35% of its assets in debt securities
that are not investment-grade but are rated BB or lower by an NRSRO (or, if
unrated, determined by the adviser to be of comparable quality). Some of these
securities may involve equity characteristics. The Fund may invest in equity
securities, including unit offerings which combine fixed rate securities and
common stock or common stock equivalents such as warrants, rights and options.
Securities which are rated BB or lower by a nationally recognized statistical
rating organization are considered speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligations.
These securities are commonly referred to as "junk bonds." A description of the
rating categories for the permissible investments are contained in the Appendix
to this Prospectus.
The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High-Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio. RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each issuer
as well as by monitoring broad economic trends and corporate and legislative
developments.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stock and bonds, derivatives do
not necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
TOTAL RETURN
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling Shares) or realized from the purchase and sale of securities, and
successful use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed-upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Directors and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned at all times. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. The Fund may dispose of a commitment prior to
settlement if the adviser deems it appropriate to do so. In addition, the Fund
may enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments. PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticipate that portfolio turnover
will result in adverse tax consequences. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs. INVESTMENT
LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge its
assets to secure such borrowings; or
* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities) or acquire more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares by Federal Reserve wire, call the Fund before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Total
Return Bond Fund--Institutional Shares; Fund Number (this number can be found on
the account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement.
BY MAIL
To purchase Shares by mail, send a check made payable to Federated Total Return
Bond Fund--Institutional Shares to: Federated Shareholder Services Company, P.O.
Box 8600, Boston, MA 02266-8600. Orders by mail are considered received when
payment by check is converted by State Street Bank and Trust Company ("State
Street Bank") into federal funds. This is normally the next business day after
State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary. The net asset value is determined as of the close of
trading (normally 4:00 p.m., Eastern time), on the New York Stock Exchange,
Monday through Friday, except on: (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund. The Fund acquires the exchanged
securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In
addition, shareholders will receive periodic statements reporting all
account activity, including dividends paid. The Fund will not issue share
certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 2266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above. The
written request should state: Federated Total Return Bond Fund--Institutional
Shares; the account name as registered with the Fund; the account number; and
the number of shares to be redeemed or the dollar amount requested. All owners
of the account must sign the request exactly as the Shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after the receipt of a proper written redemption
request. Dividends are paid up to and including the day that a redemption
request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $100,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to 0.40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion. ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors. Federated Management and other subsidiaries of
Federated Investors serve as investment advisers to a number of investment
companies and private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With over $110
billion invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1996, Federated Investors
is one of the largest mutual fund investment managers in the United States. With
more than 2,000 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than 60 days.
Violations of the codes are subject to review by the Directors and could result
in severe penalties.
PORTFOLIO MANAGER'S BACKGROUND
Joseph M. Balestrino has been a portfolio manager of the Fund since
inception. Mr. Balestrino joined Federated Investors in 1986 and has been a
Vice President of the Fund's investment adviser and Federated Research Corp.
since 1995. Mr. Balestrino served as an Assistant Vice President of the
investment adviser and Federated Research Corp. from 1991 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.
John T. Gentry has been a portfolio manager of the Fund since November 1997.
Mr. Gentry joined Federated Investors in 1995 as an Investment Analyst and
has been an Assistant Vice President of the Fund's adviser and Federated
Research Corp. since April 1997. Mr. Gentry served as a Senior Treasury
Analyst at Sun Company, Inc. from 1991 to 1995. Mr. Gentry is a Chartered
Financial Analyst and earned his M.B.A., with concentrations in Finance and
Accounting, from Cornell University.
Donald T. Ellenberger has been a portfolio manager of the Fund since
November 1997. Mr. Ellenberger joined Federated in 1996 as a Vice President
of a Federated advisory subsidiary. He has been a Vice President of the
Fund's adviser and Federated Research Corp. since March 1997. From 1986 to
1996, he served as a Trader/Portfolio Manager for Mellon Bank, N.A. Mr.
Ellenberger received his M.B.A. in Finance from Stanford University.
Mark E. Durbiano has been the Fund's portfolio manager for the high-yield
corporate bonds asset category of the Fund since inception. He has performed
these duties since the Fund's inception. Mr. Durbiano joined Federated
Investors in 1982 and has been a Senior Vice President of the Fund's adviser
and Federated Research Corp. since January 1996. Mr. Durbiano was a Vice
President of the Fund's adviser and Federated Research Corp. from 1988
through 1995. Mr. Durbiano is a Chartered Financial Analyst and received his
M.B.A. in Finance from the University of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for Institutional
Shares. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to 0.25% of the average daily net asset value of the
Institutional Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund' s investment adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose voluntarily to waive a portion of its
fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 208,177 (91.14%) of the
Institutional Service Shares of the Fund, may for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage. The yield of the Fund is
calculated by dividing the net investment income per share (as defined by the
Securities and Exchange Commission) earned by the Fund over a 30-day period by
the maximum offering price per share of the Fund on the last day of the period.
This number is then annualized using semi-annual compounding. The yield does not
necessarily reflect income actually earned by the Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund.
Institutional Service Shares and Institutional Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Service
Shares and Institutional Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.69
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.01
LESS DISTRIBUTIONS
Distributions from net investment income (0.69)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.22%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.31%
Net investment income 6.71%
Expense waiver/reimbursement(c) 4.59%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $2,289
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--38.2%
BANKING--1.4%
$ 260,000 FirstBank Puerto Rico, Sub. Note, 7.625%, 12/20/2005 $ 266,231
BROADCAST RADIO & T.V.--0.7%
125,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 131,408
CABLE TELEVISION--2.7%
200,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 231,974
250,000 TKR Cable, Inc., 10.50%, 10/30/2007 279,240
TOTAL 511,214
CONGLOMERATES--1.3%
250,000 (a)Hutchison Whampoa Finance, Company Guarantee, 7.50%, 247,318
8/1/2027
ECOLOGICAL SERVICES & EQUIPMENT--1.5%
250,000 WMX Technologies, Inc., Deb., 8.75%, 5/1/2018 279,143
ELECTRONICS--1.4%
250,000 Anixter International, Inc., Company Guarantee, 8.00%, 259,512
9/15/2003
FINANCIAL INTERMEDIARIES--1.6%
250,000 Green Tree Financial Corp., Sr. Sub. Note, 10.25%, 6/1/2002 287,013
25,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 25,133
TOTAL 312,146
FINANCIAL SERVICES--3.1%
500,000 AIM Management Group, 9.00%, 11/15/2003 540,240
50,000 Associates Corp. of North America, Sr. Note, 6.25%, 3/15/1999 50,259
TOTAL 590,499
FOREST PRODUCTS--3.0%
25,000 Pope & Talbot, Inc., 8.375%, 6/1/2013 25,700
500,000 Repap Wisconsin, Inc., 2nd Priority Sr. Secd. Note, 9.875%, 545,625
5/1/2006
TOTAL 571,325
INDUSTRIAL PRODUCTS & EQUIPMENT--5.1%
350,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 366,188
10/1/1999
295,000 Joy Technologies, Inc., Sr. Note, 10.25%, 9/1/2003 320,075
250,000 Southdown, Inc., Sr. Sub. Note, 10.00%, 3/1/2006 278,125
TOTAL 964,388
</TABLE>
FEDERATED TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
INSURANCE--5.8%
$ 250,000 American General Corp., S.F. Deb., 9.625%, 2/1/2018 $ 264,707
250,000 Conseco, Inc., Sr. Note, 10.50%, 12/15/2004 299,600
150,000 Delphi Financial Group, Inc., 9.31%, 3/25/2027 162,924
110,000 (a)Life Re Capital Trust I, 8.72%, 6/15/2027 114,192
250,000 SunAmerica, Inc., Sr. Note, 9.00%, 1/15/1999 259,533
TOTAL 1,100,956
LEISURE & ENTERTAINMENT--0.8%
150,000 Paramount Communications, Inc., Sr. Deb., 8.25%, 8/1/2022 151,665
OIL & GAS--2.7%
400,000 Clark Refining & Marketing Inc., Sr. Note, 10.50%, 12/1/2001 414,000
100,000 Husky Oil Ltd., Sr. Note, 7.125%, 11/15/2006 102,007
TOTAL 516,007
PRINTING & PUBLISHING--2.7%
500,000 Valassis Communication, Inc., Sr. Sub. Note, 9.375%, 3/15/1999 518,825
RETAILERS--2.0%
100,000 Eckerd Corp., Sr. Sub. Note, 9.25%, 2/15/2004 108,143
250,000 Penney (J.C.) Co., Inc., Deb., 7.65%, 8/15/2016 264,265
TOTAL 372,408
SURFACE TRANSPORTATION--2.4%
400,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 464,120
TOTAL CORPORATE BONDS (IDENTIFIED COST 7,257,165
$7,158,444)
(B)MORTGAGE BACKED SECURITIES--20.9%
704,863 Federal Home Loan Mortgage Corp., Pool D28594, 7.50%, 12/1/2022 721,822
491,208 Federal Home Loan Mortgage Corp., Pool E00484, 6.50%, 5/1/2012 487,985
245,072 Federal Home Loan Mortgage Corp., Pool E66587, 6.50%, 3/1/2012 243,464
504,956 Federal Home Loan Mortgage Corp., Pool E66943, 6.50%, 5/1/2012 501,644
485,962 Federal National Mortgage Association, Pool 267905, 7.00%, 487,633
2/1/2024
499,307 Federal National Mortgage Association, Pool 394064, 7.50%, 507,576
7/1/2027
997,090 GNMA, Pool 452179, 7.50%, 6/15/2027 1,014,230
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST 3,964,354
$3,913,741)
MUNICIPAL SECURITIES--0.7%
125,000 Harvard University, Revenue Bonds, 8.125%, 4/15/2007 139,653
(identified cost $133,869)
PRINCIPAL AMOUNT VALUE
U.S. TREASURY--36.2%
U.S. TREASURY BONDS--7.9%
$ 1,600,000 6.00%, 2/15/2026 $ 1,504,096
U.S. TREASURY NOTES--28.3%
5,325,000 6.25%, 2/15/2003 5,378,516
TOTAL U.S. TREASURY (IDENTIFIED COST 6,882,612
$6,771,494)
(C)REPURCHASE AGREEMENT--2.1%
400,000 BT Securities Corporation, 6.07%, dated 9/30/1997, due 400,000
10/1/1997 (at amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $ 18,643,784
$18,377,548)(D)
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities law. At September 30, 1997, these securities amounted
to $361,510 which represents 1.9% of net assets.
(b) Because of monthly principal payments, the average lives of the Mortgage
Backed Securities are less than the indicated periods.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $18,377,548. The
net unrealized appreciation of investments on a federal tax basis amounts to
$266,236 which is comprised of $269,662 appreciation and $3,426 depreciation at
September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($18,988,769) at September 30, 1997.
The following acronym is used throughout this portfolio:
GNMA --Government National Mortgage Association
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 18,643,784
$18,377,548)
Cash 7,359
Income receivable 241,480
Receivable for shares sold 332,105
Deferred organizational costs 9,499
Total assets 19,234,227
LIABILITIES:
Payable for investments purchased $ 104,203
Payable for shares redeemed 33,135
Income distribution payable 93,409
Accrued expenses 14,711
Total liabilities 245,458
Net Assets for 1,839,240 shares outstanding $ 18,988,769
NET ASSETS CONSIST OF:
Paid in capital $ 18,795,167
Net unrealized appreciation of investments 266,236
Accumulated net realized loss on investments (72,573)
Distributions in excess of net investment income (61)
Total Net Assets $ 18,988,769
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$16,699,722 1,617,506 shares outstanding $10.32
INSTITUTIONAL SERVICE SHARES:
$2,289,047 221,734 shares outstanding $10.32
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED TOTAL RETURN BOND FUND
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 599,075
EXPENSES:
Investment advisory fee $ 33,489
Administrative personnel and services fee 154,935
Custodian fees 5,794
Transfer and dividend disbursing agent fees and expenses 58,068
Directors'/Trustees' fees 10,320
Legal fees 7,733
Portfolio accounting fees 58,372
Distribution services fee--Institutional Service Shares 897
Shareholder services fee--Institutional Service Shares 897
Share registration costs 25,599
Printing and postage 8,853
Taxes 25
Miscellaneous 5,296
Total expenses 370,278
Waivers and reimbursements--
Waiver of investment advisory fee $ (33,489)
Waiver of distribution services fee--Institutional Service (717)
Shares
Reimbursement of other operating expenses by Adviser (334,143)
Total waivers and reimbursements (368,349)
Net expenses 1,929
Net investment income 597,146
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 53,760
Net change in unrealized appreciation of investments 266,236
Net realized and unrealized gain on investments 319,996
Change in net assets resulting from operations $ 917,142
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 597,146
Net realized gain (loss) on investments ($72,573 net loss, as 53,760
computed for federal tax purposes)
Net change in unrealized appreciation of investments 266,236
Change in net assets resulting from operations 917,142
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (573,166)
Institutional Service Shares (24,041)
Change in net assets resulting from distributions to (597,207)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 27,197,758
Net asset value of shares issued to shareholders in payment of 15,827
distributions declared
Cost of shares redeemed (13,645,266)
Change in net assets resulting from share transactions 13,568,319
Change in net assets 13,888,254
NET ASSETS:
Beginning of period 5,100,515
End of period (including undistributed net investment income of $ 18,988,769
$(61))
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Total Return
Bond Fund (the "Fund"), a diversified portfolio. The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
U.S. government securities, listed corporate bonds, other fixed-income
securities, asset-backed securities, unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked price as
furnished by an independent pricing service. Short-term securities are valued at
the prices provided by an independent pricing service. However, short-term
securities with remaining maturities of 60 days or less at the time of purchase
may be valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/ dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At September 30, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $72,573, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire in
2005 ($72,573).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES
The costs incurred by the Fund with respect to registration of its shares in its
first fiscal year, excluding the initial expense of registering its shares, have
been deferred and are being amortized over a period not to exceed five years
from the Fund's commencement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
In some cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no market
prices are available, at the fair value as determined by the Fund's pricing
committee. Additional information on each restricted security held at September
30, 1997 is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
Hutchison Whampoa Finance 7/25/1997 $248,233
Life Re Capital Trust I 9/17/1997 $112,578
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
Institutional Shares 1,000,000,000
Institutional Service Shares1,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(A)
INSTITUTIONAL SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 2,441,867 $ 24,817,916
Shares issued to shareholders in payment of distributions declared 1,355 13,891
Shares redeemed (1,335,737) (13,538,732)
Net change resulting from Institutional Share transactions 1,107,485 $ 11,293,075
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(A)
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 231,935 $ 2,379,842
Shares issued to shareholders in payment of distributions declared 189 1,936
Shares redeemed (10,420) (106,534)
Net change resulting from Institutional Service Share transactions 221,704 $ 2,275,244
Net change resulting from share transactions 1,329,189 $ 13,568,319
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver and/or reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares annually, to compensate FSC.
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets
of the Fund for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. For the period
ended September 30, 1997, the Institutional Shares did not incur a shareholder
services fee. FSS may voluntarily choose to waive any portion of its fee. FSS
can modify or terminate this voluntary waiver at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
PURCHASES $ 25,588,747
SALES $ 8,132,262
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of Federated Total Return Bond Fund: We
have audited the accompanying statement of assets and liabilities of Federated
Total Return Bond Fund, including the portfolio of investments, as of September
30, 1997, and the related statement of operations, statement of changes in net
assets, and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Total Return Bond Fund at September 30, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
ERNST &YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has 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 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.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. 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 in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR--NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA---High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A---Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB---Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB---Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B---Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP--Preferred stock with dividend arrearages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
* Leading market positions in well established industries. * High rates of
return on funds employed. * Conservative capitalization structure with moderate
reliance on debt and ample asset protection. * Broad margins in earning coverage
of fixed financial charges and high internal cash generation. * Well established
access to a range of financial markets and assured sources of alternate
liquidity. Prime-2--Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
STANDARD AND POOR'S RATINGS GROUP 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 INVESTORS SERVICE, 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.
FEDERATED TOTAL RETURN BOND FUND Federated Investors Funds 5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 AUDITORS Ernst & Young LLP One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
Federated Total Return Bond Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc. an Open-End,
Management Investment Company
[Graphic]
FEDERATED INVESTORS
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428Q101
G01721-01-IS (11/97)
[Graphic]
Federated Total Return Bond Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the "Fund") offered by this prospectus
represent interests in a diversified investment portfolio of Federated Total
Return Series, Inc. (the "Corporation"), an open-end, management investment
company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities, focusing on investment grade debt securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference. The Fund has also filed a Statement of Additional
Information dated November 30, 1997, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if you
have received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the Fund,
contact the Fund at the address listed on the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1 Financial Highlights--Institutional Service Shares 2
General Information 3 Investment Information 3 Investment Objective 3
Investment Policies 3 Investment Limitations 12 Hub and Spoke(R) Option 12 Net
Asset Value 12 Investing in Institutional Service Shares 12 Share Purchases 12
Minimum Investment Required 13 What Shares Cost 13 Exchanging Securities for
Fund Shares 13 Confirmations and Account Statements 13 Dividends and
Distributions 13 Redeeming Institutional Service Shares 14 Telephone Redemption
14 Written Requests 14 Accounts with Low Balances 14 Fund Information 14
Management of the Fund 14 Distribution of Institutional Service Shares 16
Administration of the Fund 16 Shareholder Information 16 Voting Rights 16 Tax
Information 17 Federal Income Tax 17 State and Local Taxes 17 Performance
Information 17 Other Classes of Shares 17 Financial Highlights--Institutional
Shares 18 Financial Statements 19 Report of Ernst & Young LLP, Independent
Auditors 29 Appendix 30
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.00%
12b-1 Fee(2) 0.05%
Total Other Expenses (after expense reimbursement) 0.60%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 0.65%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%.
(2) The 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any time
at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total operating
expenses were 0.31% for the fiscal year ended September 30, 1997 and would have
been 4.90% absent the voluntary waivers of the management fee and a portion of
the 12b-1 fee and the voluntary reimbursement of certain other operating
expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Service Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in Institutional Service Shares"
and "Fund Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $ 7
3 years $21
5 years $36
10 years $81
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.69
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.01
LESS DISTRIBUTIONS
Distributions from net investment income (0.69)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.22%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.31%
Net investment income 6.71%
Expense waiver/reimbursement(c) 4.59%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $2,289
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." and the name of the Fund was changed from "Insight U.S. Government Fund"
to "Federated Government Total Return Fund." On May 15 1996, the name of the
Fund was changed from "Federated Government Total Return Fund" to "Federated
Total Return Bond Fund." The Articles of Incorporation permit the Corporation to
offer separate portfolios and classes of shares. As of the date of this
prospectus, the Board of Directors (the "Directors") has established two classes
of shares for Federated Total Return Bond Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to Institutional Service
Shares of Federated Total Return Bond Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interst in a professionally managed, diversified
portfolio investing primarily in investment grade debt securities. A minimum
initial investment of $25,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of investment grade debt securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A,
or BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. Unless indicated otherwise, the
investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective. ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of investment grade debt securities. The Fund may also invest in
convertible securities. The Fund may also invest in derivative instruments of
such securities (including instruments with demand features or credit
enhancement and stripped mortgage-backed securities), as well as money market
instruments and cash.
The securities in which the Fund invests principally are:
* asset-backed securities;
* domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
* obligations issued or guaranteed as to payment of principal and
interest by the U.S. government, or its agencies or instrumentalities;
* mortgage-backed securities;
* municipal securities;
* commercial paper which matures in 270 days or less; * time deposits
(including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured banks
or which have at least $100 million in capital; and
* repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS
The Fund invests in corporate and foreign government/agency debt obligations,
including bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities, including fixed rate
securities with short-term characteristics. Fixed-rate securities with
short-term characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the securities may
make them callable within a short period of time. A fixed-rate security with
short-term characteristics would include a fixed-income security priced close to
call or redemption price or a fixed-income security approaching maturity, where
the expectation of call or redemption is high.
Fixed-rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed-rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates, the value of a fixed-rate
security is likely to fall. Fixed-rate securities with short-term
characteristics are not subject to the same price volatility as fixed-rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand notes
allow the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features."
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities, which generally include
direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations (including mortgage-backed securities, bonds, notes and
discount notes) issued or guaranteed by the following U.S. government agencies
or instrumentalities: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association; Government National Mortgage Association;
and Student Loan Marketing Association. These securities are backed by: the full
faith and credit of the U.S. Treasury; the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal
National Mortgage Association; Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property. There are currently four basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Government National Mortgage Association ("Ginnie
Mae"), the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; (iii) those issued by private issuers that represent an
interest in or are collateralized by whole loans or mortgage-backed securities
without a government guarantee but usually having some form of private credit
enhancement; and (iv) privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund may invest in certain CMOs which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) securities which are collateralized by pools of mortgages in
which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (iii) other
securities in which the proceeds of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal are received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rapidly rising interest rates, mortgage-backed securities may also
have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
FOREIGN SECURITIES
The Fund may invest in foreign securities. Foreign securities do not include
American Depository Receipts, but do include foreign securities not publicly
traded in the United States. Investments in foreign securities involve special
risks that differ from those associated with investments in domestic securities.
The Fund may invest more than 10% in foreign securities.
RISKS
The risks associated with investments in foreign securities relate to political
and economic developments abroad, as well as those that result from the
differences between the regulation of domestic securities and issuers and
foreign securities and issuers. These risks may include, but are not limited to,
expropriation, confiscatory taxation, currency fluctuations, withholding taxes
on interest, limitations on the use or transfer of assets, political or social
instability, ability to obtain or enforce court judgments abroad and adverse
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as growth of
gross national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS
Foreign securities may be denominated in foreign currencies. Therefore, the
value in U.S. dollars of the Fund's assets and income may be affected by changes
in exchange rates and regulations. Although the Fund values its assets daily in
U.S. dollars, it will not convert its holdings of foreign currencies to U.S.
dollars daily. When the Fund converts its holdings to another currency, it may
incur conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in connection
with its investments in foreign securities. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may want to establish the U.S. dollar cost or proceeds, as
the case may be. By entering into a forward contract in U.S. dollars for the
purchase or sale of the amount of foreign currency involved in an underlying
security transaction, the Fund attempts to protect itself against a possible
loss between trade and settlement dates resulting from an adverse change in the
relationship between the U.S. dollar and such foreign currency. However, this
tends to limit potential gains which might result from a positive change in such
currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency or denominated in a
currency or currencies that the adviser believes will reflect a high degree of
correlation with the currency with regard to price movements. The Fund generally
will not enter into forward foreign currency exchange contracts with a term
longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased--the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which can or
otherwise limit returns to the convertible security holder, such as DECS
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security.), LYONS (Liquid Yield Option Notes which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock
which are an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES (Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating below
investment grade after the Fund has purchased it. See "High Yield Debt
Obligations." BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution that
has capital, surplus and undivided profits over $100 million or is insured by
the BIF or the SAIF. Bank instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs"). The banks issuing these instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping and the public availability of
information.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will treat
credit-enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial and foreign currency futures contracts
to hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the instruments subject to the futures contracts may not
correlate perfectly with the prices of the instruments in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio's holdings to market changes. In addition, the Fund's
investment adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events, the
Fund may lose money on the futures contract or option. It is not certain that a
secondary market for positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary market on an exchange or otherwise will exist for any particular
futures contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS
The Fund may invest up to but not including 35% of its total assets in debt
securities that are not investment-grade but are rated BB or lower by an NRSRO
(or, if unrated, determined by the adviser to be of comparable quality). Some of
these securities may involve equity characteristics. The Fund may invest in
equity securities, including unit offerings which combine fixed rate securities
and common stock or common stock equivalents such as warrants, rights and
options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.
The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High-Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio. RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each issuer
as well as by monitoring broad economic trends and corporate and legislative
developments.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stock and bonds, derivatives do
not necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
TOTAL RETURN
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling Shares) or realized from the purchase and sale of securities, and
successful use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed-income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed-income portfolio is expected to be less than that of an equity
portfolio.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed-upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Directors and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. The Fund may dispose of a commitment prior to
settlement if the adviser deems it appropriate to do so. In addition, the Fund
may enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticpate that portfolio turnover
will result in adverse tax consequences. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs. INVESTMENT
LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge its
assets to secure such borrowings; or
* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities) or acquire more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken over the telephone.
The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares by Federal Reserve wire, call the Fund before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Total
Return Bond Fund--Institutional Service Shares; Fund Number (this number can be
found on the account statement or by contacting the Fund); Group Number or Order
Number; Nominee or Institution Name; ABA Number 011000028. Shares cannot be
purchased by wire on holidays when wire transfers are restricted. Questions on
wire purchases should be directed to your shareholder services representative at
the telephone number listed on your account statement.
BY MAIL
To purchase Shares by mail, send a check made payable to Federated Total Return
Bond Fund--Institutional Service Shares to: Federated Shareholder Services
Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are considered
received when payment by check is converted by State Street Bank and Trust
Company ("State Street Bank") into federal funds. This is normally the next
business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary. The net asset value is determined as of the close of
trading (normally 4:00 p.m., Eastern time), on the New York Stock Exchange,
Monday through Friday, except on: (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Martin Luther King Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund. The Fund acquires the exchanged
securities for investment and not for resale. Securities accepted by the
Fund will be valued in the same manner as the Fund values its assets. The basis
of the exchange will depend on the net asset value of Fund Shares on the day the
securities are valued. One Share of the Fund will be issued for the equivalent
amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
Shares, a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In
addition, shareholders will receive periodic statements reporting all
account activity, including dividends paid. The Fund will not issue share
certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above. The
written request should state: Federated Total Return Bond Fund--Institutional
Service Shares; the account name as registered with the Fund; the account
number; and the number of Shares to be redeemed or the dollar amount requested.
All owners of the account must sign the request exactly as the Shares are
registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to 0.40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion. ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors. Federated Management and other subsidiaries of
Federated Investors serve as investment advisers to a number of investment
companies and private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With over $110
billion invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1996, Federated Investors
is one of the largest mutual fund investment managers in the United States. With
more than 2,000 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than 60 days.
Violations of the codes are subject to review by the Directors and could result
in severe penalties.
PORTFOLIO MANAGER'S BACKGROUND
Joseph M. Balestrino has been a portfolio manager of the Fund since
inception. Mr. Balestrino joined Federated Investors in 1986 and has been a
Vice President of the Fund's investment adviser and Federated Research Corp.
since 1995. Mr. Balestrino served as an Assistant Vice President of the
investment adviser and Federated Research Corp. from 1991 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.
John T. Gentry has been a portfolio manager of the Fund since November 1997.
Mr. Gentry joined Federated Investors in 1995 as an Investment Analyst and
has been an Assistant Vice President of the Fund's adviser and Federated
Research Corp. since April 1997. Mr. Gentry served as a Senior Treasury
Analyst at Sun Company, Inc. from 1991 to 1995. Mr. Gentry is a Chartered
Financial Analyst and earned his M.B.A., with concentrations in Finance and
Accounting, from Cornell University.
Donald T. Ellenberger has been a portfolio manager of the Fund since
November 1997. Mr. Ellenberger joined Federated in 1996 as a Vice President
of a Federated advisory subsidiary. He has been a Vice President of the
Fund's adviser and Federated Research Corp. since March 1997. From 1986 to
1996, he served as a Trader/Portfolio Manager for Mellon Bank, N.A. Mr.
Ellenberger received his M.B.A. in Finance from Stanford University.
Mark E. Durbiano has been the Fund's portfolio manager for the high-yield
corporate bonds asset category of the Fund since inception. He has performed
these duties since the Fund's inception. Mr. Durbiano joined Federated
Investors in 1982 and has been a Senior Vice President of the Fund's adviser
and Federated Research Corp. since January 1996. Mr. Durbiano was a Vice
President of the Fund's adviser and Federated Research Corp. from 1988
through 1995. Mr. Durbiano is a Chartered Financial Analyst and received his
M.B.A. in Finance from the University of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Institutional
Service Shares. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Fund in an amount computed at an annual rate of 0.25% of the average
daily net asset value of Institutional Service Shares of the Fund. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers. The Plan is a compensation-type plan. As such, the
Fund makes no payments to the distributor except as described above. Therefore,
the Fund does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it from the
Fund, interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amounts or may earn a profit from future
payments made by the Fund under the Plan. In addition, the Fund has entered
into a Shareholder Services Agreement with Federated Shareholder Services, a
subsidiary of Federated Investors, under which the Fund may make payments up to
0.25% of the average daily net asset value of Shares to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services. SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose voluntarily to waive a portion of its
fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 208,177 (91.14%) of the
Institutional Service Shares of the Fund, may for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a 30-day period by the maximum offering price per share of the Fund on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Fund's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $100,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.72
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.04
LESS DISTRIBUTIONS
Distributions from net investment income (0.72)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.52%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.01%
Net investment income 7.15%
Expense waiver/reimbursement(c) 4.39%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $16,700
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--38.2%
BANKING--1.4%
$ 260,000 FirstBank Puerto Rico, Sub. Note, 7.625%, 12/20/2005 $ 266,231
BROADCAST RADIO & T.V.--0.7%
125,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 131,408
CABLE TELEVISION--2.7%
200,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 231,974
250,000 TKR Cable, Inc., 10.50%, 10/30/2007 279,240
TOTAL 511,214
CONGLOMERATES--1.3%
250,000 (a)Hutchison Whampoa Finance, Company Guarantee, 7.50%, 247,318
8/1/2027
ECOLOGICAL SERVICES & EQUIPMENT--1.5%
250,000 WMX Technologies, Inc., Deb., 8.75%, 5/1/2018 279,143
ELECTRONICS--1.4%
250,000 Anixter International, Inc., Company Guarantee, 8.00%, 259,512
9/15/2003
FINANCIAL INTERMEDIARIES--1.6%
250,000 Green Tree Financial Corp., Sr. Sub. Note, 10.25%, 6/1/2002 287,013
25,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 25,133
TOTAL 312,146
FINANCIAL SERVICES--3.1%
500,000 AIM Management Group, 9.00%, 11/15/2003 540,240
50,000 Associates Corp. of North America, Sr. Note, 6.25%, 3/15/1999 50,259
TOTAL 590,499
FOREST PRODUCTS--3.0%
25,000 Pope & Talbot, Inc., 8.375%, 6/1/2013 25,700
500,000 Repap Wisconsin, Inc., 2nd Priority Sr. Secd. Note, 9.875%, 545,625
5/1/2006
TOTAL 571,325
INDUSTRIAL PRODUCTS & EQUIPMENT--5.1%
350,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 366,188
10/1/1999
295,000 Joy Technologies, Inc., Sr. Note, 10.25%, 9/1/2003 320,075
250,000 Southdown, Inc., Sr. Sub. Note, 10.00%, 3/1/2006 278,125
TOTAL 964,388
</TABLE>
FEDERATED TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
INSURANCE--5.8%
$ 250,000 American General Corp., S.F. Deb., 9.625%, 2/1/2018 $ 264,707
250,000 Conseco, Inc., Sr. Note, 10.50%, 12/15/2004 299,600
150,000 Delphi Financial Group, Inc., 9.31%, 3/25/2027 162,924
110,000 (a)Life Re Capital Trust I, 8.72%, 6/15/2027 114,192
250,000 SunAmerica, Inc., Sr. Note, 9.00%, 1/15/1999 259,533
TOTAL 1,100,956
LEISURE & ENTERTAINMENT--0.8%
150,000 Paramount Communications, Inc., Sr. Deb., 8.25%, 8/1/2022 151,665
OIL & GAS--2.7%
400,000 Clark Refining & Marketing Inc., Sr. Note, 10.50%, 12/1/2001 414,000
100,000 Husky Oil Ltd., Sr. Note, 7.125%, 11/15/2006 102,007
TOTAL 516,007
PRINTING & PUBLISHING--2.7%
500,000 Valassis Communication, Inc., Sr. Sub. Note, 9.375%, 3/15/1999 518,825
RETAILERS--2.0%
100,000 Eckerd Corp., Sr. Sub. Note, 9.25%, 2/15/2004 108,143
250,000 Penney (J.C.) Co., Inc., Deb., 7.65%, 8/15/2016 264,265
TOTAL 372,408
SURFACE TRANSPORTATION--2.4%
400,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 464,120
TOTAL CORPORATE BONDS (IDENTIFIED COST 7,257,165
$7,158,444)
(B)MORTGAGE BACKED SECURITIES--20.9%
704,863 Federal Home Loan Mortgage Corp., Pool D28594, 7.50%, 12/1/2022 721,822
491,208 Federal Home Loan Mortgage Corp., Pool E00484, 6.50%, 5/1/2012 487,985
245,072 Federal Home Loan Mortgage Corp., Pool E66587, 6.50%, 3/1/2012 243,464
504,956 Federal Home Loan Mortgage Corp., Pool E66943, 6.50%, 5/1/2012 501,644
485,962 Federal National Mortgage Association, Pool 267905, 7.00%, 487,633
2/1/2024
499,307 Federal National Mortgage Association, Pool 394064, 7.50%, 507,576
7/1/2027
997,090 GNMA, Pool 452179, 7.50%, 6/15/2027 1,014,230
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST 3,964,354
$3,913,741)
MUNICIPAL SECURITIES--0.7%
125,000 Harvard University, Revenue Bonds, 8.125%, 4/15/2007 139,653
(identified cost $133,869)
PRINCIPAL AMOUNT VALUE
U.S. TREASURY--36.2%
U.S. TREASURY BONDS--7.9%
$ 1,600,000 6.00%, 2/15/2026 $ 1,504,096
U.S. TREASURY NOTES--28.3%
5,325,000 6.25%, 2/15/2003 5,378,516
TOTAL U.S. TREASURY (IDENTIFIED COST 6,882,612
$6,771,494)
(C)REPURCHASE AGREEMENT--2.1%
400,000 BT Securities Corporation, 6.07%, dated 9/30/1997, due 400,000
10/1/1997 (at amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $ 18,643,784
$18,377,548)(D)
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities law. At September 30, 1997, these securities amounted
to $361,510 which represents 1.9% of net assets.
(b) Because of monthly principal payments, the average lives of the Mortgage
Backed Securities are less than the indicated periods.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $18,377,548. The
net unrealized appreciation of investments on a federal tax basis amounts to
$266,236 which is comprised of $269,662 appreciation and $3,426 depreciation at
September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($18,988,769) at September 30, 1997.
The following acronym is used throughout this portfolio:
GNMA --Government National Mortgage Association
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 18,643,784
$18,377,548)
Cash 7,359
Income receivable 241,480
Receivable for shares sold 332,105
Deferred organizational costs 9,499
Total assets 19,234,227
LIABILITIES:
Payable for investments purchased $ 104,203
Payable for shares redeemed 33,135
Income distribution payable 93,409
Accrued expenses 14,711
Total liabilities 245,458
Net Assets for 1,839,240 shares outstanding $ 18,988,769
NET ASSETS CONSIST OF:
Paid in capital $ 18,795,167
Net unrealized appreciation of investments 266,236
Accumulated net realized loss on investments (72,573)
Distributions in excess of net investment income (61)
Total Net Assets $ 18,988,769
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$16,699,722 1,617,506 shares outstanding $10.32
INSTITUTIONAL SERVICE SHARES:
$2,289,047 221,734 shares outstanding $10.32
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED TOTAL RETURN BOND FUND
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 599,075
EXPENSES:
Investment advisory fee $ 33,489
Administrative personnel and services fee 154,935
Custodian fees 5,794
Transfer and dividend disbursing agent fees and expenses 58,068
Directors'/Trustees' fees 10,320
Legal fees 7,733
Portfolio accounting fees 58,372
Distribution services fee--Institutional Service Shares 897
Shareholder services fee--Institutional Service Shares 897
Share registration costs 25,599
Printing and postage 8,853
Taxes 25
Miscellaneous 5,296
Total expenses 370,278
Waivers and reimbursements--
Waiver of investment advisory fee $ (33,489)
Waiver of distribution services fee--Institutional Service (717)
Shares
Reimbursement of other operating expenses by Adviser (334,143)
Total waivers and reimbursements (368,349)
Net expenses 1,929
Net investment income 597,146
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 53,760
Net change in unrealized appreciation of investments 266,236
Net realized and unrealized gain on investments 319,996
Change in net assets resulting from operations $ 917,142
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 597,146
Net realized gain (loss) on investments ($72,573 net loss, as 53,760
computed for federal tax purposes)
Net change in unrealized appreciation of investments 266,236
Change in net assets resulting from operations 917,142
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (573,166)
Institutional Service Shares (24,041)
Change in net assets resulting from distributions to (597,207)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 27,197,758
Net asset value of shares issued to shareholders in payment of 15,827
distributions declared
Cost of shares redeemed (13,645,266)
Change in net assets resulting from share transactions 13,568,319
Change in net assets 13,888,254
NET ASSETS:
Beginning of period 5,100,515
End of period (including undistributed net investment income of $ 18,988,769
$(61))
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Total Return
Bond Fund (the "Fund"), a diversified portfolio. The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
U.S. government securities, listed corporate bonds, other fixed-income
securities, asset-backed securities and unlisted securities and private
placement securities are generally valued at the mean of the latest bid and
asked price as furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of 60 days or less at
the time of purchase may be valued at amortized cost, which approximates fair
market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/ dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At September 30, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $72,573, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire in
2005 ($72,573).
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES
The costs incurred by the Fund with respect to registration of its shares in its
first fiscal year, excluding the initial expense of registering its shares, have
been deferred and are being amortized over a period not to exceed five years
from the Fund's commencement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
In some cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no market
prices are available, at the fair value as determined by the Fund's pricing
committee. Additional information on each restricted security held at September
30, 1997 is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
Hutchison Whampoa Finance 7/25/1997 $248,233
Life Re Capital Trust I 9/17/1997 $112,578
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(A)
INSTITUTIONAL SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 2,441,867 $ 24,817,916
Shares issued to shareholders in payment of distributions declared 1,355 13,891
Shares redeemed (1,335,737) (13,538,732)
Net change resulting from Institutional Share transactions 1,107,485 $ 11,293,075
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(A)
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 231,935 $ 2,379,842
Shares issued to shareholders in payment of distributions declared 189 1,936
Shares redeemed (10,420) (106,534)
Net change resulting from Institutional Service Share transactions 221,704 $ 2,275,244
Net change resulting from share transactions 1,329,189 $ 13,568,319
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver and/or reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares annually, to compensate FSC.
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets
of the Fund for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. For the period
ended September 30, 1997, the Institutional Shares did not incur a shareholder
services fee. FSS may voluntarily choose to waive any portion of its fee. FSS
can modify or terminate this voluntary waiver at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
PURCHASES $ 25,588,747
SALES $ 8,132,262
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of Federated Total Return Bond Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Total Return Bond Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets, and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Total Return Bond Fund at September 30, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
ERNST &YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has 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 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.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba--Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. 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 in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR--NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA---High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A---Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB---Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB---Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B---Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC--Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP--Preferred stock with dividend arrearages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
* Leading market positions in well established industries. * High rates of
return on funds employed. * Conservative capitalization structure with moderate
reliance on debt and ample asset protection. * Broad margins in earning coverage
of fixed financial charges and high internal cash generation. * Well established
access to a range of financial markets and assured sources of alternate
liquidity. Prime-2--Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
STANDARD AND POOR'S RATINGS GROUP 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 INVESTORS SERVICE, 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.
FEDERATED TOTAL RETURN BOND FUND
Federated Investors Funds
5800 Corporate Drive Pittsburgh, PA 15237-7000 DISTRIBUTOR Federated
Securities Corp. Federated Investors Tower Pittsburgh, PA 15222-3779 INVESTMENT
ADVISER Federated Management Federated Investors Tower 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 AUDITORS Ernst
& Young LLP One Oxford Centre Pittsburgh, PA 15219
[Graphic]
Federated Total Return Bond Fund
(A Portfolio of
Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc. an Open-End,
Management Investment Company
[Graphic]
FEDERATED INVESTORS
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428Q101
Cusip 31428Q507
G01721-03-SS (11/97)
[Graphic]
Federated Total Return Bond Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
Institutional Service Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus(es) of Federated Total Return Bond Fund (formerly, Federated
Government Total Return Fund) (the "Fund"), a portfolio of Federated Total
Return Series, Inc. (the "Corporation") dated November 30, 1997. This
Statement is not a prospectus. You may request a copy of a prospectus or a
paper copy of this Statement, if you have received it electronically, free
of charge by calling 1-800-341-7400.
Federated Total Return Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
Statement dated November 30, 1997
[GRAPHIC OMITTED]
Cusip 31428Q101
Cusip 31428Q507
G01722-02 (11/97)
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Table of Contents
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I
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOs") 1
Real Estate Mortgage Investment Conduits ("REMICs") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Foreign Bank Instruments 3
Futures and Options Transactions 3
Medium Term Notes and Deposit Notes 5
Weighted Average Portfolio Maturity 5
Weighted Average Portfolio Duration 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Portfolio Turnover 7
Investment Limitations 8
Federated Total Return Series,
Inc. Management 10
Director Liability 14
Investment Advisory Services 15
Adviser to the Fund 15
Advisory Fees 15
Other Services 15
Fund Administration 15
Custodian and Portfolio Accountant 15
Brokerage Transactions 15
Purchasing Shares 16
Distribution Plan (Institutional
Service Shares only) and
Shareholder Services 16
Determining Net Asset Value 16
Determining Market Value of Securities16
Valuing Municipal Bonds 17
Use of Amortized Cost 17
Redeeming Shares 17
Redemption In Kind 17
Tax Status 17
The Fund's Tax Status 17
Shareholders' Tax Status 18
Total Return 18
Yield 18
Performance Comparisons 18
Economic and Market Information 19
About Federated Investors 19
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General Information About the Fund
The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." and the name of the Fund was changed from "Insight U.S. Government
Fund" to "Federated Government Total Return Fund." ." On May 15, 1996, the name
of the Fund was changed from "Federated Government Total Return Fund" to
"Federated Total Return Bond Fund." The Articles of Incorporation permit the
Corporation to offer separate portfolios and classes of shares.
Shares of the Fund are offered in two classes, known as Institutional Shares and
Institutional Service Shares (individually and collectively referred to as
"Shares," as the context may require). This Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
Investment Objective and Policies
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors ("Directors")
without shareholder approval. Shareholders will be notified before any material
change in the investment policies becomes effective.
Types of Investments
The Fund invests primarily in a diversified portfolio of debt securities. Under
normal circumstances, the Fund will invest at least 65% of the value of its
total assets in domestic investment grade debt securities.
Adjustable Rate Mortgage Securities ("ARMS")
The ARMS in which the Fund invests include, but are not limited to, securities
issued by Government National Mortgage Association, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation. Unlike conventional
bonds, ARMS pay back principal over the life of the ARMS rather than at
maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing payments on the underlying mortgages. At the
time that a holder of the ARMS reinvests the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking in"
long-term interest rates than other types of fixed income securities. ARMS may
also be collateralized by whole loans or private pass-through securities.
Like other fixed income securities, the market value of ARMS will generally vary
inversely with changes in market interest rates. Thus, the market value of ARMS
generally declines when interest rates rise and generally rises when interest
rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Collateralized Mortgage Obligations ("CMOs")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs; most of the CMOs in which the Fund invests use the same basic
structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities. The
first three (A, B, and C bonds) pay interest at their stated rates beginning
with the issue date, and the final class (Z bond) typically receives any excess
income from the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the shorter
maturity classes have been retired, but then receives all remaining principal
and interest payments;
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(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities; and
(3) The classes of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity class (or A bond). When those
securities are completely retired, all principal payments are then directed to
the next shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro rata, as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. The interest portion of
these payments is distributed by the Fund as income, and the capital portion is
reinvested.
Real Estate Mortgage Investment Conduits ("REMICs")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
Interest-Only and Principal-Only Investments
Some of the securities purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on mortgage-backed
securities (stripped mortgage-backed securities or "SMBSs"). SMBSs are usually
structured with two classes and receive different proportions of the interest
and principal distributions on the pool of underlying mortgage-backed
securities. Due to the possibility of prepayments on the underlying mortgages,
SMBSs may be more interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which SMBSs were
issued, there may be substantial prepayments on the underlying mortgages,
leading to the relatively early prepayments of principal-only SMBSs (the
principal-only or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class). Because the
yield to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on the
underlying mortgages. The Fund's inability to fully recoup its investments in
these securities as a result of a rapid rate of principal prepayments may occur
even if the securities are rated by an NRSRO. Therefore, interest-only SMBSs
generally increase in value as interest rates rise and decrease in value as
interest rates fall, counter to changes in value experienced by most fixed
income securities.
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid.
Resets of Interest
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels.
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To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMS which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Caps and Floors
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages.
Convertible Securities
DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common stock at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common stock up to the first call
price. They are effectively capped at that point unless the common stock rises
above a second price point, at which time they participate with unlimited upside
potential.
PERCS, or similar instruments marketed under different names, offer a
substantial dividend advantage, but capital appreciation potential is limited to
a predetermined level. PERCS are less risky and less volatile than the
underlying common stock because their superior income mitigates declines when
the common stock falls, while the cap price limits gains when the common stock
rises.
Foreign Bank Instruments
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income. The Fund currently does not intend to
invest more than 5% of its total assets in options transactions.
<PAGE>
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. In the fixed
income securities market, price moves inversely to interest rates. A rise
in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would agree to purchase securities in the future at a
predetermined price (i.e., "go long") to hedge against a decline in market
interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out nor exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
offset the drop in value of the Fund's fixed income portfolio which is
occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The net
premium income of the Fund will then offset the decrease in value of the
hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts. If
this limitation is exceeded at any time, the Fund will take prompt action
to close out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
<PAGE>
"Margin" In Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking
to market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment
of the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right
to obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
Medium Term Notes and Deposit Notes
Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years.
Weighted Average Portfolio Maturity
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity to each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) asset-backed
securites as having a maturity equal to their estimated weighted-average
maturity and (b) variable and floating rate instruments as having a remaining
maturity commensurate with the period remaining until the next scheduled
adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of the principal prepayments
weighted by the period until such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be treated as
floating or variable rate securities based upon the interest rate index of the
swap or cap; floating and variable rate securities hedged with interest rate
swaps or floors will be treated as having a maturity equal to the term of the
swap or floor. In the event that the Fund holds an interest rate swap, cap or
floor that is not hedging another portfolio security, the swap, cap or floor
will be treated as having a maturity equal to its term and a weight equal to its
notional principal amount of such term.
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Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as the probable amount
and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.
Mathematically, duration is measured as follows:
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3) + ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt= the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the Fund
sufficient to make payment for the securities to be purchased are segregated on
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
<PAGE>
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors. The
Directors consider the following criteria in determining the liquidity of
certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the period from October 1, 1996 (date of
initial public investment) to September 30, 1997, the Fund's portfolio turnover
rate was 101%.
<PAGE>
Investment Limitations
The following limitations are fundamental [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 Securities and
Exchange Commission) in an open-end investment company with substantially the
same investment objectives]:
Selling Short or Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount 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 Fund 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 any borrowings in excess of 5% of its
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 will not be deemed to be pledges of the Fund's assets: 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.
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
U.S. government, 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, and will not acquire more than 10% of the outstanding voting
securities of any one issuer.
Investing in Real Estate
The Fund will not purchase 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 except to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
<PAGE>
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.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government, its
agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Directors 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 Securities and Exchange
Commission) in an open-end investment company with substantially the same
investment objectives]. Shareholders will be notified before any material
changes in these limitations become effective.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, interest rate swaps,
non-negotiable fixed time deposits with maturities over seven days, and
certain restricted securities not determined by the Directors to be
liquid.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of the investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund does not expect to borrow money, pledge securities or engage in reverse
repurchase agreements during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings associations having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
<PAGE>
Federated Total Return Series, Inc. Management
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President and Director of the
Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
<PAGE>
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
<PAGE>
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University 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 and Czech Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
<PAGE>
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board between meetings
of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; 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 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 Investment Portfolios; Federated Investment Trust; 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.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.
As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Anbee & Company, Aurora, IL
owned 87,777 (5.02%); Union Planters National Bank, Memphis, TN owned 225,764
(12.91%); Onedun, Dundee, IL owned 113, 019 (6.46%); Sunbank and Co., Sunbury,
PA owned 246,474 (14.09%); Grand Old Co., Zanesville, OH owned 268,281 (15.34%);
Onedun, Dundee, IL owned 88,807 (5.08%); and First Mar & Co., Marquette, MI
owned 263,274 (15.06%). As of October 28, 1997, the following shareholder of
record owned 5% or more of the outstanding Institutional Service Shares of the
Fund: Anbee & Company, Aurora, IL owned 208,177 (91.14%).
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Directors' Compensation
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 54 other investment companies in the Fund Complex
Thomas G. Bigley $1,004 $86,331 for the Corporation and
Director 54 other investment companies in the Fund Complex
John T. Conroy, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
William J. Copeland, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 16 other investment companies in the Fund Complex
andDirector
James E. Dowd, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Peter E. Madden, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
John E. Murray, Jr., $1,004 $104,898 for the Corporationand
Director 54 other investment companies in the Fund Complex
Wesley W. Posvar, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Marjorie P. Smuts, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended September 30, 1997 and
the Corporation was comprised of four portfolios.
+The information is provided for the last calendar year.
Director Liability
The Corporation's Articles of Incorporation provide that the Directors will not
be liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
<PAGE>
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
Advisory Fees
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. For the period from October 1, 1996
(date of initial public investment) to September 30, 1997, the Adviser earned
fees of $33,489, all of which was voluntarily waived.
Other Services
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from October 1, 1996 (date of initial public
investment) to September 30, 1997, the administrator earned fees of $154,935.
Custodian and Portfolio Accountant
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
Transfer Agent
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based upon the size, type and
number of accounts and transactions made by shareholders.
Independent Auditors
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally 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 makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Directorss. The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the adviser or by affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the period from
October 1, 1996 (date of initial public investment) to September 30, 1997, the
Fund paid no commissions on brokerage transactions.
<PAGE>
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value on days the New York Stock Exchange is open for
business. The procedure for purchasing shares of the Fund is explained in the
prospectus under "Investing in the Fund."
Distribution Plan (Institutional Service Shares only) and Shareholder Services
As explained in the respective prospectuses, with respect to Shares of the Fund,
the Fund has adopted a Shareholder Services Agreement, and, with respect to
Institutional Service Shares, the Fund has adopted a Distribution Plan.
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations and addresses.
By adopting the Plan, the Directors expect that the Fund will be able to achieve
a more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the period from October 1, 1996 (date of initial public investment) to
September 30, 1997, the Fund paid $897, of which $717 was voluntarily waived for
Institutional Service Shares under the Distribution Plan. In addition, for the
period from October 1, 1996 (date of initial public investment) to September 30,
1997, the Fund paid $897 in shareholder service fees for Institutional Service
Shares. For the same period, the Fund paid no shareholder services fees for
Institutional Shares.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's securities, other than options, are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean bid and asked prices,
as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost unless the Directors determine this is not
fair value; or
o at fair value as determined in good faith by the Directors.
<PAGE>
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Directors determine in good faith
that another method of valuing option positions is necessary.
Valuing Municipal Bonds
The Directors use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
Use of Amortized Cost
The Directors have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank does not charge
for telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
Redemption In Kind
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which a Fund is obligated to redeem shares for any
one shareholder solely in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Directors
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way that net asset value is determined. The portfolio instruments
will be selected in a manner that the Directors deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
<PAGE>
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
Total Return
The Fund's average annual total return for the one-year period ended September
30, 1997 were 10.52% and 10.22% for Institutional Shares and Institutional
Service Shares, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.
Yield
The Fund's yields for the thirty-day period ended September 30, 1997 were 7.02%
and 6.72%, for Institutional Shares and Institutional Service Shares,
respectively.
The yield of the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is 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 the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial institutions
and broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance.
<PAGE>
When comparing performance, investors should consider all relevant factors such
as the composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
o Russell Active Sector Rotation Accounts Universe includes portfolios
that change interest rate exposure relative to the Lehman Brothers
Aggregate Bond Index or other broad market indexes, with changes in
portfolio interest rate sensitivity limited to approximately plus or
minus 20% index duration. Durations have typically been 3.5 to 6 years.
Primary emphasis is on selecting undervalued sectors or issues.
Includes separate accounts, pooled funds, or mutual funds managed by
investment advisors, banks or insurance companies.
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 offering price
over a specific period of time. From time to time, the Fund will quote
its Lipper ranking in the "Intermediate Investment Grade Debt "
category in advertising and sales literature.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues, which include: non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate bonds
guaranteed by the U.S. government and quasi-federal corporations; and
publicly issued, fixed rate, non-convertible domestic bonds of
companies in industry, public utilities, and finance. The average
maturity of these bonds approximates nine years. Tracked by Lehman
Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.
o Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index comprised of all the bonds issued by the Lehman
Brothers Government/Corporate Bond Index with maturities between 1 and
9.99 years. Total return is based on price appreciation/depreciation
and income as a percentage of the original investment. Indices are
rebalanced monthly by market capitalization.
o Lehman Brothers Aggregate Bond Index is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indices are rebalanced monthly by market
capitalization.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
About Federated Investors
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making-structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. These traders handle trillions of dollars
in annual trading volume.
<PAGE>
In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds and 17 bond funds with assets approximating $17.2
billion and $4.0 billion, respectively. Federated's corporate bond decision
making--based on intensive, diligent credit analysis--is backed by over 21 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 $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international and global portfolios.
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 $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with 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 2,000 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, Federated Securities Corp.
* Source: Investment Company Institute.
FEDERATED LIMITED DURATION FUND
(A Portfolio of Federated Total Return Inc.)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Limited Duration Fund (the "Fund") offered
by this prospectus represent interests in a diversified investment portfolio of
Federated Total Return Series, Inc. (the "Corporation"), an open-end, management
investment company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference. The Fund has also filed a Statement of Additional Information
dated November 30, 1997, with the Securities and Exchange Commission ("SEC").
The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus if you
have received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the Fund,
contact the Fund at the address listed on the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Institutional Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 11
Hub and Spoke [registered trademark] Option 12
Net Asset Value 12
Investing in Institutional Shares 12
Share Purchases 12
Minimum Investment Required 12
What Shares Cost 13
Exchanging Securities for Fund Shares 13
Confirmations and Account Statement 13
Dividends and Distributions 13
Redeeming Institutional Shares 13
Telephone Redemption 13
Written Requests 14
Accounts with Low Balances 14
Fund Information 14
Management of the Fund 14
Distribution of Institutional Shares 15
Administration of the Fund 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 17
Financial Highlights -- Institutional Service Shares 18
Financial Statements 19
Report of Ernst & Young LLP, Independent Auditors 30
Appendix 31
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)
None Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1) 0.00% 12b-1 Fee None Total Other Expenses
(after expense reimbursement) 0.35% Shareholder Services Fee(2) 0.00% Total
Operating Expenses (after waivers and expense reimbursement)(3) 0.35%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%.
(2) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1998. If
Institutional Shares were paying or accruing the shareholder services fee,
Institutional Shares would be able to pay up to 0.25% of its average daily net
assets for the shareholder services fee. See "Fund Information."
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total operating
expenses were 0.00% for the fiscal year ended September 30, 1997 and would have
been 8.74% absent the voluntary waiver of the management fee and the voluntary
reimbursement of certain other operating expenses.
* Total operating expenses are estimated based on average expenses expected to
be incurred during the period ending September 30, 1998. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Shares of the fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Institutional Shares" and "Fund
Information." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.
<TABLE>
<CAPTION>
EXAMPLE
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of eachtime period.
<S> <C>
1 year $ 4
3 years $11
5 years $20
10 years $44
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout the period)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 30.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(a)
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------
Net investment income 0.66
- -------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 0.14
- ------------------------------------------------------------------------------------- -------
Total from investment operations 0.80
- ------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------
Distributions from net investment income (0.65)
- -------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- -------------------------------------------------------------------------------------- -------
Total distributions (0.67)
- -------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.13
- -------------------------------------------------------------------------------------- -------
TOTAL RETURN(b) 8.27%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 0.00%
- --------------------------------------------------------------------------------------
Net investment income 6.47%
- --------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 8.74%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $7,589
- --------------------------------------------------------------------------------------
Portfolio turnover 109%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." On May 14, 1997, the Board of Directors (the "Directors") approved the
Fund's name change from Federated Total Return Limited Duration Fund to
Federated Limited Duration Fund. The Articles of Incorporation permit the
Corporation to offer separate portfolios and classes of shares. As of the date
of this prospectus, the Board of Directors (the "Directors") has established two
classes of shares for Federated Limited Duration Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to the Institutional
Shares of Federated Limited Duration Fund.
Institutional Shares ("Shares") of the Fund are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of fixed income securities. A minimum initial investment
of $100,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
Investment Objective
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in domestic
investment grade debt securities. Investment grade debt securities are rated in
the four highest rating categories by one or more nationally recognized
statistical rating organizations ("NRSROs") (AAA, AA, A or BBB by Standard &
Poor's Ratings Group ("Standard & Poor's"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's")), or which are of comparable
quality in the judgment of the adviser. Downgraded securities will be evaluated
on a case-by-case basis by the adviser. The adviser will determine whether or
not the security continues to be an acceptable investment. If not, the security
will be sold. The remainder of the Fund's assets may be invested in any of the
securities discussed below. The Fund's weighted-average portfolio duration will
at all times be limited to three years or less. (See the section entitled
"Average Portfolio Duration" in this Prospectus.) Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of corporate debt obligations, U.S. and foreign government
obligations, and mortgage-backed and asset-backed securities. The Fund may also
invest in convertible securities. The Fund may also invest in derivative
instruments of such securities (including instruments with demand features or
credit enhancement and stripped mortgage-backed securities), as well as money
market instruments and cash.
The securities in which the Fund invests principally are:
* domestic (i.e., issued in the United States) and foreign issues of corporate
debt obligations as well as domestic and foreign issues of obligations of
foreign governments and/ortheir instrumentalities having floating or fixed rates
of interest;
* obligations issued or guaranteed as to payment of principal and
interest by the U.S. government, or its agencies or instrumentalities;
* mortgage-backed securities;
* asset-backed securities;
* municipal securities;
* commercial paper which matures in 270 days or less;
* time deposits (including savings deposits and certificates of deposit) and
bankers' acceptances in commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF"), both of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit issued by and other time
deposits in foreign branches of FDIC insured banks or who have at least $100
million in capital; and
* repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY
DEBT OBLIGATIONS
The Fund invests in corporate and foreign government/agency debt obligations,
including bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities, including fixed rate
securities with short-term characteristics. Fixed rate securities with
short-term characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the securities may
make them callable within a short period of time. A fixed rate security with
short-term characteristics would include a fixed income security priced close to
call or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates, the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand notes
allow the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features."
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities, which generally include
direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations (including mortgage-backed securities, bonds, notes and
discount notes) issued or guaranteed by the following U.S. government agencies
or instrumentalities: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association; Government National Mortgage Association;
and Student Loan Marketing Association. These securities are backed by: the full
faith and credit of the U.S. Treasury; the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal National
Mortgage Association; Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property. There are currently four basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Government National Mortgage Association ("Ginnie
Mae"), the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; (iii) those issued by private issuers that represent an
interest in or are collateralized by whole loans or mortgage-backed securities
without a government guarantee but usually having some form of private credit
enhancement; and (iv) privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund may invest in certain CMOs which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) securities which are collateralized by pools of mortgages in
which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (iii) other
securities in which the proceeds of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset- backed bonds. The securities are issued by
non-governmental entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal are received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset- backed securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rapidly rising interest rates, mortgage-backed securities may also
have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
FOREIGN SECURITIES
The Fund may invest in foreign securities. Foreign securities do not include
American Depository Receipts, but do include foreign securities not publicly
traded in the United States. Investments in foreign securities involve special
risks that differ from those associated with investments in domestic securities.
The Fund may invest more than 10% in foreign securities.
RISKS
The risks associated with investments in foreign securities relate to political
and economic developments abroad, as well as those that result from the
differences between the regulation of domestic securities and issuers and
foreign securities and issuers. These risks may include, but are not limited to,
expropriation, confiscatory taxation, currency fluctuations, withholding taxes
on interest, limitations on the use or transfer of assets, political or social
instability, ability to obtain or enforce court judgments abroad and adverse
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as growth of
gross national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional
differences exist between investing in foreign and domestic securities. Examples
of such differences include: less publicly available information about foreign
issuers; credit risks associated with certain foreign governments; the lack of
uniform financial accounting standards applicable to foreign issuers; less
readily available market quotations on foreign issues; the likelihood that
securities of foreign issuers may be less liquid or more volatile; generally
higher foreign brokerage commissions; and unreliable mail service between
countries.
CURRENCY RISKS
Foreign securities may be denominated in foreign currencies. Therefore, the
value in U.S. dollars of the Fund's assets and income may be affected by changes
in exchange rates and regulations. Although the Fund values its assets daily in
U.S. dollars, it will not convert its holdings of foreign currencies to U.S.
dollars daily. When the Fund converts its holdings to another currency, it may
incur conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in connection
with its investments in foreign securities. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may want to establish the U.S. dollar cost or proceeds, as
the case may be. By entering into a forward contract in U.S. dollars for the
purchase or sale of the amount of foreign currency involved in an underlying
security transaction, the Fund attempts to protect itself against a possible
loss between trade and settlement dates resulting from an adverse change in the
relationship between the U.S. dollar and such foreign currency. However, this
tends to limit potential gains which might result from a positive change in such
currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency or denominated in a
currency or currencies that the adviser believes will reflect a high degree of
correlation with the currency with regard to price movements. The Fund generally
will not enter into forward foreign currency exchange contracts with a term
longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased -- the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which can or
otherwise limit returns to the convertible security holder, such as DECS
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security.), LYONS (Liquid Yield Option Notes which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock
which are an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES (Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue.).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating below
investment grade after the Fund has purchased it. See "High Yield Debt
Obligations."
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution that
has capital, surplus and undivided profits over $100 million or is insured by
the BIF or the SAIF. Bank instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs"). The banks issuing these instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan requirements, loan limitations, examinations,
accounting, auditing, recordkeeping and the public availability of information.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will treat credit
enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial and foreign currency futures contracts
to hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the instruments subject to the futures contracts may not
correlate perfectly with the prices of the instruments in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio's holdings to market changes. In addition, the Fund's
investment adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events, the
Fund may lose money on the futures contract or option. It is not certain that a
secondary market for positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary market on an exchange or otherwise will exist for any particular
futures contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS
The Fund may invest up to but not including 35% of its total assets in debt
securities that are not investment-grade but are rated BB or lower by an NRSRO
(or, if unrated, determined by the adviser to be of comparable quality). Some of
these securities may involve equity characteristics. The Fund may invest in
equity securities, including unit offerings which combine fixed rate securities
and common stock or common stock equivalents such as warrants, rights and
options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.
The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administration and accounting services. The Fund's adviser the High- Yield Bond
Portfolio will provide the Fund broad diversity and exposure to all aspects of
the high-yield bond sector of the market while at the same time providing
greater liquidity than if high-yield debt obligations were purchased separately
for the Fund. The Fund will be deemed to own a pro rata portion of each
investment of the High-Yield Bond Portfolio.
RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each issuer
as well as by monitoring broad economic trends and corporate and legislative
developments.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stock and bonds, derivatives do
not necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
AVERAGE PORTFOLIO DURATION
Although the Fund will not maintain a stable net asset value, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
total return, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average duration of the Fund's portfolio. Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. The Fund
should be expected to maintain a higher average duration during periods of lower
expected market volatility, and a lower average duration during periods of
higher expected market volatility. In any event, the Fund's dollar-weighted
average duration will not exceed three years.
TOTAL RETURN
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares) or realized from the purchase and sale of securities, and
successful use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Directors and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticipate that portfolio turnover
will result in adverse tax consequnces. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge its assets to secure such borrowings; or
* with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed by the U.S. government and its agencies or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of the outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE [REGISTERED TRADEMARK] OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Limited Duration Fund -- Institutional Shares; Fund Number (this
number can be found on the account statement or by contacting the Fund); Group
Number or Order Number; Nominee or Institution Name; ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted. Questions on wire purchases should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
BY MAIL
To purchase shares of the Fund by mail, send a check made payable to Federated
Limited Duration Fund -- Institutional Shares to: Federated Shareholder Services
Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are
considered received when payment by check is converted by State Street Bank and
Trust Company ("State Street Bank") into federal funds. This is normally the
next business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time), on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Martin Luther King Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund and must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund. The Fund acquires the exchanged
securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 2266-8600. If
share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: Federated Limited Duration Fund --
Institutional Shares; the account name as registered with the Fund; the account
number; and the number of shares to be redeemed or the dollar amount requested.
All owners of the account must sign the request exactly as the Shares are
registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. this requirement does not apply, however, if the
balance falls below $100,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to 0.40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The Adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
PORTFOLIO MANAGER'S BACKGROUND
Randall S. Bauer has been a portfolio manager of the Fund since
inception. Mr. Bauer joined Federated Investors in 1989 and has been a
Vice President of the Fund's investment adviser and Federated Research
Corp. since 1994. Mr. Bauer was an Assistant Vice President of the
Fund's investment adviser and Federated Research Corp. from 1989 to 1993.
Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University.
Robert K. Kinsey has been a portfolio manager of the Fund since May
1997. Mr. Kinsey joined Federated in 1995 as a Vice President of a
Federated advisory subsidiary. He has been a Vice President of the
Fund's adviser and Federated Research Corp. since March, 1997. From 1992
to 1995, he served as a Portfolio Manager for Harris Investment
Management Co., Inc. Mr. Kinsey received his M.B.A. in Finance from
U.C.L.A.
Mark E. Durbiano has been the portfolio manager for the high yield
corporate bonds asset category of the Fund since inception. Mr. Durbiano
joined Federated Investors in 1982 and has been a Senior Vice President
of the Fund's adviser and Federated Research Corp. since January 1996.
Mr. Durbiano was a Vice President of the Fund's adviser and Federated
Research Corp. from 1988 through 1995. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University
of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for shares of
the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment
companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to .25% of the average daily net asset value of the
Institutional Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's investment adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE
FEE FEDERATED FUNDS
- ------- ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose to voluntarily waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 267,780 (94.49%) of the
Institutional Service Shares; and Sunbank & Co., who was the record owner of
250,872 (31.31%) and First Mar & Co., who was the record owner of 234,049
(29.21%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund.
Institutional Service Shares and Institutional Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Service
Shares and Institutional Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(For a share outstanding throughout the period)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 30.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(a)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------
Net investment income 0.63
- --------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 0.15
- -------------------------------------------------------------------------------------- -------
Total from investment operations 0.78
- -------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------
Distributions from net investment income (0.63)
- --------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- -------------------------------------------------------------------------------------- -------
Total distributions (0.65)
- -------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.13
- -------------------------------------------------------------------------------------- -------
TOTAL RETURN(b) 8.10%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 0.29%
- --------------------------------------------------------------------------------------
Net investment income 6.31%
- --------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 14.52%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,724
- --------------------------------------------------------------------------------------
Portfolio turnover 109%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
(a)ASSET-BACKED SECURITIES -- 32.8%
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobile -- 13.5%
- ------------------------------------------------------------------------------------------------
$ 200,000 AFG Receivables Trust 1997-B, Class C, 7.00%, 2/15/2003 $ 199,876
-------------------------------------------------------------------------------
128,795 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 5/15/2002 129,224
-------------------------------------------------------------------------------
328,508 Honda Auto Receivables Grantor Trust 1995-A, Class A, 6.20%, 12/15/2000 329,740
-------------------------------------------------------------------------------
525,182 Olympic Automobile Receivables Trust 1994-A, Class CTF, 5.70%, 1/15/2001 526,153
-------------------------------------------------------------------------------
50,000 Team Fleet Financing Corp. Series 1997-1, Class B, 7.80%, 5/15/2003 51,53
-------------------------------------------------------------------------------
150,000 Yamaha Motor Master Trust 1995-1, Class A, 6.20%, 5/15/2003 150,329
------------------------------------------------------------------------------- ------------
Total 1,386,861
------------------------------------------------------------------------------- ------------
FINANCIAL SERVICES -- 10.9%
- ------------------------------------------------------------------------------------------------
150,000 Banco Nacional de Mexico S.A., Credit Card Merchant Voucher Receivables Master
Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 148,887
-------------------------------------------------------------------------------
250,000 Circuit City Credit Card Master Trust 1995-1 , Class A, 6.375%, 8/15/2005 251,393
-------------------------------------------------------------------------------
250,000 Dayton Hudson Credit Card Master Trust 1995-1 , Class A, 6.10%, 2/25/2002 251,035
-------------------------------------------------------------------------------
65,000 Discover Card Trust 1993-A, Class B, 6.80%, 8/16/2000 65,470
-------------------------------------------------------------------------------
200,000 Household Affinity Credit Card Master Trust 1993-1, Class B, 5.30%, 9/15/2000 198,038
-------------------------------------------------------------------------------
200,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 208,962
------------------------------------------------------------------------------- ------------
Total 1,123,785
------------------------------------------------------------------------------- ------------
HOME EQUITY LOAN -- 3.0%
- ------------------------------------------------------------------------------------------------
208,973 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 214,357
-------------------------------------------------------------------------------
95,000 TMS Home Equity Trust 1996-B, Class A7, 7.55%, 8/15/2020 98,263
------------------------------------------------------------------------------- ------------
Total 312,620
------------------------------------------------------------------------------- ------------
MANUFACTURED HOUSING -- 3.4%
- ------------------------------------------------------------------------------------------------
200,000 Associates Manufactured Housing Certificates 1996-2, Class A-2, 6.05%,
6/15/2027 200,428
-------------------------------------------------------------------------------
150,000 Green Tree Financial Corp. 1994-1, Class A3, 6.90%, 4/15/2019 151,481
------------------------------------------------------------------------------- ------------
Total 351,909
------------------------------------------------------------------------------- ------------
OTHER -- 2.0%
- -----------------------------------------------------------------------------------------------
200,000 Centerior Energy Receivables Master Trust 1996-1, Class A, 7.20%, 4/15/2002 206,572
------------------------------------------------------------------------------- ------------
Total Asset-Backed Securities (identified cost $3,354,709) 3,381,747
------------------------------------------------------------------------------- ------------
CORPORATE BONDS -- 19.1%
- ------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Raytheon Co., Note, 6.45%, 8/15/2002 199,908
------------------------------------------------------------------------------- ------------
AUTOMOBILE -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Arvin Industries, Inc., Note, 6.875%, 2/15/2001 201,404
------------------------------------------------------------------------------- ------------
CABLE TELEVISION -- 3.0%
- ------------------------------------------------------------------------------------------------
200,000 TKR Cable, Inc., 10.50%, 10/30/2007 223,392
-------------------------------------------------------------------------------
100,000 Videotron Holdings PLC, Sr. Disc. Note, 0/11.00%, 8/15/2005 86,000
------------------------------------------------------------------------------- ------------
Total 309,392
------------------------------------------------------------------------------- ------------
FINANCIAL SERVICES -- 2.6%
- ------------------------------------------------------------------------------------------------
250,000 AIM Management Group, 9.00%, 11/15/2003 270,120
------------------------------------------------------------------------------- ------------
HOTELS, MOTELS, INNS & CASINOS -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 La Quinta Inns, Inc. , Sr. Sub. Note, 9.25%, 5/15/2003 105,250
------------------------------------------------------------------------------- ------------
INDUSTRIAL PRODUCTS & EQUIPMENT -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 10/1/1999 104,625
------------------------------------------------------------------------------- ------------
INSURANCE -- 2.4%
- -----------------------------------------------------------------------------------------------
250,000 (b)HSB Group, Inc., 6.66%, 7/15/2027 250,242
------------------------------------------------------------------------------- ------------
OIL & GAS -- 0.8%
- ------------------------------------------------------------------------------------------------
75,000 Clark Refining & Marketing Inc., Sr. Note, 10.50%, 12/1/2001 77,625
------------------------------------------------------------------------------- ------------
PRINTING & PUBLISHING -- 0.8%
- ------------------------------------------------------------------------------------------------
75,000 Valassis Communication, Inc., Sr. Note, 9.55%, 12/1/2003 83,128
------------------------------------------------------------------------------- ------------
RETAILERS -- 0.5%
- ------------------------------------------------------------------------------------------------
50,000 Shopko Stores, Inc., 8.50%, 3/15/2002 53,630
------------------------------------------------------------------------------- ------------
SOVEREIGN -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Korea Development Bank, Bond, 7.125%, 9/17/2001 201,728
------------------------------------------------------------------------------- ------------
UTILITIES -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 Pennsylvania Power & Light Co., 9.25%, 10/1/2019 107,654
------------------------------------------------------------------------------- ------------
Total Corporate Bonds (identified cost $1,945,495) 1,964,706
------------------------------------------------------------------------------- ------------
(a)COLLATERALIZED MORTGAGE Obligations -- 13.0%
- ------------------------------------------------------------------------------------------------
217,660 (b)C-BASS ABS, LLC, (Series 1997-1), Class A-1, 7.05%, 2/1/2017 218,342
-------------------------------------------------------------------------------
95,884 (b)GE Capital Mortgage Services, Inc., (Series 1994-3), Class B4, 6.50%,
1/25/2024 67,359
-------------------------------------------------------------------------------
388,993 (b)Greenwich Capital Acceptance, Inc. Subordinate Mortgage Securities Trust,
(Series 1996-A), Class B, 7.5916%, 6/15/2019 377,930
-------------------------------------------------------------------------------
100,000 (b)K Mart CMBS Financing, Inc., (Series 1997-1), Class D, 6.475%, 3/1/2007 100,188
-------------------------------------------------------------------------------
252,471 Residential Accredit Loans, Inc., (Series 1996-QS8), Class A3, 7.05%, 12/25/2026 254,816
-------------------------------------------------------------------------------
250,000 Residential Accredit Loans, Inc., (Series1997-QS2), Class A3, 7.25%, 3/31/2027 252,699
-------------------------------------------------------------------------------
4,402,889 Vendee Mortgage Trust 1995-1C , (Series 1995-1C), Class 3IO, 0.2925%, 2/15/2025 70,182
------------------------------------------------------------------------------- ------------
Total Collateralized Mortgage Obligations (identified cost $1,336,562) 1,341,516
------------------------------------------------------------------------------- ------------
Government/Agencies -- 23.0%
- ------------------------------------------------------------------------------------------------
(a)Government Agency -- 20.6%
- ------------------------------------------------------------------------------------------------
500,000 Federal National Mortgage Association, 6.34%, 7/28/2000 501,780
-------------------------------------------------------------------------------
477,551 Government National Mortgage Association, ARM, 7.00%, 1/20/2022 492,369
-------------------------------------------------------------------------------
450,450 Government National Mortgage Association, 8.50%, 8/15/2026 471,986
-------------------------------------------------------------------------------
585,722 Government National Mortgage Association, 11.00%, 9/15/2015 661,684
------------------------------------------------------------------------------- ------------
Total 2,127,819
------------------------------------------------------------------------------- ------------
STATE/PROVINCIAL -- 2.4%
- ------------------------------------------------------------------------------------------------
300,000 Ontario Hydro, 10.00%, 3/19/2001 250,063
------------------------------------------------------------------------------- ------------
Total Governments/Agencies (identified cost $2,371,643) 2,377,882
------------------------------------------------------------------------------- ------------
U.S. TREASURY -- 8.2%
- ------------------------------------------------------------------------------------------------
835,000 United States Treasury Note, 6.375%, 5/15/2000 (identified cost $839,988) 845,371
------------------------------------------------------------------------------- ------------
(c)REPURCHASE AGREEMENT -- 8.6%
- ------------------------------------------------------------------------------------------------
885,000 BT Securities Corporation, 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized
cost) 885,000
------------------------------------------------------------------------------- ------------
Total Investments (identified cost $10,733,404)(d) 10,796,222
------------------------------------------------------------------------------- ------------
</TABLE>
(a) Because of monthly principal payments, the average lives of the Asset-Backed
Securities, Collateralized Mortgage Obligations and certain Government
Agency Securities are less than the indicated
periods.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $1,014,061 which represents 9.8% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $10,733,404. The
net unrealized appreciation of investments on a federal tax basis amounts to
$62,818 which is comprised of $69,261 appreciation and $6,443 depreciation
at September 30, 1997.
Note: The categories of investments are shown as a percentage of net
assets ($10,313,382) at September 30, 1997.
The following acronyms are used throughout this portfolio: ARM - Adjustable Rate
Mortgage LLC - Limited Liability Corporation PLC - Public Limited Company (See
Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $10,733,404) $ 10,796,222
- -----------------------------------------------------------------------------------------------
Income receivable 112,573
- -----------------------------------------------------------------------------------------------
Receivable for shares sold 663
- ----------------------------------------------------------------------------------------------- --------------
Total assets 10,909,458
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------
Payable for investments purchased $ 251,099
- ---------------------------------------------------------------
Income distribution payable 53,157
- ---------------------------------------------------------------
Net payable for foreign currency exchange contracts purchased 1,573
- ---------------------------------------------------------------
Payable to Bank 153,162
- ----------------------------------------------------------------
Accrued expenses 137,085
- ---------------------------------------------------------------- --------------
Total liabilities 596,076
- ----------------------------------------------------------------------------------------------- --------------
NET ASSETS for 1,017,958 shares outstanding $ 10,313,382
- ----------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid in capital $ 10,220,716
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and translation of assets and
liabilities in foreign currency 61,248
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions 18,340
- -----------------------------------------------------------------------------------------------
Undistributed net investment income 13,078
- ----------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 10,313,382
- ----------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- -----------------------------------------------------------------------------------------------
$7,589,231 (divided by) 749,087 shares outstanding $10.13
- ----------------------------------------------------------------------------------------------- --------------
INSTITUTIONAL SERVICE SHARES:
- -----------------------------------------------------------------------------------------------
$2,724,151 (divided by) 268,871 shares outstanding $10.13
- ----------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FEDERATED LIMITED DURATION FUND
YEAR ENDED SEPTEMBER 30, 1997
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------------------------------
Interest $ 398,708
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------
Investment advisory fee $ 24,589
- -----------------------------------------------------------------------------------------------
Administrative personnel and services fee 155,000
- -----------------------------------------------------------------------------------------------
Custodian fees 14,978
- -----------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 121,972
- -----------------------------------------------------------------------------------------------
Legal fees 2,628
- -----------------------------------------------------------------------------------------------
Portfolio accounting fees 139,765
- -----------------------------------------------------------------------------------------------
Distribution services fee -- Institutional Service Shares 1,798
- -----------------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Shares 13,570
- -----------------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Service Shares 1,799
- -----------------------------------------------------------------------------------------------
Share registration costs 62,140
- -----------------------------------------------------------------------------------------------
Printing and postage 12,906
- -----------------------------------------------------------------------------------------------
Insurance premiums 10,044
- -----------------------------------------------------------------------------------------------
Miscellaneous 19,598
- ----------------------------------------------------------------------------------------------- ------------
Total expenses 580,787
- -----------------------------------------------------------------------------------------------
Waivers and reimbursements --
- --------------------------------------------------------------------------------
Waiver of investment advisory fee -- $ (22,579)
- --------------------------------------------------------------------------------
Waiver of distribution services fee -- Institutional Service Shares (1,442)
- --------------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Shares (13,570)
- --------------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Service Shares (44)
- --------------------------------------------------------------------------------
Reimbursement of other operating expenses (541,046)
- -------------------------------------------------------------------------------- ------------
Total waivers and reimbursements (578,681)
- ----------------------------------------------------------------------------------------------- ------------
Net expenses 2,106
- ------------------------------------------------------------------------------------------------------------- ------------
Net investment income 396,602
- ------------------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
- -----------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 41,450
- -------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation of assets
and liabilities in foreign currency 61,248
- ------------------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments and foreign currency 102,698
- ------------------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 499,300
- ------------------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED LIMITED DURATION FUND
YEAR ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------
OPERATIONS --
- ------------------------------------------------------------------------------------------------
Net investment income $ 396,602
- ------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions
($28,563 as computed for federal tax purposes) 41,450
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation
of assets and liabilities in foreign currency 61,248
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from operations 499,300
- ------------------------------------------------------------------------------------------------ ---------------
DISTRIBUTIONS TO SHAREHOLDERS --
- ------------------------------------------------------------------------------------------------
Distributions from net investment income
- ------------------------------------------------------------------------------------------------
Institutional Shares (351,005)
- ------------------------------------------------------------------------------------------------
Institutional Service Shares (45,407)
- ------------------------------------------------------------------------------------------------
Distributions from net realized gains on investments and foreign
currency transactions
- ------------------------------------------------------------------------------------------------
Institutional Shares (10,211)
- ------------------------------------------------------------------------------------------------
Institutional Service Shares (11)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from distributions to shareholders (406,634)
- ------------------------------------------------------------------------------------------------ ---------------
SHARE TRANSACTIONS --
- ------------------------------------------------------------------------------------------------
Proceeds from sale of shares 21,728,448
- ------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 4,418
- ------------------------------------------------------------------------------------------------
Cost of shares redeemed (11,512,650)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from share transactions 10,220,216
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets 10,312,882
- ------------------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------------------
Beginning of period 500
- ------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income of $13,078) $ 10,313,382
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Limited
Duration Fund (the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, other fixed income
securities, asset-backed securities, unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked price as
furnished by an independent pricing service. Short-term securities are valued at
the prices provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost, which approximates fair market value.
With respect to valuation of foreign securities, trading in foreign cities may
be completed at times which vary from the closing of the New York Stock
Exchange. Therefore, foreign securities are valued at the latest closing price
on the exchange on which they are traded prior to the closing of the New York
Stock Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. Dollars at the foreign exchange rate in effect at noon, eastern time,
on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERATED LIMITED DURATION FUND
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for foreign currency
transactions. The following reclassifications have been made to the financial
statements.
INCREASE (DECREASE)
- -------------------------------------------
ACCUMULATED UNDISTRIBUTED NET
NET REALIZED INVESTMENT
GAIN INCOME
- ------------ -----------------
($12,888) $12,888
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rules
and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
FOREIGN EXCHANGE CONTRACTS
The Fund may enter into foreign currency commitments for the delayed delivery of
securities or foreign currency exchange transactions. Purchase contracts are
used to acquire exposure to foreign currencies; whereas, contracts to sell are
used to hedge the Fund's securities against currency fluctuations. Risks may
arise upon entering these transactions from the potential inability of
counter-parts to meet the terms of their commitments and from unanticipated
movements in security prices or foreign exchange rates. The foreign currency
transactions are adjusted by the daily exchange rate of the underlying currency
and any gains or losses are recorded for financial statement purposes as
unrealized until the settlement date. At September 30, 1997, the Fund had
outstanding foreign currency commitments as set forth below:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 11/25/97 361,449 $262,359 $260,786 ($1,573)
</TABLE>
FEDERATED LIMITED DURATION FUND
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies ("FC") are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
In some cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no market
prices are available, at the fair value as determined by the Fund's pricing
committee.
Additional information on each restricted security held at September 30, 1997 is
as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
- --------------------------------------------------------------------
C-BASS ABS, LLC 2/25/1997 $218,544
GE Capital Mortgage Services, Inc. 7/10/1997 67,119
Greenwich Capital Acceptance, Inc. 7/24/1997 378,296
HSB Group, Inc. 7/10/1997 247,413
K Mart CMBS Financing, Inc. 2/27/1997 100,000
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
- ------------------------------- -------------------
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
FEDERATED LIMITED DURATION FUND
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(a)
-----------------------
<S> <C> <C>
Institutional Shares Shares Amount
- -----------------------------------------------------------------------
Shares sold 1,888,493 $ 18,917,589
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 380 3,834
- -----------------------------------------------------------------------
Shares redeemed (1,139,806) (11,407,045)
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from Institutional Share transactions 749,067 $ 7,514,378
- ----------------------------------------------------------------------- ----------- -----------
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
YEAR ENDED
SEPTEMBER 30, 1997(a)
-----------------------
Institutional Service Shares Shares Amount
- -----------------------------------------------------------------------
Shares sold 279,256 $ 2,810,859
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 58 584
- -----------------------------------------------------------------------
Shares redeemed (10,473) (105,605)
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from Institutional Service share transactions 268,841 $ 2,705,838
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from share transactions 1,017,908 $ 10,220,216
- ----------------------------------------------------------------------- ----------- -----------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses. The Adviser can
modify or terminate this voluntary waiver and/or reimbursement at any time at
its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares, to compensate FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
FEDERATED LIMITED DURATION FUND
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services, the Fund will pay Federated Shareholder Services ("FSS") up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary, Federated
Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing
agent for the Fund. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
Purchases $ 16,088,788
------------
Sales $ 6,250,858
------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Limited Duration Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Limited Duration Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Limited Duration Fund at September 30, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
APPENDIX
STANDARD AND POOR'S RATINGS GROUP
LONG-TERM DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has 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 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.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba -- Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds - which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. 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 in imminent default in payment of interest or principal.
DDD, DD, and D -- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR -- NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB -- Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B -- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend averages.
MOODY'S INVESTORS SERVICE, INC.
COMMERCIAL PAPER RATINGS
Prime-1 -- Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
* Leading market positions in well established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
* Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
* Well established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2 -- Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
STANDARD AND POOR'S RATINGS GROUP 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 INVESTORS SERVICE, 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.
[LOGO]
FEDERATED INVESTORS
FEDERATED LIMITED
DURATION FUND
(A portfolio of Federated Total Return Series, Inc.)
Institutional Shares
Prospectus
November 30, 1997
A Diversified Portfolio of
Federated Total Return Series, Inc.,
an Open-End, Management
Investment Company
FEDERATED LIMITED DURATION FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428Q408
G01744-01-IS (11/97)
FEDERATED LIMITED DURATION FUND
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Limited Duration Fund (the "Fund")
offered by this prospectus represent interests in a diversified investment
portfolio of Federated Total Return Series, Inc. (the "Corporation"), an
open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Institutional Service Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 11
Hub and Spoke(registered trademark) Option 12
Net Asset Value 12
Investing in Institutional Service Shares 12
Share Purchases 12
Minimum Investment Required 12
What Shares Cost 13
Exchanging Securities for Fund Shares 13
Confirmations and Account Statements 13
Dividends and Distributions 13
Redeeming Institutional Service Shares 13
Telephone Redemption 13
Written Requests 14
Accounts with Low Balances 14
Fund Information 14
Management of the Fund 14
Distrubution of Institutional Service Shares 15
Administration of the Fund 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 17
Performance Information 17
Other Classes of Shares 17
Financial Highlights -- Institutional Shares 18
Financial Statements 19
Report of Ernst & Young LLP, Independent Auditors 30
Appendix 31
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)
None Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1) 0.00%
12b-1 Fee (after waiver)(2) 0.05%
Total Other Expenses (after expense reimbursement) 0.60%
Shareholder Services Fee 0.25%
Total Operating Expenses (after waivers and expense reimbursements)(3) 0.65%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.40%.
(2) The 12b-1 Fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total
operating expenses were 0.29% for the fiscal year ended September 30, 1997
and would have been 14.81% absent the voluntary waivers of the management
fee and a portion of the shareholder services fee and 12b-1 fee and the
voluntary reimbursement of certain other operating expenses.
* Total operating expenses are estimated based on average expenses expected to
be incurred during the period ending September 30, 1998. During the course
of this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Service Shares of the
fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in Institutional Service Shares"
and "Fund Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
- --------------------------------------------------------------
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period.
[S] [C]
1 year $ 7
3 years $21
5 years $36
10 years $81
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(For a share outstanding throughout the period)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 30.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(a)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------
Net investment income 0.63
- --------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 0.15
- -------------------------------------------------------------------------------------- -------
Total from investment operations 0.78
- -------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------
Distributions from net investment income (0.63)
- --------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- -------------------------------------------------------------------------------------- -------
Total distributions (0.65)
- -------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.13
- -------------------------------------------------------------------------------------- -------
TOTAL RETURN(b) 8.10%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 0.29%
- --------------------------------------------------------------------------------------
Net investment income 6.31%
- --------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 14.52%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,724
- --------------------------------------------------------------------------------------
Portfolio turnover 109%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." On May 14, 1997, the Board of Directors (the "Directors") approved the
Fund's name change from Federated Limited Duration Fund to Federated Limited
Duration Fund. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for Federated Limited Duration Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to the Institutional Service
Shares of Federated Limited Duration Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in fixed income securities. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in domestic
investment grade debt securities. Investment grade debt securities are rated in
the four highest rating categories by one or more nationally recognized
statistical rating organizations ("NRSROs") (AAA, AA, A or BBB by Standard &
Poor's Ratings Group ("Standard & Poor's"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's")), or which are of comparable
quality in the judgment of the adviser. Downgraded securities will be evaluated
on a case-by-case basis by the adviser. The adviser will determine whether or
not the security continues to be an acceptable investment. If not, the security
will be sold. The remainder of the Fund's assets may be invested in any of the
securities discussed below. The Fund's weighted-average portfolio duration will
at all times be limited to three years or less. (See the section entitled
"Average Portfolio Duration" in this Prospectus.) Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of corporate debt obligations, U.S. and foreign government
obligations, and mortgage-backed and asset-backed securities. The Fund may also
invest in convertible securities. The Fund may also invest in derivative
instruments of such securities (including instruments with demand features or
credit enhancement and stripped mortgage-backed securities), as well as money
market instruments and cash.
The securities in which the Fund invests principally are:
* domestic (i.e., issued in the United States) and foreign issues of corporate
debt obligations as well as domestic and foreign issues of obligations of
foreign governments and/or their instrumentalities having floating or fixed
rates of interest;
* obligations issued or guaranteed as to payment of principal and
interest by the U.S. government, or its agencies or instrumentalities;
* mortgage-backed securities;
* asset-backed securities;
* municipal securities;
* commercial paper which matures in 270 days or less;
* time deposits (including savings deposits and certificates of deposit) and
bankers' acceptances in commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF"), both of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit issued by and other time
deposits in foreign branches of FDIC insured banks or who have at least $100
million in capital; and
* repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS
The Fund invests in corporate and foreign government/agency debt obligations,
including bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities, including fixed rate
securities with short-term characteristics. Fixed rate securities with
short-term characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the securities may
make them callable within a short period of time. A fixed rate security with
short-term characteristics would include a fixed income security priced close to
call or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates, the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand notes
allow the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features."
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities, which generally include
direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations (including mortgage-backed securities, bonds, notes and
discount notes) issued or guaranteed by the following U.S. government agencies
or instrumentalities: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association; Government National Mortgage Association;
and Student Loan Marketing Association. These securities are backed by: the full
faith and credit of the U.S. Treasury; the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal National
Mortgage Association; Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property. There are currently four basic types of mortgage-backed securities:
(i) those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as Government National Mortgage Association ("Ginnie
Mae"), the Federal National Mortgage Association ("Fannie Mae") and Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; (iii) those issued by private issuers that represent an
interest in or are collateralized by whole loans or mortgage-backed securities
without a government guarantee but usually having some form of private credit
enhancement; and (iv) privately issued securities which are collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund may invest in certain CMOs which are issued by private entities such as
investment banking firms and companies related to the construction industry. The
CMOs in which the Fund may invest may be: (i) securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government; (ii) securities which are collateralized by pools of mortgages in
which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (iii) other
securities in which the proceeds of the issuance are invested in mortgage-backed
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal are received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rapidly rising interest rates, mortgage-backed securities may also
have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
FOREIGN SECURITIES
The Fund may invest in foreign securities. Foreign securities do not include
American Depository Receipts, but do include foreign securities not publicly
traded in the United States. Investments in foreign securities involve special
risks that differ from those associated with investments in domestic securities.
The Fund may invest more than 10% in foreign securities.
RISKS
The risks associated with investments in foreign securities relate to political
and economic developments abroad, as well as those that result from the
differences between the regulation of domestic securities and issuers and
foreign securities and issuers. These risks may include, but are not limited to,
expropriation, confiscatory taxation, currency fluctuations, withholding taxes
on interest, limitations on the use or transfer of assets, political or social
instability, ability to obtain or enforce court judgments abroad and adverse
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respects as growth of
gross national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS
Foreign securities may be denominated in foreign currencies. Therefore, the
value in U.S. dollars of the Fund's assets and income may be affected by changes
in exchange rates and regulations. Although the Fund values its assets daily in
U.S. dollars, it will not convert its holdings of foreign currencies to U.S.
dollars daily. When the Fund converts its holdings to another currency, it may
incur conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in connection
with its investments in foreign securities. The Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or through forward
contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may want to establish the U.S. dollar cost or proceeds, as
the case may be. By entering into a forward contract in U.S. dollars for the
purchase or sale of the amount of foreign currency involved in an underlying
security transaction, the Fund attempts to protect itself against a possible
loss between trade and settlement dates resulting from an adverse change in the
relationship between the U.S. dollar and such foreign currency. However, this
tends to limit potential gains which might result from a positive change in such
currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency or denominated in a
currency or currencies that the adviser believes will reflect a high degree of
correlation with the currency with regard to price movements. The Fund generally
will not enter into forward foreign currency exchange contracts with a term
longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased -- the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which can or
otherwise limit returns to the convertible security holder, such as DECS
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security.), LYONS (Liquid Yield Option Notes which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock
which are an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES (Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue.).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating below
investment grade after the Fund has purchased it. See "High Yield Debt
Obligations."
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution that
has capital, surplus and undivided profits over $100 million or is insured by
the BIF or the SAIF. Bank instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs"). The banks issuing these instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan requirements, loan limitations, examinations,
accounting, auditing, recordkeeping and the public availability of information.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will treat credit
enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial and foreign currency futures contracts
to hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the instruments subject to the futures contracts may not
correlate perfectly with the prices of the instruments in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio's holdings to market changes. In addition, the Fund's
investment adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events, the
Fund may lose money on the futures contract or option. It is not certain that a
secondary market for positions in futures contracts or for options will exist at
all times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary market on an exchange or otherwise will exist for any particular
futures contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS
The Fund may invest up to but not including 35% of its total assets in debt
securities that are not investment-grade but are rated BB or lower by an NRSRO
(or, if unrated, determined by the adviser to be of comparable quality). Some of
these securities may involve equity characteristics. The Fund may invest in
equity securities, including unit offerings which combine fixed rate securities
and common stock or common stock equivalents such as warrants, rights and
options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.
The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower- rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High-Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio.
RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each issuer
as well as by monitoring broad economic trends and corporate and legislative
developments.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stock and bonds, derivatives do
not necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
AVERAGE PORTFOLIO DURATION
Although the Fund will not maintain a stable net asset value, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
total return, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average duration of the Fund's portfolio. Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. The Fund
should be expected to maintain a higher average duration during periods of lower
expected market volatility, and a lower average duration during periods of
higher expected market volatility. In any event, the Fund's dollar-weighted
average duration will not exceed three years.
TOTAL RETURN
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares) or realized from the purchase and sale of securities, and
successful use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES.
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Directors and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned at all times.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticipate that portfolio turnover
will result in adverse tax consequences. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge its assets to secure such borrowings; or
* with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed by the U.S. government and its agencies or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of the outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE [REGISTERED TRADEMARK] OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Total Return Limited Duration Fund -- Institutional Service Shares;
Fund Number (this number can be found on the account statement or by contacting
the Fund); Group Number or Order Number; Nominee or Institution Name; ABA Number
011000028. Shares cannot be purchased by wire on holidays when wire transfers
are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.
BY MAIL
To purchase shares of the Fund by mail, send a check made payable to Federated
Total Return Limited Duration Fund -- Institutional Service Shares to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
Orders by mail are considered received when payment by check is converted by
State Street Bank & Trust Company ("State Street Bank") into federal funds. This
is normally the next business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time), on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Martin Luther King Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund and must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund. The Fund acquires the exchanged
securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 2266-8600. If
share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: Federated Limited Duration Fund --
Institutional Service Shares; the account name as registered with the Fund; the
account number; and the number of Shares to be redeemed or the dollar amount
requested. All owners of the account must sign the request exactly as the Shares
are registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to .40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
PORTFOLIO MANAGER'S BACKGROUND
Randall S. Bauer has been a portfolio manager of the Fund since
inception. Mr. Bauer joined Federated Investors in 1989 and has been a
Vice President of the Fund's investment adviser and Federated Research
Corp. since 1994. Mr. Bauer was an Assistant Vice President of the Fund's
investment adviser and Federated Research Corp. from 1989 to 1993. Mr.
Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance
from Pennsylvania State University.
Robert K. Kinsey has been a portfolio manager of the Fund since May 1997.
Mr. Kinsey joined Federated in 1995 as a Vice President of a Federated
advisory subsidiary. He has been a Vice President of the Fund's adviser
and Federated Research Corp. since March, 1997. From 1992 to 1995, he
served as a Portfolio Manager for Harris Investment Management Co., Inc.
Mr. Kinsey received his M.B.A. in Finance from U.C.L.A.
Mark E. Durbiano has been the portfolio manager for the high yield
corporate bonds asset category of the Fund since inception. Mr. Durbiano
joined Federated Investors in 1982 and has been a Senior Vice President
of the Fund's adviser and Federated Research Corp. since January 1996.
Mr. Durbiano was a Vice President of the Fund's adviser and Federated
Research Corp. from 1988 through 1995. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University
of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Institutional
Service Shares. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment
companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Fund in an amount computed at an annual rate of 0.25% of the average
daily net asset value of Institutional Service Shares of the Fund. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers.
The Plan is a compensation-type plan. As such, the Fund makes no payments to the
distributor except as described above. Therefore, the Fund does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to .25% of the average daily net asset value of
Shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. Under the
Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund' s investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE
FEE FEDERATED FUNDS
- ------------ ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose to voluntarily waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 267,780 (94.49%) of the
Institutional Service Shares and Sunbank & Co., who was the record owner of
250,872 (31.31%) and First Mar & Co., who was the record owner of 234,049
(29.21%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Fund's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $100,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout the period)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 30.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(a)
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------
Net investment income 0.66
- -------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 0.14
- ------------------------------------------------------------------------------------- -------
Total from investment operations 0.80
- ------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------
Distributions from net investment income (0.65)
- -------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- -------------------------------------------------------------------------------------- -------
Total distributions (0.67)
- -------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.13
- -------------------------------------------------------------------------------------- -------
TOTAL RETURN(b) 8.27%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 0.00%
- --------------------------------------------------------------------------------------
Net investment income 6.47%
- --------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 8.74%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $7,589
- --------------------------------------------------------------------------------------
Portfolio turnover 109%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
(a)ASSET-BACKED SECURITIES -- 32.8%
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobile -- 13.5%
- ------------------------------------------------------------------------------------------------
$ 200,000 AFG Receivables Trust 1997-B, Class C, 7.00%, 2/15/2003 $ 199,876
-------------------------------------------------------------------------------
128,795 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 5/15/2002 129,224
-------------------------------------------------------------------------------
328,508 Honda Auto Receivables Grantor Trust 1995-A, Class A, 6.20%, 12/15/2000 329,740
-------------------------------------------------------------------------------
525,182 Olympic Automobile Receivables Trust 1994-A, Class CTF, 5.70%, 1/15/2001 526,153
-------------------------------------------------------------------------------
50,000 Team Fleet Financing Corp. Series 1997-1, Class B, 7.80%, 5/15/2003 51,53
-------------------------------------------------------------------------------
150,000 Yamaha Motor Master Trust 1995-1, Class A, 6.20%, 5/15/2003 150,329
------------------------------------------------------------------------------- ------------
Total 1,386,861
------------------------------------------------------------------------------- ------------
FINANCIAL SERVICES -- 10.9%
- ------------------------------------------------------------------------------------------------
150,000 Banco Nacional de Mexico S.A., Credit Card Merchant Voucher Receivables Master
Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 148,887
-------------------------------------------------------------------------------
250,000 Circuit City Credit Card Master Trust 1995-1 , Class A, 6.375%, 8/15/2005 251,393
-------------------------------------------------------------------------------
250,000 Dayton Hudson Credit Card Master Trust 1995-1 , Class A, 6.10%, 2/25/2002 251,035
-------------------------------------------------------------------------------
65,000 Discover Card Trust 1993-A, Class B, 6.80%, 8/16/2000 65,470
-------------------------------------------------------------------------------
200,000 Household Affinity Credit Card Master Trust 1993-1, Class B, 5.30%, 9/15/2000 198,038
-------------------------------------------------------------------------------
200,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 208,962
------------------------------------------------------------------------------- ------------
Total 1,123,785
------------------------------------------------------------------------------- ------------
HOME EQUITY LOAN -- 3.0%
- ------------------------------------------------------------------------------------------------
208,973 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 214,357
-------------------------------------------------------------------------------
95,000 TMS Home Equity Trust 1996-B, Class A7, 7.55%, 8/15/2020 98,263
------------------------------------------------------------------------------- ------------
Total 312,620
------------------------------------------------------------------------------- ------------
MANUFACTURED HOUSING -- 3.4%
- ------------------------------------------------------------------------------------------------
200,000 Associates Manufactured Housing Certificates 1996-2, Class A-2, 6.05%,
6/15/2027 200,428
-------------------------------------------------------------------------------
150,000 Green Tree Financial Corp. 1994-1, Class A3, 6.90%, 4/15/2019 151,481
------------------------------------------------------------------------------- ------------
Total 351,909
------------------------------------------------------------------------------- ------------
OTHER -- 2.0%
- -----------------------------------------------------------------------------------------------
200,000 Centerior Energy Receivables Master Trust 1996-1, Class A, 7.20%, 4/15/2002 206,572
------------------------------------------------------------------------------- ------------
Total Asset-Backed Securities (identified cost $3,354,709) 3,381,747
------------------------------------------------------------------------------- ------------
CORPORATE BONDS -- 19.1%
- ------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Raytheon Co., Note, 6.45%, 8/15/2002 199,908
------------------------------------------------------------------------------- ------------
AUTOMOBILE -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Arvin Industries, Inc., Note, 6.875%, 2/15/2001 201,404
------------------------------------------------------------------------------- ------------
CABLE TELEVISION -- 3.0%
- ------------------------------------------------------------------------------------------------
200,000 TKR Cable, Inc., 10.50%, 10/30/2007 223,392
-------------------------------------------------------------------------------
100,000 Videotron Holdings PLC, Sr. Disc. Note, 0/11.00%, 8/15/2005 86,000
------------------------------------------------------------------------------- ------------
Total 309,392
------------------------------------------------------------------------------- ------------
FINANCIAL SERVICES -- 2.6%
- ------------------------------------------------------------------------------------------------
250,000 AIM Management Group, 9.00%, 11/15/2003 270,120
------------------------------------------------------------------------------- ------------
HOTELS, MOTELS, INNS & CASINOS -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 La Quinta Inns, Inc. , Sr. Sub. Note, 9.25%, 5/15/2003 105,250
------------------------------------------------------------------------------- ------------
INDUSTRIAL PRODUCTS & EQUIPMENT -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 10/1/1999 104,625
------------------------------------------------------------------------------- ------------
INSURANCE -- 2.4%
- -----------------------------------------------------------------------------------------------
250,000 (b)HSB Group, Inc., 6.66%, 7/15/2027 250,242
------------------------------------------------------------------------------- ------------
OIL & GAS -- 0.8%
- ------------------------------------------------------------------------------------------------
75,000 Clark Refining & Marketing Inc., Sr. Note, 10.50%, 12/1/2001 77,625
------------------------------------------------------------------------------- ------------
PRINTING & PUBLISHING -- 0.8%
- ------------------------------------------------------------------------------------------------
75,000 Valassis Communication, Inc., Sr. Note, 9.55%, 12/1/2003 83,128
------------------------------------------------------------------------------- ------------
RETAILERS -- 0.5%
- ------------------------------------------------------------------------------------------------
50,000 Shopko Stores, Inc., 8.50%, 3/15/2002 53,630
------------------------------------------------------------------------------- ------------
SOVEREIGN -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Korea Development Bank, Bond, 7.125%, 9/17/2001 201,728
------------------------------------------------------------------------------- ------------
UTILITIES -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 Pennsylvania Power & Light Co., 9.25%, 10/1/2019 107,654
------------------------------------------------------------------------------- ------------
Total Corporate Bonds (identified cost $1,945,495) 1,964,706
------------------------------------------------------------------------------- ------------
(a)COLLATERALIZED MORTGAGE Obligations -- 13.0%
- ------------------------------------------------------------------------------------------------
217,660 (b)C-BASS ABS, LLC, (Series 1997-1), Class A-1, 7.05%, 2/1/2017 218,342
-------------------------------------------------------------------------------
95,884 (b)GE Capital Mortgage Services, Inc., (Series 1994-3), Class B4, 6.50%,
1/25/2024 67,359
-------------------------------------------------------------------------------
388,993 (b)Greenwich Capital Acceptance, Inc. Subordinate Mortgage Securities Trust,
(Series 1996-A), Class B, 7.5916%, 6/15/2019 377,930
-------------------------------------------------------------------------------
100,000 (b)K Mart CMBS Financing, Inc., (Series 1997-1), Class D, 6.475%, 3/1/2007 100,188
-------------------------------------------------------------------------------
252,471 Residential Accredit Loans, Inc., (Series 1996-QS8), Class A3, 7.05%, 12/25/2026 254,816
-------------------------------------------------------------------------------
250,000 Residential Accredit Loans, Inc., (Series1997-QS2), Class A3, 7.25%, 3/31/2027 252,699
-------------------------------------------------------------------------------
4,402,889 Vendee Mortgage Trust 1995-1C , (Series 1995-1C), Class 3IO, 0.2925%, 2/15/2025 70,182
------------------------------------------------------------------------------- ------------
Total Collateralized Mortgage Obligations (identified cost $1,336,562) 1,341,516
------------------------------------------------------------------------------- ------------
Government/Agencies -- 23.0%
- ------------------------------------------------------------------------------------------------
(a)Government Agency -- 20.6%
- ------------------------------------------------------------------------------------------------
500,000 Federal National Mortgage Association, 6.34%, 7/28/2000 501,780
-------------------------------------------------------------------------------
477,551 Government National Mortgage Association, ARM, 7.00%, 1/20/2022 492,369
-------------------------------------------------------------------------------
450,450 Government National Mortgage Association, 8.50%, 8/15/2026 471,986
-------------------------------------------------------------------------------
585,722 Government National Mortgage Association, 11.00%, 9/15/2015 661,684
------------------------------------------------------------------------------- ------------
Total 2,127,819
------------------------------------------------------------------------------- ------------
STATE/PROVINCIAL -- 2.4%
- ------------------------------------------------------------------------------------------------
300,000 Ontario Hydro, 10.00%, 3/19/2001 250,063
------------------------------------------------------------------------------- ------------
Total Governments/Agencies (identified cost $2,371,643) 2,377,882
------------------------------------------------------------------------------- ------------
U.S. TREASURY -- 8.2%
- ------------------------------------------------------------------------------------------------
835,000 United States Treasury Note, 6.375%, 5/15/2000 (identified cost $839,988) 845,371
------------------------------------------------------------------------------- ------------
(c)REPURCHASE AGREEMENT -- 8.6%
- ------------------------------------------------------------------------------------------------
885,000 BT Securities Corporation, 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized
cost) 885,000
------------------------------------------------------------------------------- ------------
Total Investments (identified cost $10,733,404)(d) 10,796,222
------------------------------------------------------------------------------- ------------
</TABLE>
(a) Because of monthly principal payments, the average lives of the Asset-Backed
Securities, Collateralized Mortgage Obligations and certain Government
Agency Securities are less than the indicated
periods.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $1,014,061 which represents 9.8% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $10,733,404. The
net unrealized appreciation of investments on a federal tax basis amounts to
$62,818 which is comprised of $69,261 appreciation and $6,443 depreciation
at September 30, 1997.
Note: The categories of investments are shown as a percentage of net
assets ($10,313,382) at September 30, 1997.
The following acronyms are used throughout this portfolio: ARM - Adjustable Rate
Mortgage LLC - Limited Liability Corporation PLC - Public Limited Company (See
Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $10,733,404) $ 10,796,222
- -----------------------------------------------------------------------------------------------
Income receivable 112,573
- -----------------------------------------------------------------------------------------------
Receivable for shares sold 663
- ----------------------------------------------------------------------------------------------- --------------
Total assets 10,909,458
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------
Payable for investments purchased $ 251,099
- ---------------------------------------------------------------
Income distribution payable 53,157
- ---------------------------------------------------------------
Net payable for foreign currency exchange contracts purchased 1,573
- ---------------------------------------------------------------
Payable to Bank 153,162
- ----------------------------------------------------------------
Accrued expenses 137,085
- ---------------------------------------------------------------- --------------
Total liabilities 596,076
- ----------------------------------------------------------------------------------------------- --------------
NET ASSETS for 1,017,958 shares outstanding $ 10,313,382
- ----------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid in capital $ 10,220,716
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and translation of assets and
liabilities in foreign currency 61,248
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions 18,340
- -----------------------------------------------------------------------------------------------
Undistributed net investment income 13,078
- ----------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 10,313,382
- ----------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- -----------------------------------------------------------------------------------------------
$7,589,231 (divided by) 749,087 shares outstanding $10.13
- ----------------------------------------------------------------------------------------------- --------------
INSTITUTIONAL SERVICE SHARES:
- -----------------------------------------------------------------------------------------------
$2,724,151 (divided by) 268,871 shares outstanding $10.13
- ----------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FEDERATED LIMITED DURATION FUND
YEAR ENDED SEPTEMBER 30, 1997
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------------------------------
Interest $ 398,708
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------
Investment advisory fee $ 24,589
- -----------------------------------------------------------------------------------------------
Administrative personnel and services fee 155,000
- -----------------------------------------------------------------------------------------------
Custodian fees 14,978
- -----------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 121,972
- -----------------------------------------------------------------------------------------------
Legal fees 2,628
- -----------------------------------------------------------------------------------------------
Portfolio accounting fees 139,765
- -----------------------------------------------------------------------------------------------
Distribution services fee -- Institutional Service Shares 1,798
- -----------------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Shares 13,570
- -----------------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Service Shares 1,799
- -----------------------------------------------------------------------------------------------
Share registration costs 62,140
- -----------------------------------------------------------------------------------------------
Printing and postage 12,906
- -----------------------------------------------------------------------------------------------
Insurance premiums 10,044
- -----------------------------------------------------------------------------------------------
Miscellaneous 19,598
- ----------------------------------------------------------------------------------------------- ------------
Total expenses 580,787
- -----------------------------------------------------------------------------------------------
Waivers and reimbursements --
- --------------------------------------------------------------------------------
Waiver of investment advisory fee -- $ (22,579)
- --------------------------------------------------------------------------------
Waiver of distribution services fee -- Institutional Service Shares (1,442)
- --------------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Shares (13,570)
- --------------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Service Shares (44)
- --------------------------------------------------------------------------------
Reimbursement of other operating expenses (541,046)
- -------------------------------------------------------------------------------- ------------
Total waivers and reimbursements (578,681)
- ----------------------------------------------------------------------------------------------- ------------
Net expenses 2,106
- ------------------------------------------------------------------------------------------------------------- ------------
Net investment income 396,602
- ------------------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
- -----------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 41,450
- -------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation of assets
and liabilities in foreign currency 61,248
- ------------------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments and foreign currency 102,698
- ------------------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 499,300
- ------------------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED LIMITED DURATION FUND
YEAR ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------
OPERATIONS --
- ------------------------------------------------------------------------------------------------
Net investment income $ 396,602
- ------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions
($28,563 as computed for federal tax purposes) 41,450
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation
of assets and liabilities in foreign currency 61,248
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from operations 499,300
- ------------------------------------------------------------------------------------------------ ---------------
DISTRIBUTIONS TO SHAREHOLDERS --
- ------------------------------------------------------------------------------------------------
Distributions from net investment income
- ------------------------------------------------------------------------------------------------
Institutional Shares (351,005)
- ------------------------------------------------------------------------------------------------
Institutional Service Shares (45,407)
- ------------------------------------------------------------------------------------------------
Distributions from net realized gains on investments and foreign
currency transactions
- ------------------------------------------------------------------------------------------------
Institutional Shares (10,211)
- ------------------------------------------------------------------------------------------------
Institutional Service Shares (11)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from distributions to shareholders (406,634)
- ------------------------------------------------------------------------------------------------ ---------------
SHARE TRANSACTIONS --
- ------------------------------------------------------------------------------------------------
Proceeds from sale of shares 21,728,448
- ------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 4,418
- ------------------------------------------------------------------------------------------------
Cost of shares redeemed (11,512,650)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from share transactions 10,220,216
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets 10,312,882
- ------------------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------------------
Beginning of period 500
- ------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income of $13,078) $ 10,313,382
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Limited
Duration Fund (the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, other fixed income
securities, asset-backed securities, unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked price as
furnished by an independent pricing service. Short-term securities are valued at
the prices provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost, which approximates fair market value.
With respect to valuation of foreign securities, trading in foreign cities may
be completed at times which vary from the closing of the New York Stock
Exchange. Therefore, foreign securities are valued at the latest closing price
on the exchange on which they are traded prior to the closing of the New York
Stock Exchange. Foreign securities quoted in foreign currencies are translated
into U.S. Dollars at the foreign exchange rate in effect at noon, eastern time,
on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERATED LIMITED DURATION FUND
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for foreign currency
transactions. The following reclassifications have been made to the financial
statements.
INCREASE (DECREASE)
- -------------------------------------------
ACCUMULATED UNDISTRIBUTED NET
NET REALIZED INVESTMENT
GAIN INCOME
- ------------ -----------------
($12,888) $12,888
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rules
and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
FOREIGN EXCHANGE CONTRACTS
The Fund may enter into foreign currency commitments for the delayed delivery of
securities or foreign currency exchange transactions. Purchase contracts are
used to acquire exposure to foreign currencies; whereas, contracts to sell are
used to hedge the Fund's securities against currency fluctuations. Risks may
arise upon entering these transactions from the potential inability of
counter-parts to meet the terms of their commitments and from unanticipated
movements in security prices or foreign exchange rates. The foreign currency
transactions are adjusted by the daily exchange rate of the underlying currency
and any gains or losses are recorded for financial statement purposes as
unrealized until the settlement date. At September 30, 1997, the Fund had
outstanding foreign currency commitments as set forth below:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 11/25/97 361,449 $262,359 $260,786 ($1,573)
</TABLE>
FEDERATED LIMITED DURATION FUND
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies ("FC") are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
In some cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no market
prices are available, at the fair value as determined by the Fund's pricing
committee.
Additional information on each restricted security held at September 30, 1997 is
as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
- --------------------------------------------------------------------
C-BASS ABS, LLC 2/25/1997 $218,544
GE Capital Mortgage Services, Inc. 7/10/1997 67,119
Greenwich Capital Acceptance, Inc. 7/24/1997 378,296
HSB Group, Inc. 7/10/1997 247,413
K Mart CMBS Financing, Inc. 2/27/1997 100,000
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
- ------------------------------- -------------------
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
FEDERATED LIMITED DURATION FUND
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(a)
-----------------------
<S> <C> <C>
Institutional Shares Shares Amount
- -----------------------------------------------------------------------
Shares sold 1,888,493 $ 18,917,589
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 380 3,834
- -----------------------------------------------------------------------
Shares redeemed (1,139,806) (11,407,045)
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from Institutional Share transactions 749,067 $ 7,514,378
- ----------------------------------------------------------------------- ----------- -----------
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
YEAR ENDED
SEPTEMBER 30, 1997(a)
-----------------------
Institutional Service Shares Shares Amount
- -----------------------------------------------------------------------
Shares sold 279,256 $ 2,810,859
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 58 584
- -----------------------------------------------------------------------
Shares redeemed (10,473) (105,605)
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from Institutional Service share transactions 268,841 $ 2,705,838
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from share transactions 1,017,908 $ 10,220,216
- ----------------------------------------------------------------------- ----------- -----------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses. The Adviser can
modify or terminate this voluntary waiver and/or reimbursement at any time at
its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares, to compensate FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
FEDERATED LIMITED DURATION FUND
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services, the Fund will pay Federated Shareholder Services ("FSS") up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary, Federated
Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing
agent for the Fund. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
Purchases $ 16,088,788
------------
Sales $ 6,250,858
------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees of
Federated Limited Duration Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Limited Duration Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets, and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Limited Duration Fund, September 30, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has 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 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.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba -- Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. 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 in imminent default in payment of interest or principal.
DDD, DD, and D -- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
NR -- NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend averages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
Prime-1 -- Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
* Leading market positions in well established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
* Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
* Well established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
STANDARD AND POOR'S RATINGS GROUP 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 INVESTORS SERVICE, 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.
[LOGO] FEDERATED INVESTORS
FEDERATED LIMITED DURATION FUND
(A portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc.
an Open-End, Management Investment Company
FEDERATED LIMITED DURATION FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.federatedinvestors.com
Cusip 31428Q309
G01744-02-SS (11/97)
[RECYCLE LOGO]
Federated Limited Duration Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
Institutional Service Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus(es) of Federated Limited Duration Fund (the "Fund"), a portfolio
of Federated Total Return Series, Inc. (the "Corporation") dated November
30, 1997. This Statement is not a prospectus. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.
Federated Limited Duration Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
Statement dated November 30, 1997
[GRAPHIC OMITTED]
Cusip 31428Q408
Cusip 31428Q309
G01744-03 (11/97)
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
I
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOS") 1
Real Estate Mortgage Investment Conduits ("REMICS") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Convertible Securities 3
Foreign Bank Instruments 3
Futures and Options Transactions 3
Medium Term Notes and Deposit Notes 5
Weighted Average Portfolio Maturity 5
Weighted Average Portfolio Duration 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Investing in Securities of Other Investment Companies 7
Portfolio Turnover 7
Investment Limitations 8
Federated Total Return Series, Inc. Management 9
Fund Ownership 13
Directors' Compensation 14
Director Liability 14
Investment Advisory Services 15
Adviser to the Fund 15
Advisory Fees 15
Other Services 15
Fund Administration 15
Custodian and Portfolio Accountant 15
Transfer Agent 15
Independent Auditors 15
Brokerage Transactions 15
Purchasing Shares 16
Distribution Plan (Institutional
Service Shares Only) and
Shareholder Services 16
Determining Net Asset Value 17
Determining Market Value of
Securities 17
Valuing Municipal Bonds 17
Use of Amortized Cost 17
Redeeming Shares 17
Redemption in Kind 18
Tax Status 18
The Fund's Tax Status 18
Shareholders' Tax Status 18
Total Return 18
Yield 19
Performance Comparisons 19
Economic and Market Information 20
About Federated Investors 20
Mutual Fund Market 20
<PAGE>
General Information About the Fund
The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." On May 14, 1997 the Board of Directors ("Directors") approved the
Fund's name change from Federated Total Return Limited Duration Fund to
Federated Limited Duration Fund. The Articles of Incorporation permit the
Corporation to offer separate portfolios and classes of shares. Shares of the
Fund are offered in two classes, known as Institutional Shares and Institutional
Service Shares (individually and collectively referred to as "Shares," as the
context may require). This Statement of Additional Information relates to the
above-mentioned Shares of the Fund.
Investment Objective and Policies
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. The investment
policies stated below may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material change in the
investment policies becomes effective.
Types of Investments
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in domestic
investment grade debt securities. The Fund's weighted- average portfolio
duration will at all times be limited to three years or less.
Adjustable Rate Mortgage Securities ("ARMS")
The ARMS in which the Fund invests include, but are not limited to, securities
issued by Government National Mortgage Association, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation. Unlike conventional
bonds, ARMS pay back principal over the life of the ARMS rather than at
maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing payments on the underlying mortgages. At the
time that a holder of the ARMS reinvests the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking in"
long-term interest rates than other types of fixed income securities. ARMS may
also be collateralized by whole loans or private pass-through securities.
Like other fixed income securities, the market value of ARMS will generally vary
inversely with changes in market interest rates. Thus, the market value of ARMS
generally declines when interest rates rise and generally rises when interest
rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Collateralized Mortgage Obligations ("CMOS")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs; most of the CMOs in which the Fund invests use the same basic
structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities. The
first three (A, B, and C bonds) pay interest at their stated rates beginning
with the issue date, and the final class (Z bond) typically receives any excess
income from the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the shorter
maturity classes have been retired, but then receives all remaining principal
and interest payments;
<PAGE>
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities; and
(3) The classes of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity class (or A bond). When those
securities are completely retired, all principal payments are then directed to
the next shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off. Because the cash flow is distributed
sequentially instead of pro rata, as with pass-through securities, the cash
flows and average lives of CMOs are more predictable, and there is a period of
time during which the investors in the longer-maturity classes receive no
principal paydowns. The interest portion of these payments is distributed by the
Fund as income, and the capital portion is reinvested.
Real Estate Mortgage Investment Conduits ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
Interest-Only and Principal-Only Investments
Some of the securities purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on mortgage-backed
securities (stripped mortgage-backed securities or "SMBSs"). SMBSs are usually
structured with two classes and receive different proportions of the interest
and principal distributions on the pool of underlying mortgage-backed
securities. Due to the possibility of prepayments on the underlying mortgages,
SMBSs may be more interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which SMBSs were
issued, there may be substantial prepayments on the underlying mortgages,
leading to the relatively early prepayments of principal-only SMBSs (the
principal-only or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class). Because the
yield to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on the
underlying mortgages. The Fund's inability to fully recoup its investments in
these securities as a result of a rapid rate of principal prepayments may occur
even if the securities are rated by an NRSRO. Therefore, interest-only SMBSs
generally increase in value as interest rates rise and decrease in value as
interest rates fall, counter to changes in value experienced by most fixed
income securities.
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid.
Resets of Interest
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one- year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels.
<PAGE>
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMS, which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Caps and Floors
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages.
Convertible Securities
DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common stock at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common stock up to the first call
price. They are effectively capped at that point unless the common stock rises
above a second price point, at which time they participate with unlimited upside
potential.
PERCS, or similar instruments marketed under different names, offer a
substantial dividend advantage, but capital appreciation potential is limited to
a predetermined level. PERCS are less risky and less volatile than the
underlying common stock because their superior income mitigates declines when
the common stock falls, while the cap price limits gains when the common stock
rises.
Foreign Bank Instruments
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income. The Fund currently does not intend to
invest more than 5% of its total assets in options transactions.
<PAGE>
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. In the fixed
income securities market, price moves inversely to interest rates. A rise
in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would agree to purchase securities in the future at a
predetermined price (i.e., "go long") to hedge against a decline in market
interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out nor exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
offset the drop in value of the Fund's fixed income portfolio which is
occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The net
premium income of the Fund will then offset the decrease in value of the
hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts. If
this limitation is exceeded at any time, the Fund will take prompt action
to close out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
<PAGE>
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking
to market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment
of the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right
to obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
Medium Term Notes and Deposit Notes
Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years.
Weighted Average Portfolio Maturity
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a `weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity to each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) asset-backed
securites as having a maturity equal to their estimated weighted-average
maturity and (b) variable and floating rate instruments as having a remaining
maturity commensurate with the period remaining until the next scheduled
adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of the principal prepayments
weighted by the period until such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be treated as
floating or variable rate securities based upon the interest rate index of the
swap or cap; floating and variable rate securities hedged with interest rate
swaps or floors will be treated as having a maturity equal to the term of the
swap or floor. In the event that the Fund holds an interest rate swap, cap or
floor that is not hedging another portfolio security, the swap, cap or floor
will be treated as having a maturity equal to its term and a weight equal to its
notional principal amount of such term.
<PAGE>
Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as the probable amount
and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3) + ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt = the present value of the cash flow in period t discounted at
the prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the
present value is determined using the prevailing
yield-to-maturity.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the Fund
sufficient to make payment for the securities to be purchased are segregated on
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
<PAGE>
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non- exclusive safe harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors. The
Directors consider the following criteria in determining the liquidity of
certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time. When
effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date. These securities are marked to market daily and
are maintained until the transaction is settled.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the period from October 1, 1996 (start of
performance) to September 30, 1997, the Fund's portfolio turnover rate was 109%.
<PAGE>
Investment Limitations
The following limitations are fundamental [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 Securities and
Exchange Commission) in an open-end investment company with substantially the
same investment objectives]:
Selling Short or Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount 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 Fund 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 any borrowings in excess of 5% of its
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 will not be deemed to be pledges of the Fund's assets: 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.
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
U.S. government, 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, and will not acquire more than 10% of the outstanding voting
securities of any one issuer.
Investing in Real Estate
The Fund will not purchase 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 except to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
<PAGE>
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.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government, its
agencies or instrumentalities).
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Directors 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 Securities and Exchange
Commission) in an open-end investment company with substantially the same
investment objectives]. Shareholders will be notified before any material
changes in these limitations become effective.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, interest rate swaps,
non-negotiable fixed time deposits with maturities over seven days, and
certain restricted securities not determined by the Directors to be
liquid.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of the investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Fund does not expect to borrow money, pledge securities or engage in reverse
repurchase agreements during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
Federated Total Return Series, Inc. Management
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President and Director of the
Company.
<PAGE>
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
<PAGE>
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University 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 and Czech Management Center, Prague; Director or Trustee of the Funds.
<PAGE>
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board between meetings
of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; 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 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 Investment Portfolios; Federated Investment Trust; 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.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.
As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Anbee & Company, Aurora, IL
owned 42,384 (5.29%); Sunbank and Co., Sunbury, PA owned 250,872 (31.31%); Grand
Old Co., Zanesville, OH owned 124,003 (15.48%); First Mar & Co., Marquette, MI
owned 234,049 (29.21%); and Soy Capital Bank & Trust, Decatur, IL owned 68,677
(8.57%). As of October 28, 1997 the following shareholders of record owned 5% or
more of the outstanding Institutional Service Shares of the Fund: Anbee &
Company, Aurora, IL owned 267,780 (94.49%).
<PAGE>
Directors' Compensation
<TABLE>
<CAPTION>
<S> <C> <C>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 54 other investment companies in the Fund Complex
Thomas G. Bigley $1,004 $86,331 for the Corporation and
Director 54 other investment companies in the Fund Complex
John T. Conroy, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
William J. Copeland, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 16 other investment companies in the Fund Complex
andDirector
James E. Dowd, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Peter E. Madden, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
John E. Murray, Jr., $1,004 $104,898 for the Corporationand
Director 54 other investment companies in the Fund Complex
Wesley W. Posvar, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Marjorie P. Smuts, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended September 30, 1997 and the
Corporation was comprised of four portfolios.
+The information is provided for the last calendar year.
Director Liability
The Corporation's Articles of Incorporation provide that the Directors will not
be liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
<PAGE>
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
Advisory Fees
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. For the period from October 1, 1996
(start of performance) to September 30, 1997, the Fund's Adviser earned $24,589,
of which $22,579 was voluntarily waived.
Other Services
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from October 1, 1996, (start of performance) to
September 30, 1997, the Fund incurred costs for administrative services of
$155,000, none of which was voluntarily waived.
Custodian and Portfolio Accountant
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
Transfer Agent
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based upon the size, type and
number of accounts and transactions made by shareholders.
Independent Auditors
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally 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 makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Directors.The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services.
<PAGE>
Research services provided by brokers and dealers may be used by the adviser or
by affiliates in advising the Fund and other accounts. To the extent that
receipt of these services may supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the period from October 1, 1996 (start of
performance) to September 30, 1997, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value on days the New York Stock Exchange is open for
business. The procedure for purchasing shares of the Fund is explained in the
prospectus under "Investing in the Fund."
Distribution Plan (Institutional Service Shares Only) and Shareholder Services
As explained in the respective prospectuses, with respect to Shares of the Fund,
the Fund has adopted a Shareholder Services Agreement, and, with respect to
Institutional Service Shares, has adopted a Distribution Plan.
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations and addresses. By
adopting the Plan, the Directors expect that the Fund will be able to achieve a
more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
<PAGE>
For the period from October 1, 1996 (start of performance) to September 30,
1997, a payment in the amount of $1,798 were made to financial institutions by
Institutional Service Shares pursuant to the Distribution Plan, of which $1,442
was voluntarily waived. In addition, for the period from October 1, 1996 (start
of performance) to September 30, 1997, payments in the amount of $13,570 and
$1,799 were made pursuant to the Shareholder Services Agreement for
Institutional Shares and Institutional Service Shares, respectively, of which
$13,570 and $44, respectively, were voluntarily waived.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's securities, other than options, are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or for short- term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost unless the Directors determine this is not fair value; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Directors determine in good faith
that another method of valuing option positions is necessary.
Valuing Municipal Bonds
The Directors use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
Use of Amortized Cost
The Directors have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank does not charge
for telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
<PAGE>
Redemption in Kind
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which a Fund is obligated to redeem shares for any
one shareholder solely in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Directors
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way that net asset value is determined. The portfolio instruments
will be selected in a manner that the Directors deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
Total Return
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.
The Fund's average annual total returns for the one-year period from ended
September 30, 1997, were 8.27% for Institutional Shares and 8.10% for
Institutional Service Shares.
<PAGE>
Yield
The yield of the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is 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 the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial institutions
and broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees.
The Fund's yields for the thirty-day period ended September 30, 1997, were 6.91%
for Institutional Shares and 6.60% for Institutional Service Shares.
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o Merrill Lynch 1-3 Year Treasury Index is an unmanaged index tracking
short-term U.S. government securities between 1 and 2.99 years. The index
is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o Merrill Lynch 1-3 Year Corporate Index is a market capitalization weighted
index including fixed-coupon domestic investment grade corporate bonds with
at least $100 million par amount outstanding. Both interest and price return
are calculated daily based on an accrued schedule and trader pricing.
Quality range is BBB3-AAA. Maturities for all bonds are more than one year
and less than three years. Yankees, Canadians, and all Structured Notes are
excluded. Advertisements and other sales literature for the Fund may quote
total returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an investment in
the Fund based on monthly reinvestment of dividends over a specified period
of time.
oLehman Brothers High Yield Index covers the universe of fixed rate, publicly
issued, noninvestment 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 Investor's
Service. 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.
<PAGE>
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
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 $3.5 trillion to the more than 6,000 funds available.
About Federated Investors
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making-structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. These traders handle trillions of dollars
in annual trading volume.
In the government sector, as of December 31, 1996, Federated Investors managed 9
mortgage-backed, 5 government/agency and 17 government money market mutual
funds, with assets approximating $6.3 billion, $1.7 billion and $23.6 billion,
respectively. Federated trades approximately $309 million in U.S. government and
mortgage-backed securities daily and places $17 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
nearly $30 billion in government funds within these maturity ranges.
In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds and 17 bond funds with assets approximating $17.2
billion and $4.0 billion, respectively. Federated's corporate bond decision
making--based on intensive, diligent credit analysis--is backed by over 21 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 $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international and global portfolios.
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 $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
<PAGE>
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with 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 2,000 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, Federated Securities Corp.
* Source: Investment Company Institute.
FEDERATED GOVERNMENT FUND
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Government Fund (the "Fund") offered by
this prospectus represent interests in a diversified investment portfolio of
Federated Total Return Series, Inc. (the "Corporation"), an open-end, management
investment company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by investing primarily in a portfolio of U.S.
government securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Institutional Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Portfolio Turnover 8
Hub and Spoke [registered trademark] Option 8
Net Asset Value 9
Investing in Institutional Shares 9
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 9
Exchanging Securities for Fund Shares 9
Confirmations and Account Statements 10
Dividends and Distributions 10
Redeeming Institutional Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 11
Fund Information 11
Management of the Fund 11
Distribution of Institutional Shares 12
Administration of the Fund 12
Shareholder Information 13
Voting Rights 13
Tax Information 13
Federal Income Tax 13
State and Local Taxes 13
Performance Information 13
Other Classes of Shares 14
Financial Highlights -- Institutional Service Shares 15
Financial Statements 16
Report of Ernst & Young LLP, Independent Auditors 23
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.06%
12b-1 Fee None
Total Other Expenses 0.24%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses(3) 0.30%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1998.
If Institutional Shares were paying or accruing the shareholder services
fee, Institutional Shares would be able to pay up to 0.25% of its average
daily net assets for the shareholder services fee. See "Fund Information."
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total
operating expenses were 0.00% for the fiscal year ended September 30, 1997
and would have been 12.25% absent the voluntary waiver of the management fee
and the voluntary reimbursement of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Fund Information". Wire-transferred redemptions
of less than $5,000 may be subject to additional fees.
<TABLE>
EXAMPLE
- ------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $ 3
3 years $10
5 years $17
10 years $38
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 23.
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1997(A)
---------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------
Net investment income 0.25
- --------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- -------------------------------------------------------------- -------
Total from investment operations 0.51
- -------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------
Distributions from net investment income (0.25)
- -------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.26
- -------------------------------------------------------------- -------
TOTAL RETURN(B) 5.12%
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------
Expenses 0.00%*
- --------------------------------------------------------------
Net investment income 7.37%*
- --------------------------------------------------------------
Expense waiver/reimbursement(c) 12.25%*
- --------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------
Net assets, end of period (000 omitted) $5,145
- --------------------------------------------------------------
Portfolio turnover 9%
- --------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 31, 1997 (start of performance)
to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for the Fund: Institutional Shares and Institutional Service Shares. This
prospectus relates only to Institutional Shares of the Fund.
Institutional Shares ("Shares") of the Fund are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of U.S. government securities. A minimum initial
investment of $100,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, or capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares) or realized from the purchase and sale of securities, and
successful use of futures and options. Generally, over the long term, the total
return obtained by a portfolio investing primarily in fixed income securities is
not expected to be as great as that obtained by a portfolio that invests
primarily in equity securities. At the same time, the market risk and price
volatility of a fixed income portfolio is expected to be less than that of an
equity portfolio.
INVESTMENT POLICIES
The Fund pursues this investment objective by investing in U.S. government
securities, including mortgage-backed securities and non-U.S. government
mortgage-backed securities and asset-backed securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in securities that are issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The remainder of the Fund's assets may be
invested in any of the securities discussed below. Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests principally are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, discount notes and mortgage-backed securities issued or
guaranteed by U.S. government agencies and instrumentalities supported
by the full faith and credit of the United States;
* notes, bonds, discount notes and mortgage-backed securities of U.S.
government agencies or instrumentalities which receive or have access to
federal funding;
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities;
and
* asset-backed securities and commercial mortgage securities rated BBB
or better by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("Standard & Poor's"), or Fitch Investors Service,
Inc. ("Fitch"), or which are of comparable quality in the judgment of
the adviser.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
GOVERNMENT SECURITIES
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government are backed by the full faith and credit of the
U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since
it is not obligated to do so. The instrumentalities are supported by:
* the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
* discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
* the credit of the agency or instrumentality.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security is an obligation of the issuer backed
by a mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Some mortgage-backed securities, such as collateralized mortgage
obligations ("CMOs"), make payments of both principal and interest at a variety
of intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of mortgage-backed
securities will likely be developed in the future, and the Fund may invest in
them if the investment adviser determines they are consistent with the Fund's
investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non- government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests generally are issued by
Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed by
the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund will invest only in CMOs that are rated A or better by a nationally
recognized statistical rating organization. The Fund may also invest in certain
CMOs which are issued by private entities such as investment banking firms and
companies related to the construction industry. The CMOs in which the Fund may
invest may be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (ii) securities which are
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; (iii) collateralized by pools of mortgages in which
payment of principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multiclass securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. Interest-only stripped mortgage-backed securities
yield to maturity is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage-backed securities. It
is possible that the Fund might not recover its original investment on
interest-only stripped mortgage-backed securities if there are substantial
prepayments on the underlying mortgages. Interest-only stripped mortgage-backed
securities generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by most
fixed income securities.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED
And Asset-Backed Securities
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rising interest rates, mortgage-backed securities may also have less
potential for capital appreciation than other similar investments (e.g.,
investments with comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
mortgage-backed securities are purchased at a premium, mortgage foreclosures and
unscheduled principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if mortgage-backed
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit- enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will not treat
credit-enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any related
options to react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In these events, the Fund may lose money on the futures contract or option. It
is not certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stocks and bonds, derivatives
do not necessarily present greater market risks than traditional investments.
The Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
LEVERAGE AND BORROWING
The Fund is authorized to borrow money from banks or otherwise in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the bank or other borrowing. This
limitation may not be changed without the approval of shareholders. The Fund is
also authorized to borrow an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes such as clearance of portfolio
transactions and share repurchases. The Fund will only borrow when there is an
expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund also may borrow in order to effect share purchases and
tender offers.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of the Fund shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained. To the extent the income derived
from securities purchased with borrowed funds exceeds the interest the Fund will
have to pay, the Fund's net income will be greater than if borrowing were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The Fund may also
borrow for emergency purposes, for the payment of dividends for share
repurchases or for the clearance of transactions.
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but does not ensure
this result. When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are: segregated on the Trust's records at the trade date; marked to
market daily; and maintained until the transaction is settled.
The Fund may enter into "dollar rolls" in which the Fund sells securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered dollar roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. To the extent that dollar rolls are not covered rolls,
they will be included in the 33 1/3% borrowing limit.
The Fund expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with (i) the lender to act as
a subcustodian if the lender is a bank or otherwise qualifies as a custodian of
investment company assets or (ii) a suitable subcustodian. Because few or none
of its assets will consist of margin securities, the Fund does not expect to
borrow on margin.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy and will receive collateral
in the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase U.S. government obligations on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
The Fund does not attempt to set or meet any specific portfolio turnover rate,
since turnover is incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. High turnover rates may result in higher
brokerage commissions and capital gains. See "Tax Information" in this
prospectus.
HUB AND SPOKE [REGISTERED TRADEMARK] OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (which is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares by Federal Reserve wire, call the Fund before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Government
Fund -- Institutional Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.
BY MAIL
To purchase Shares by mail, send a check made payable to Federated Government
Fund -- Institutional Shares to: Federated Shareholder Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are considered
received when payment by check is converted by State Street Bank and Trust
Company ("State Street Bank") into federal funds. This is normally the next
business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time), on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Martin Luther King Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Shares. The Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, and must have a readily ascertainable market value. The market value of
any securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund. The Fund acquires the
exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Shares on the day the securities are valued. One Share will be issued for the
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value, unless cash payments are requested by
shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
If share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $100,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to .40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
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 Vice President of the Fund's investment adviser since 1993. Ms.
Foody-Malus served as an Assistant Vice President of the investment
adviser from 1990 until 1992. Ms. Foody-Malus received her M.B.A. in
Accounting/Finance from the University of Pittsburgh.
Edward J. Tiedge has been the Fund's portfolio manager since inception.
Mr. Tiedge joined Federated Investors in 1993 and has been a Vice
President of the Fund's investment adviser since January 1996. He served
as an Assistant Vice President of the Fund's investment adviser in 1995,
and an Investment Analyst during 1993 and 1994. Mr. Tiedge served as
Director of Investments at Duquesne Light Company from 1990 to 1993.
Mr Tiedge is a Chartered Financial Analyst and received his M.S.I.A.
concentrating in Finance from Carnegie Mellon University.
Donald T. Ellenberger has been the Fund's portfolio manager since
inception. Mr. Ellenberger joined Federated Investors in 1996 as a Vice
President of a Federated advisory subsidiary. He has been a Vice
President of the Fund's investment adviser since March, 1997. From 1986
to 1996, he served as a Trader/Portfolio Manager for Mellon Bank, N.A.
Mr. Ellenberger received his M.B.A. in Finance from Stanford University.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for
Institutional Shares. It is a Pennsylvania corporation organized on
November 14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary of
Federated Investors.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to 0.25% of the average daily net asset value of the
Institutional Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services. Currently, Institutional Shares are accruing no shareholder services
fees. Shareholders will be notified if this changes.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's investment adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
- ------------ ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Federated Securities Corp., who was the record owner of 367,774
(72.08%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
The Fund is not required to hold annual shareholder meetings. Shareholder
approval will be sought only for certain changes in the Fund's operation and for
the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar nonrecurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund and are also subject to shareholder services fees.
Institutional Service Shares and Institutional Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Service
Shares and Institutional Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 23.
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1997(A)
--------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------
Net investment income 0.24
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- ----------------------------------------------------------------------- -------
Total from investment operations 0.50
- ----------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------
Distributions from net investment income (0.24)
- ----------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.26
- ----------------------------------------------------------------------- -------
TOTAL RETURN(B) 5.07%
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------
Expenses 0.00%*
- -----------------------------------------------------------------------
Net investment income 7.76%*
- -----------------------------------------------------------------------
Expense waiver/reimbursement(c) 14.14%*
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------
Net assets, end of period (000 omitted) $5
- -----------------------------------------------------------------------
Portfolio turnover 9%
- -----------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 31, 1997 (start of performance)
to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements).
PORTFOLIO OF INVESTMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- ---------
<C> <S> <C>
MORTGAGE BACKED SECURITIES -- 94.9%
- -------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION -- 49.2%
- -------------------------------------------------------------------------------------------------
$195,359 6.00%, 5/1/2011 $191,039
---------------------------------------------------------------------------------
636,559 6.50%, 4/1/2012 - 2/1/2024 627,169
---------------------------------------------------------------------------------
909,922 7.50%, 11/1/2025 927,839
---------------------------------------------------------------------------------
906,603 Series 180-2, 7.50%, 10/1/2026, (Interest Only) 272,180
---------------------------------------------------------------------------------
482,286 9.00%, 1/1/2025 514,088
--------------------------------------------------------------------------------- ----------
Total 2,532,315
--------------------------------------------------------------------------------- ----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 25.0%
- -------------------------------------------------------------------------------------------------
375,000 Series 1996-50-P, .000%, 11/25/2026, (Principal Only) 352,500
---------------------------------------------------------------------------------
595,270 8.00%, 12/1/2026 614,730
---------------------------------------------------------------------------------
307,689 8.50%, 12/1/2024 322,114
--------------------------------------------------------------------------------- ----------
Total 1,289,344
--------------------------------------------------------------------------------- ----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 20.7%
- -------------------------------------------------------------------------------------------------
1,064,442 7.00%, 10/15/2023 1,067,763
--------------------------------------------------------------------------------- ----------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST $4,742,863) 4,889,422
--------------------------------------------------------------------------------- ----------
U.S. TREASURY OBLIGATIONS -- 2.0%
- -------------------------------------------------------------------------------------------------
100,000 6.250%, 8/31/2002 (identified cost $99,930) 100,980
--------------------------------------------------------------------------------- ----------
(A)REPURCHASE AGREEMENT -- 3.7%
- -------------------------------------------------------------------------------------------------
190,000 BT Securities Corp., 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized cost) 190,000
--------------------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $5,032,793)(B) $5,180,402
--------------------------------------------------------------------------------- ----------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $5,036,716. The
net unrealized appreciation of investments on a federal tax basis amounts to
$143,686 which is comprised of $198,342 appreciation and $54,656
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,150,266) at September 30, 1997.
The following acronyms are used throughout this portfolio:
REMIC - Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified cost $5,032,793 and tax
cost $5,036,716) $5,180,402
- ---------------------------------------------------------------------------------------------------------
Cash 4,379
- ---------------------------------------------------------------------------------------------------------
Income receivable 27,593
- --------------------------------------------------------------------------------------------------------- -----------
Total assets 5,212,374
- ---------------------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------
Income distribution payable $30,356
- ----------------------------------------------------------------------------------------- -----------
Accrued expenses 31,752
- ----------------------------------------------------------------------------------------- -----------
Total liabilities 62,108
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSETS for 501,787 shares outstanding $5,150,266
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------------
Paid in capital $5,018,233
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 147,609
- ---------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (15,576)
- --------------------------------------------------------------------------------------------------------- -----------
Total Net Assets $5,150,266
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- ---------------------------------------------------------------------------------------------------------
$5,144,898 [divided by] 501,264 shares outstanding $10.26
- --------------------------------------------------------------------------------------------------------- -----------
INSTITUTIONAL SERVICE SHARES:
- ---------------------------------------------------------------------------------------------------------
$5,368 [divided by] 523 shares outstanding $10.26
- --------------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED GOVERNMENT FUND
PERIOD ENDED SEPTEMBER 30, 1997*
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------------
Interest $123,389
- -----------------------------------------------------------------------------------------
Investment advisory fee $6,692
- -----------------------------------------------------------------------------------------
Administrative personnel and services fee 51,000
- -----------------------------------------------------------------------------------------
Custodian fees 42
- -----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 10,800
- -----------------------------------------------------------------------------------------
Directors'/Trustees' fees 6,262
- -----------------------------------------------------------------------------------------
Portfolio accounting fees 12,857
- -----------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Shares 4,182
- -----------------------------------------------------------------------------------------
Share registration costs 77,760
- -----------------------------------------------------------------------------------------
Printing and postage 13,200
- -----------------------------------------------------------------------------------------
Miscellaneous 22,200
- ----------------------------------------------------------------------------------------- --------
Total expenses 204,995
- -----------------------------------------------------------------------------------------
Waivers and reimbursement --
- -------------------------------------------------------------------------
Waiver of investment advisory fee ($6,692)
- -------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Shares (4,182)
- -------------------------------------------------------------------------
Reimbursement of other operating expenses (194,121)
- ------------------------------------------------------------------------- --------
Total waivers and reimbursement (204,995)
- ----------------------------------------------------------------------------------------- --------
Net expenses 0
- -------------------------------------------------------------------------------------------------------- --------
Net investment income 123,389
- -------------------------------------------------------------------------------------------------------- --------
NET REALIZED UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------------
Net realized loss on investments (15,576)
- --------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 147,609
- -------------------------------------------------------------------------------------------------------- --------
Net realized and unrealized gain on investments 132,033
- -------------------------------------------------------------------------------------------------------- --------
Change in net assets resulting from operations $255,422
- -------------------------------------------------------------------------------------------------------- --------
</TABLE>
* For the period from May 31, 1997 (start of performance) to September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED GOVERNMENT FUND
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997*
--------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------
OPERATIONS --
- -----------------------------------------------------------------------------------------
Net investment income $123,389
- -----------------------------------------------------------------------------------------
Net realized loss on investments
($0 as computed for federal tax purposes) (15,576)
- -----------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation 147,609
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations 255,422
- ----------------------------------------------------------------------------------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS --
- -----------------------------------------------------------------------------------------
Distributions from net investment income
- -----------------------------------------------------------------------------------------
Institutional Shares (123,380)
- -----------------------------------------------------------------------------------------
Institutional Service Shares (9)
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from distributions to shareholders (123,389)
- ----------------------------------------------------------------------------------------- ------------
SHARE TRANSACTIONS --
- -----------------------------------------------------------------------------------------
Proceeds from sale of shares 10,633,387
- -----------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 278
- -----------------------------------------------------------------------------------------
Cost of shares redeemed (5,615,432)
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from share transactions 5,018,233
- ----------------------------------------------------------------------------------------- ------------
Change in net assets 5,150,266
- -----------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------
Beginning of period 0
- ----------------------------------------------------------------------------------------- ------------
End of period $5,150,266
- ----------------------------------------------------------------------------------------- ------------
</TABLE>
* For the period from May 31, 1997 (start of performance) to September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Government Fund
(the "Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or less
at the time of purchase may be valued at amortized cost, which approximates fair
market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
Additionally, net capital losses of $11,653 attributable to security
transactions incurred after September 30, 1996 are treated as arising on the
first day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At September 30, 1997, par value shares ($ 0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CAPITAL STOCK
SHARE CLASS NAME AUTHORIZED
- -------------------------------- ------------------------
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
----------------
Total shares authorized 2,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997(A)
--------------------------
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,060,203 $10,628,087
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 27 272
- ------------------------------------------------------------------------------
Shares redeemed (558,966) (5,615,428)
- ------------------------------------------------------------------------------ ---------- -----------
Net change resulting from Institutional Share transactions 501,264 $5,012,931
- ------------------------------------------------------------------------------ ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997(A)
--------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 523 $5,300
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared -- 6
- ------------------------------------------------------------------------------
Shares redeemed -- (4)
- ------------------------------------------------------------------------------
Net change resulting from Institutional Service Share transactions 523 5,302
- ------------------------------------------------------------------------------
Net change resulting from share transactions 501,787 $5,018,233
- ------------------------------------------------------------------------------
</TABLE>
(a) For the period from May 31, 1997 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver and/or reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. FSC may
voluntarily choose to waive a portion of this fee. FSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets
of the Fund's Institutional Shares for the period. The fee paid to FSS is used
to finance certain services for shareholders and to maintain shareholder
accounts. For the period ended September 30, 1997, the Institutional Service
Shares did not incur a shareholder services fee. FSS may voluntarily choose to
waive any portion of its fee. FSS can modify or terminate this voluntary waiver
at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary, Federated
Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing
agent for the Fund. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
PURCHASES $5,401,279
- -------------------------------------------- ----------
SALES $434,549
- -------------------------------------------- ----------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Government Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Government Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets and the financial highlights for the period presented
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Government Fund at September 30, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the period
presented therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
[LOGO] FEDERATED INVESTORS
Federated Government Fund
(A portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc.,
an Open-End, Management Investment Company
FEDERATED GOVERNMENT FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.federatedinvestors.com
Cusip 31428Q887
G01922-01-IS (11/97)
FEDERATED GOVERNMENT FUND
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Government Fund (the "Fund")
offered by this prospectus represent interests in a diversified investment
portfolio of Federated Total Return Series, Inc. (the "Corporation"), an
open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by investing primarily in a portfolio of U.S.
government securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Institutional Service Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Portfolio Turnover 8
Hub and Spoke [registered trademark] Option 8
Net Asset Value 9
Investing in Institutional Service Shares 9
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 9
Exchanging Securities for Fund Shares 10
Confirmations and Account Statements 10
Dividends and Distributions 10
Redeeming Institutional Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 11
Fund Information 11
Management of the Fund 11
Distribution of Institutional Service Shares 12
Administration of the Fund 13
Administrative Services 13
Shareholder Information 13
Voting Rights 13
Tax Information 13
Federal Income Tax 13
State and Local Taxes 13
Performance Information 13
Other Classes of Shares 14
Financial Highlights -- Institutional Shares 15
Financial Statements 16
Report of Ernst & Young LLP,
Independent Auditors 23
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.06%
12b-1 Fee (after waiver)(2) 0.05%
Total Other Expenses 0.49%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 0.60%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) The 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total
operating expenses were 0.00% for the fiscal year ended September 30, 1997
and would have been 14.14% absent the voluntary waivers of the management
fee, 12b-1 fee and shareholder services fee and the voluntary reimbursement
of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Service Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Fund Information". Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE
- -----------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $6
3 years $19
5 years $33
10 years $75
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 23.
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1997(A)
--------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------
Net investment income 0.24
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- ----------------------------------------------------------------------- -------
Total from investment operations 0.50
- ----------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------
Distributions from net investment income (0.24)
- ----------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.26
- ----------------------------------------------------------------------- -------
TOTAL RETURN(B) 5.07%
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------
Expenses 0.00%*
- -----------------------------------------------------------------------
Net investment income 7.76%*
- -----------------------------------------------------------------------
Expense waiver/reimbursement(c) 14.14%*
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------
Net assets, end of period (000 omitted) $5
- -----------------------------------------------------------------------
Portfolio turnover 9%
- -----------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 31, 1997 (start of performance)
to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements).
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for the Fund: Institutional Service Shares and Institutional Shares. This
prospectus relates only to Institutional Service Shares of the Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in U.S. government securities. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, or capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares) or realized from the purchase and sale of securities, and
successful use of futures and options. Generally, over the long term, the total
return obtained by a portfolio investing primarily in fixed income securities is
not expected to be as great as that obtained by a portfolio that invests
primarily in equity securities. At the same time, the market risk and price
volatility of a fixed income portfolio is expected to be less than that of an
equity portfolio.
INVESTMENT POLICIES
The Fund pursues this investment objective by investing in U.S. government
securities, including mortgage-backed securities and non-U.S. government
mortgage-backed securities and asset-backed securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in securities that are issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The remainder of the Fund's assets may be
invested in any of the securities discussed below. Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests principally are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, discount notes and mortgage-backed securities issued or
guaranteed by U.S. government agencies and instrumentalities supported
by the full faith and credit of the United States;
* notes, bonds, discount notes and mortgage-backed securities of U.S.
government agencies or instrumentalities which receive or have access to
federal funding;
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities;
and
* asset-backed securities and commercial mortgage securities rated BBB
or better by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("Standard & Poor's"), or Fitch Investors Service,
Inc. ("Fitch"), or which are of comparable quality in the judgment of
the adviser.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
GOVERNMENT SECURITIES
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government are backed by the full faith and credit of the
U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since
it is not obligated to do so. The instrumentalities are supported by:
* the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
* discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
* the credit of the agency or instrumentality.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security is an obligation of the issuer backed
by a mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Some mortgage-backed securities, such as collateralized mortgage
obligations ("CMOs"), make payments of both principal and interest at a variety
of intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of mortgage-backed
securities will likely be developed in the future, and the Fund may invest in
them if the investment adviser determines they are consistent with the Fund's
investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non- government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests generally are issued by
Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed by
the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund will invest only in CMOs that are rated A or better by a nationally
recognized statistical rating organization. The Fund may also invest in certain
CMOs which are issued by private entities such as investment banking firms and
companies related to the construction industry. The CMOs in which the Fund may
invest may be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (ii) securities which are
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; (iii) collateralized by pools of mortgages in which
payment of principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multiclass securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. Interest-only stripped mortgage-backed securities
yield to maturity is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage-backed securities. It
is possible that the Fund might not recover its original investment on
interest-only stripped mortgage-backed securities if there are substantial
prepayments on the underlying mortgages. Interest-only stripped mortgage-backed
securities generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by most
fixed income securities.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rising interest rates, mortgage-backed securities may also have less
potential for capital appreciation than other similar investments (e.g.,
investments with comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
mortgage-backed securities are purchased at a premium, mortgage foreclosures and
unscheduled principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if mortgage-backed
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit- enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will not treat
credit-enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any related
options to react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In these events, the Fund may lose money on the futures contract or option. It
is not certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stocks and bonds, derivatives
do not necessarily present greater market risks than traditional investments.
The Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
LEVERAGE AND BORROWING
The Fund is authorized to borrow money from banks or otherwise in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the bank or other borrowing. This
limitation may not be changed without the approval of shareholders. The Fund is
also authorized to borrow an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes such as clearance of portfolio
transactions and share repurchases. The Fund will only borrow when there is an
expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund also may borrow in order to effect share purchases and
tender offers.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of the Fund shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained. To the extent the income derived
from securities purchased with borrowed funds exceeds the interest the Fund will
have to pay, the Fund's net income will be greater than if borrowing were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The Fund may also
borrow for emergency purposes, for the payment of dividends for share
repurchases or for the clearance of transactions.
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but does not ensure
this result. When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are: segregated on the Trust's records at the trade date; marked to
market daily; and maintained until the transaction is settled.
The Fund may enter into "dollar rolls" in which the Fund sells securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered dollar roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. To the extent that dollar rolls are not covered rolls,
they will be included in the 33 1/3% borrowing limit.
The Fund expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with (i) the lender to act as
a subcustodian if the lender is a bank or otherwise qualifies as a custodian of
investment company assets or (ii) a suitable subcustodian. Because few or none
of its assets will consist of margin securities, the Fund does not expect to
borrow on margin.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy and will receive collateral
in the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase U.S. government obligations on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
The Fund does not attempt to set or meet any specific portfolio turnover rate,
since turnover is incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. High turnover rates may result in higher
brokerage commissions and capital gains. See "Tax Information" in this
prospectus.
HUB AND SPOKE(REGISTERED TRADEMARK) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (which is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken over the telephone.
The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares by Federal Reserve wire, call the Fund before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Government
Fund -- Institutional Service Shares; Fund Number (this number can be found on
the account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.
BY MAIL
To purchase Shares by mail, send a check made payable to Federated Government
Fund -- Institutional Service Shares to: Federated Shareholder Services Company,
P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are considered
received when payment by check is converted by State Street Bank and Trust
Company ("State Street Bank") into federal funds. This is normally the next
business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary. The net asset value is determined as of the close of
trading (normally 4:00 p.m., Eastern time), on the New York Stock Exchange,
Monday through Friday, except on: (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Martin Luther King Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Shares. The Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, and must have a readily ascertainable market value. The market value of
any securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund. The Fund acquires the
exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Shares on the day the securities are valued. One Share will be issued for the
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In
addition, shareholders will receive periodic statements reporting all
account activity, including dividends paid. The Fund will not issue
share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value, unless cash payments are requested by
shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
If share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to .40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
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 Vice President of the Fund's investment adviser since 1993. Ms.
Foody-Malus served as an Assistant Vice President of the investment
adviser from 1990 until 1992. Ms. Foody-Malus received her M.B.A. in
Accounting/Finance from the University of Pittsburgh.
Edward J. Tiedge has been the Fund's portfolio manager since inception.
Mr. Tiedge joined Federated Investors in 1993 and has been a Vice
President of the Fund's investment adviser since January 1996. He served
as an Assistant Vice President of the Fund's investment adviser in 1995,
and an Investment Analyst during 1993 and 1994. Mr. Tiedge served as
Director of Investments at Duquesne Light Company from 1990 to 1993. Mr.
Tiedge is a Chartered Financial Analyst and received his M.S.I.A.
concentrating in Finance from Carnegie Mellon University.
Donald T. Ellenberger has been the Fund's portfolio manager since
inception. Mr. Ellenberger joined Federated Investors in 1996 as a Vice
President of a Federated advisory subsidiary. He has been a Vice
President of the Fund's investment adviser since March, 1997. From 1986
to 1996, he served as a Trader/Portfolio Manager for Mellon Bank, N.A.
Mr. Ellenberger received his M.B.A. in Finance from Stanford University.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for
Institutional Service Shares. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary of
Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Fund in an amount computed at an annual rate of .25% of the average daily
net asset value of Institutional Service Shares of the Fund. The distributor may
select financial institutions such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or customers.
The Plan is a compensation-type plan. As such, the Fund makes no payments to the
distributor except as described above. Therefore, the Fund does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to .25% of the average daily net asset value of
Shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. Under the
Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund' s investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
-------- ------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose voluntarily to waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Federated Securities Corp., who was the record owner of 367,774
(72.08%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders. The Fund is not required to hold
annual shareholder meetings. Shareholder approval will be sought only for
certain changes in the Fund's operation and for the election of Directors under
certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Fund's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to aminimum initial investment of $100,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan and may be subject to
shareholder services fees.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 23.
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1997(A)
---------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------
Net investment income 0.25
- --------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- -------------------------------------------------------------- -------
Total from investment operations 0.51
- -------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------
Distributions from net investment income (0.25)
- -------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.26
- -------------------------------------------------------------- -------
TOTAL RETURN(B) 5.12%
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------
Expenses 0.00%*
- --------------------------------------------------------------
Net investment income 7.37%*
- --------------------------------------------------------------
Expense waiver/reimbursement(c) 12.25%*
- --------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------
Net assets, end of period (000 omitted) $5,145
- --------------------------------------------------------------
Portfolio turnover 9%
- --------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 31, 1997 (start of performance)
to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- ---------
<C> <S> <C>
MORTGAGE BACKED SECURITIES -- 94.9%
- -------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION -- 49.2%
- -------------------------------------------------------------------------------------------------
$195,359 6.00%, 5/1/2011 $191,039
---------------------------------------------------------------------------------
636,559 6.50%, 4/1/2012 - 2/1/2024 627,169
---------------------------------------------------------------------------------
909,922 7.50%, 11/1/2025 927,839
---------------------------------------------------------------------------------
906,603 Series 180-2, 7.50%, 10/1/2026, (Interest Only) 272,180
---------------------------------------------------------------------------------
482,286 9.00%, 1/1/2025 514,088
--------------------------------------------------------------------------------- ----------
Total 2,532,315
--------------------------------------------------------------------------------- ----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 25.0%
- -------------------------------------------------------------------------------------------------
375,000 Series 1996-50-P, .000%, 11/25/2026, (Principal Only) 352,500
---------------------------------------------------------------------------------
595,270 8.00%, 12/1/2026 614,730
---------------------------------------------------------------------------------
307,689 8.50%, 12/1/2024 322,114
--------------------------------------------------------------------------------- ----------
Total 1,289,344
--------------------------------------------------------------------------------- ----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 20.7%
- -------------------------------------------------------------------------------------------------
1,064,442 7.00%, 10/15/2023 1,067,763
--------------------------------------------------------------------------------- ----------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST $4,742,863) 4,889,422
--------------------------------------------------------------------------------- ----------
U.S. TREASURY OBLIGATIONS -- 2.0%
- -------------------------------------------------------------------------------------------------
100,000 6.250%, 8/31/2002 (identified cost $99,930) 100,980
--------------------------------------------------------------------------------- ----------
(A)REPURCHASE AGREEMENT -- 3.7%
- -------------------------------------------------------------------------------------------------
190,000 BT Securities Corp., 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized cost) 190,000
--------------------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $5,032,793)(B) $5,180,402
--------------------------------------------------------------------------------- ----------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $5,036,716. The
net unrealized appreciation of investments on a federal tax basis amounts to
$143,686 which is comprised of $198,342 appreciation and $54,656
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,150,266) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified cost $5,032,793 and tax
cost $5,036,716) $5,180,402
- ---------------------------------------------------------------------------------------------------------
Cash 4,379
- ---------------------------------------------------------------------------------------------------------
Income receivable 27,593
- --------------------------------------------------------------------------------------------------------- -----------
Total assets 5,212,374
- ---------------------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------
Income distribution payable $30,356
- ----------------------------------------------------------------------------------------- -----------
Accrued expenses 31,752
- ----------------------------------------------------------------------------------------- -----------
Total liabilities 62,108
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSETS for 501,787 shares outstanding $5,150,266
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------------
Paid in capital $5,018,233
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 147,609
- ---------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (15,576)
- --------------------------------------------------------------------------------------------------------- -----------
Total Net Assets $5,150,266
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- ---------------------------------------------------------------------------------------------------------
$5,144,898 [divided by] 501,264 shares outstanding $10.26
- --------------------------------------------------------------------------------------------------------- -----------
INSTITUTIONAL SERVICE SHARES:
- ---------------------------------------------------------------------------------------------------------
$5,368 [divided by] 523 shares outstanding $10.26
- --------------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED GOVERNMENT FUND
PERIOD ENDED SEPTEMBER 30, 1997*
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------------
Interest $123,389
- -----------------------------------------------------------------------------------------
Investment advisory fee $6,692
- -----------------------------------------------------------------------------------------
Administrative personnel and services fee 51,000
- -----------------------------------------------------------------------------------------
Custodian fees 42
- -----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 10,800
- -----------------------------------------------------------------------------------------
Directors'/Trustees' fees 6,262
- -----------------------------------------------------------------------------------------
Portfolio accounting fees 12,857
- -----------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Shares 4,182
- -----------------------------------------------------------------------------------------
Share registration costs 77,760
- -----------------------------------------------------------------------------------------
Printing and postage 13,200
- -----------------------------------------------------------------------------------------
Miscellaneous 22,200
- ----------------------------------------------------------------------------------------- --------
Total expenses 204,995
- -----------------------------------------------------------------------------------------
Waivers and reimbursement --
- -------------------------------------------------------------------------
Waiver of investment advisory fee ($6,692)
- -------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Shares (4,182)
- -------------------------------------------------------------------------
Reimbursement of other operating expenses (194,121)
- ------------------------------------------------------------------------- --------
Total waivers and reimbursement (204,995)
- ----------------------------------------------------------------------------------------- --------
Net expenses 0
- -------------------------------------------------------------------------------------------------------- --------
Net investment income 123,389
- -------------------------------------------------------------------------------------------------------- --------
NET REALIZED UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------------
Net realized loss on investments (15,576)
- --------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 147,609
- -------------------------------------------------------------------------------------------------------- --------
Net realized and unrealized gain on investments 132,033
- -------------------------------------------------------------------------------------------------------- --------
Change in net assets resulting from operations $255,422
- -------------------------------------------------------------------------------------------------------- --------
</TABLE>
* For the period from May 31, 1997 (start of performance) to September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED GOVERNMENT FUND
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997*
--------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------
OPERATIONS --
- -----------------------------------------------------------------------------------------
Net investment income $123,389
- -----------------------------------------------------------------------------------------
Net realized loss on investments
($0 as computed for federal tax purposes) (15,576)
- -----------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation 147,609
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations 255,422
- ----------------------------------------------------------------------------------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS --
- -----------------------------------------------------------------------------------------
Distributions from net investment income
- -----------------------------------------------------------------------------------------
Institutional Shares (123,380)
- -----------------------------------------------------------------------------------------
Institutional Service Shares (9)
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from distributions to shareholders (123,389)
- ----------------------------------------------------------------------------------------- ------------
SHARE TRANSACTIONS --
- -----------------------------------------------------------------------------------------
Proceeds from sale of shares 10,633,387
- -----------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 278
- -----------------------------------------------------------------------------------------
Cost of shares redeemed (5,615,432)
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from share transactions 5,018,233
- ----------------------------------------------------------------------------------------- ------------
Change in net assets 5,150,266
- -----------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------
Beginning of period 0
- ----------------------------------------------------------------------------------------- ------------
End of period $5,150,266
- ----------------------------------------------------------------------------------------- ------------
</TABLE>
* For the period from May 31, 1997 (start of performance) to September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Government Fund
(the "Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or less
at the time of purchase may be valued at amortized cost, which approximates fair
market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
Additionally, net capital losses of $11,653 attributable to security
transactions incurred after September 30, 1996 are treated as arising on the
first day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At September 30, 1997, par value shares ($ 0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CAPITAL STOCK
SHARE CLASS NAME AUTHORIZED
- -------------------------------- ------------------------
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
----------------
Total shares authorized 2,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997(A)
--------------------------
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,060,203 $10,628,087
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 27 272
- ------------------------------------------------------------------------------
Shares redeemed (558,966) (5,615,428)
- ------------------------------------------------------------------------------ ---------- -----------
Net change resulting from Institutional Share transactions 501,264 $5,012,931
- ------------------------------------------------------------------------------ ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997(A)
--------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 523 $5,300
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared -- 6
- ------------------------------------------------------------------------------
Shares redeemed -- (4)
- ------------------------------------------------------------------------------
Net change resulting from Institutional Service Share transactions 523 5,302
- ------------------------------------------------------------------------------
Net change resulting from share transactions 501,787 $5,018,233
- ------------------------------------------------------------------------------
</TABLE>
(a) For the period from May 31, 1997 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and/or reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver and/or reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. FSC may
voluntarily choose to waive a portion of this fee. FSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets
of the Fund's Institutional Shares for the period. The fee paid to FSS is used
to finance certain services for shareholders and to maintain shareholder
accounts. For the period ended September 30, 1997, the Institutional Service
Shares did not incur a shareholder services fee. FSS may voluntarily choose to
waive any portion of its fee. FSS can modify or terminate this voluntary waiver
at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary, Federated
Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing
agent for the Fund. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1997, were as follows:
PURCHASES $5,401,279
- -------------------------------------------- ----------
SALES $434,549
- -------------------------------------------- ----------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Government Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Government Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets, and the financial highlights for the period presented
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Government Fund at September 30, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the period
presented therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997
[LOGO] FEDERATED INVESTORS
FEDERATED
GOVERNMENT
FUND
(A portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc., an Open-
End, Management Investment Company
FEDERATED
GOVERNMENT FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428Q804
G01922-02-SS (11/97)
[RECYCLE LOGO]
Federated Government Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
Institutional Service Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus(es) of Federated Government Fund (the "Fund"), a portfolio of
Federated Total Return Series, Inc. (the "Corporation") dated November 30,
1997. This Statement is not a prospectus. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.
Federated Government Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
Statement dated November 30, 1997
[GRAPHIC OMITTED]
Cusip 31428Q887
Cusip 31428Q804
G01922-03(11/97)
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
I
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOs") 1
Real Estate Mortgage Investment Conduits ("REMICs") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Futures and Options Transactions 3
Leveraging 4
Leverage Through Borrowing 4
Medium Term Notes and Deposit Notes 5
Average Life 5
Weighted Average Portfolio Duration 5
Lending of Portfolio Securities 6
When-Issued and Delayed Delivery Transactions 6
Repurchase Agreements 6
Reverse Repurchase Agreements 6
Investing in Securities of Other Investment Companies 6
Portfolio Turnover 6
Investment Limitations 7
Federated Total Return Series, Inc. Management 8
Fund Ownership 11
Directors' Compensation 12
Director Liability 12
Investment Advisory Services 13
Adviser to the Fund 13
Advisory Fees 13
Brokerage Transactions 13
Other Services 13
Fund Administration 13
Custodian and Portfolio Accountant 13
Transfer Agent 14
Independent Auditors 14
Purchasing Shares 14
Distribution Plan (Institutional
Service Shares only) and
Shareholder Services 14
Determining Net Asset Value 14
Determining Market Value
of Securities 14
Use of Amortized Cost 15
Redeeming Shares 15
Redemption In Kind 15
Tax Status 15
The Fund's Tax Status 15
Shareholders' Tax Status 15
Total Return 16
Yield 16
Performance Comparisons 16
Economic and Market Information 18
About Federated Investors 18
Mutual Fund Market 19
<PAGE>
General Information About the Fund
The Fund is a portfolio of Federated Total Return Series, Inc. The Corporation
was incorporated under the laws of the State of Maryland on October 11, 1993. On
March 21, 1995, the name of the Corporation was changed from "Insight
Institutional Series, Inc." to "Federated Total Return Series, Inc." The
Articles of Incorporation permit the Corporation to offer separate portfolios
and classes of shares. Shares of the Fund are offered in two classes, known as
Institutional Shares and Institutional Service Shares (individually and
collectively referred to as "Shares," as the context may require). This
Statement of Additional Information relates to the above-mentioned Shares of the
Fund. Investment Objective and Policies
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors ("Directors")
without shareholder approval. Shareholders will be notified before any material
change in the investment policies becomes effective. Types of Investments
Under normal circumstances, the Fund will invest at least 65% of the value of
its total assets in securities that are issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Fund may also invest in the
securities described below and in the prospectus.
Adjustable Rate Mortgage Securities ("ARMS")
The ARMS in which the Fund invests generally will be issued by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. Unlike conventional bonds, ARMs pay back
principal over the life of the ARMS rather than at maturity. Thus, a holder of
the ARMS, such as the Fund, would receive monthly scheduled payments of
principal and interest, and may receive unscheduled principal payments
representing payments on the underlying mortgages. At the time that a holder of
the ARMS reinvests the payments and any unscheduled prepayments of principal
that it receives, the holder may receive a rate of interest which is actually
lower than the rate of interest paid on the existing ARMS. As a consequence,
ARMS may be a less effective means of "locking in" long-term interest rates than
other types of U.S. government securities. Like other U.S. government
securities, the market value of ARMS will generally vary inversely with changes
in market interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline. While ARMS
generally entail less risk of a decline during periods of rising rates, ARMS may
also have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because, as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if ARMS are purchased at a discount,
both a scheduled payment of principal and an unscheduled prepayment of principal
would increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. Collateralized Mortgage Obligations ("CMOs")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs; most of the CMOs in which the Fund invests use the same basic
structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities. The
first three (A, B, and C bonds) pay interest at their stated rates beginning
with the issue date, and the final class (Z bond) typically receives any excess
income from the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the shorter
maturity classes have been retired, but then receives all remaining principal
and interest payments; (2) The cash flows from the underlying mortgages are
applied first to pay interest and then to retire securities; and
<PAGE>
(3) The classes of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity class (or A bond). When those
securities are completely retired, all principal payments are then directed to
the next shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off. Because the cash flow is distributed
sequentially instead of pro rata, as with pass-through securities, the cash
flows and average lives of CMOs are more predictable, and there is a period of
time during which the investors in the longer-maturity classes receive no
principal paydowns. The interest portion of these payments is distributed by the
Fund as income, and the capital portion is reinvested. Real Estate Mortgage
Investment Conduits ("REMICs")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property. Interest-Only and
Principal-Only Investments
Some of the securities purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on mortgage-backed
securities (stripped mortgage-backed securities or "SMBSs"). SMBSs are usually
structured with two classes and receive different proportions of the interest
and principal distributions on the pool of underlying mortgage-backed
securities. Due to the possibility of prepayments on the underlying mortgages,
SMBSs may be more interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which SMBSs were
issued, there may be substantial prepayments on the underlying mortgages,
leading to the relatively early prepayments of principal-only SMBSs (the
principal-only or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class). Because the
yield to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on the
underlying mortgages. The Fund's inability to fully recoup its investments in
these securities as a result of a rapid rate of principal prepayments may occur
even if the securities are rated by an NRSRO. Therefore, interest-only SMBSs
generally increase in value as interest rates rise and decrease in value as
interest rates fall, counter to changes in value experienced by most fixed
income securities. Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid. Resets of
Interest
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. To the extent that the
adjusted interest rate on the mortgage security reflects current market rates,
the market value of an adjustable rate mortgage security will tend to be less
sensitive to interest rate changes than a fixed rate debt security of the same
stated maturity. Hence, ARMS which use indices that lag changes in market rates
should experience greater price volatility than adjustable rate mortgage
securities that closely mirror the market.
<PAGE>
Caps and Floors
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages. Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income. The Fund currently does not intend to
invest more than 5% of its total assets in options transactions.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. In the fixed
income securities market, price moves inversely to interest rates. A rise
in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would agree to purchase securities in the future at a
predetermined price (i.e., "go long") to hedge against a decline in market
interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. The Fund would
purchase put options on futures contracts to protect portfolio securities
against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures
contracts will also decrease in value and the option will increase in
value. In such an event, the Fund will normally close out its option by
selling an identical option. If the hedge is successful, the proceeds
received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option
plus the decrease in value of the hedged securities. Alternatively, the
Fund may exercise its put option. To do so, it would simultaneously enter
into a futures contract of the type underlying the option (for a price
less than the strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for payment of the
strike price. If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
<PAGE>
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
offset the drop in value of the Fund's fixed income portfolio which is
occurring as interest rates rise. Prior to the expiration of a call
written by the Fund, or exercise of it by the buyer, the Fund may close
out the option by buying an identical option. If the hedge is successful,
the cost of the second option will be less than the premium received by
the Fund for the initial option. The net premium income of the Fund will
then offset the decrease in value of the hedged securities. The Fund will
not maintain open positions in futures contracts it has sold or call
options it has written on futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or
loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this
limitation is exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its open futures
and options positions within this limitation.
"Margin" In Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. A futures contract held by the Fund is valued daily
at the official settlement price of the exchange on which it is traded.
Each day the Fund pays or receives cash, called "variation margin," equal
to the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the futures
contract expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures
contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment
of the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right
to obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
Leveraging
Leveraging exaggerates the effect on the net asset value of any increase or
decrease in the market value of the portfolio. Money borrowed for leveraging
will be limited to 33 1/3% of the value of the Fund's total assets. These
borrowings will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased; in certain cases, interest costs
may exceed the return received on the securities purchased. Leverage Through
Borrowing
For the borrowings for investment purposes, the Investment Company Act of 1940
requires the Fund to maintain continuous asset coverage (i.e., total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. If the required coverage should decline as a result of market
fluctuations or other reason, the Fund may be required to sell some of its
portfolio holdings within 3 days to reduce the debt and restore the 300%
coverage, even though it may be disadvantageous from an investment standpoint to
sell at that time. The Fund also may be
<PAGE>
required to maintain minimum average balances in connection with such borrowings
or to pay a commitment fee to maintain a line of credit; either of those
requirements would increase the cost of borrowings over the stated rate. To the
extent the Fund enters into a reverse repurchase agreement, the Fund will
maintain in a segregated custodial account cash or U.S. governement securities
or other high quality liquid debt securities at least equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest in certain
cases, in accordance with releases promulgated by the SEC. The SEC views reverse
repurchase transactions as collateralized borrowings by the Fund. Medium Term
Notes and Deposit Notes
Medium Term Notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years. Average
Life
Average Life, as applicable to asset-backed securities, is computed by
multiplying each principal repayment by the time of payment (months or years
from the evaluation date), summing these products, and dividing the sum by the
total amount of principal repaid. The weighted-average life is calculated by
multiplying the maturity of each security in a given pool by its remaining
balance, summing the products, and dividing the result by the total remaining
balance. Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. Duration is calculated by dividing the sum of the
time-weighted present values of cash flows of a security or portfolio of
securities, including principal and interest payments, by the sum of the present
values of the cash flows. The duration of interest rate agreements, such as
interest rates swaps, caps and floors, is calculated in the same manner as other
securities. However, certain interest rate agreements have negative durations,
which the Fund may use to reduce its weighted average portfolio duration.
Mathematically, duration is measured as follows: Duration = PVCF1(1) + PVCF2(2)
+ PVCF3(3) + ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt= the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity. Certain debt
securities, such as mortgage-backed and asset-backed securities, may be subject
to prepayment at irregular intervals. The duration of these instruments will be
calculated based upon assumptions established by the investment adviser as the
probable amount and sequence of principal prepayments. Duration calculated in
this manner, commonly referred to as "effective duration," allows for changing
prepayment rates as interest rates change and expected future cash flows are
affected. The calculation of effective duration will depend upon the investment
adviser's assumed prepayment rate.
<PAGE>
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Directors. Reverse
Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time. When
effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date. These securities are marked to market daily and
maintained until the transaction is settled.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Portfolio securities will be sold when the
adviser believes it is appropriate, regardless of how long those securities have
been held. The adviser does not anticipate that the Fund's portfolio turnover
rate will exceed 100%. For the period from May 31, 1997 (start of performance)
to September 30, 1997, the Fund's portfolio turnover rate was 9%.
<PAGE>
Investment Limitations
The following limitations are fundamental [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 Securities and
Exchange Commission) in an open-end investment company with substantially the
same investment objectives]:
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for clearance
of purchases and sales of portfolio securities.
Borrowing Money
The Fund will not borrow money, except to the extent permitted under the 1940
Act (which currently limits borrowings to no more than 33 1/3% of the value of
the Fund's total assets). For purposes of this investment restriction, the entry
into options, forward contracts, futures contracts, including those related to
indices, options on futures contracts or indices, and dollar roll transactions
shall not constitute borrowing.
Concentration of Investments
The Fund will not invest more than 25% of its total assets in securities of
issuers having their principal business activities in the same industry.
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 U.S. government, 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, and will not acquire more than 10%
of the outstanding voting securities of any one issuer.
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 10% of the value of total assets at
the time of the borrowing.
Lending Cash or Securities
The Fund will not lend any assets except portfolio securities. (This will not
prevent the purchase or holding of bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements or
other transactions which are permitted by the Fund's investment objective and
policies or Articles of Incorporation).
Issuing Senior Securities
The Fund will not issue senior securities, except as permitted by its investment
objective and policies.
The above limitations cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Directors 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 Securities and Exchange
Commission) in an open-end investment company with substantially the same
investment objectives]. Shareholders will be notified before any material
changes in this limitation become effective.
Investing in Restricted and Illiquid Securities
The Fund will not invest more than 15% of its net assets in illiquid securities,
including certain restricted securities (except for Section 4(2) commercial
paper and certain other restricted securities which meet the criteria for
liquidity as established by the Directors), non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice. 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.
<PAGE>
Federated Total Return Series, Inc. Management
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President and Director of the
Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
<PAGE>
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
<PAGE>
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University 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 and Czech Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
<PAGE>
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board between meetings
of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; 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 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 Investment Portfolios; Federated Investment Trust; 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.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.
As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Colonial Trust Co., Pheonix,
AZ owned 62,790 (12.31%) and Federated Securities Corp., Pittsburgh, PA owned
367,774 (72.08%). No shareholders of record owned 5% or more of the outstanding
Institutional Service Shares of the Fund.
<PAGE>
Directors' Compensation
<TABLE>
<CAPTION>
<S> <C> <C>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 54 other investment companies in the Fund Complex
Thomas G. Bigley $1,004 $86,331 for the Corporation and
Director 54 other investment companies in the Fund Complex
John T. Conroy, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
William J. Copeland, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 16 other investment companies in the Fund Complex
andDirector
James E. Dowd, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Peter E. Madden, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
John E. Murray, Jr., $1,004 $104,898 for the Corporationand
Director 54 other investment companies in the Fund Complex
Wesley W. Posvar, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Marjorie P. Smuts, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended September 30, 1997 and the
Corporation was comprised of four portfolios.
+The information is provided for the last calendar year.
Director Liability
The Corporation's Articles of Incorporation provide that the Directors will not
be liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
<PAGE>
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. The Adviser shall not be liable to
the Fund or any shareholder for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Fund. Advisory Fees
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. For the period from May 31, 1997
(start of performance) to September 30, 1997, the fees earned by the Adviser
were $6,692, all of which was voluntarily waived. Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally 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 makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Directors. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or by affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the period from
May 31, 1997 (start of performance) to September 30, 1997, the Fund paid no
brokerage commissions on brokerage transactions. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by the Adviser, investments of the type the Fund may make may also be
made by those other accounts. When the Fund and one or more other accounts
managed by the Adviser are prepared to invest in, or desire to dispose of, the
same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to participate
in volume transactions will be to the benefit of the Fund. Other Services
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from May 31, 1997 (start of performance) to September
30, 1997, the administrator earned fees of $51,000, all of which was voluntarily
waived. Custodian and Portfolio Accountant
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
<PAGE>
Transfer Agent
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based upon the size, type and
number of accounts and transactions made by shareholders. Independent Auditors
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
Purchasing Shares
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares of the Fund is explained in each
Share's prospectus under "Investing in the Institutional Shares" or "Investing
in Institutional Service Shares." Distribution Plan (Institutional Service
Shares only) and Shareholder Services
As explained in the respective prospectuses, with respect to Shares of the Fund,
the Fund has adopted a Shareholder Services Agreement, and, with respect to
Institutional Service Shares, the Fund has adopted a Distribution Plan. These
arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations and addresses. By
adopting the Plan, the Directors expect that the Fund will be able to achieve a
more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales. Other benefits, which may be realized under either arrangement,
may include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts. For the period
from May 31, 1997 (start of performance) to September 30, 1997, no payments were
made pursuant to the Plan for Institutional Service Shares. For the period from
May 31, 1997 (start of performance) to September 30, 1997, a payment of $4,182
was made pursuant to the shareholder services agreement for Institutional
Shares, all of which was voluntarily waived. Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's securities, other than options, are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost unless the Directors determine this is not fair value; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.
<PAGE>
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Directors determine in good faith
that another method of valuing option positions is necessary. Use of Amortized
Cost
The Directors have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors. Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the Fund
Instituional Shares" or "Redeeming Institutional Service Shares." Although State
Street Bank does not charge for telephone redemptions, it reserves the right to
charge a fee for the cost of wire-transferred redemptions of less than $5,000.
Redemption In Kind
The Fund is obligated to redeem shares for any one shareholder solely in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during any
90-day period. Any redemption beyond this amount will also be in cash unless the
Directors determine that payments should be in kind. In such a case, the Fund
will pay all or a portion of the remainder of the redemption in portfolio
instruments, valued in the same way that net asset value is determined. The
portfolio instruments will be selected in a manner that the Directors deem fair
and equitable. Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs. Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund Shares.
<PAGE>
Total Return
Cumulative total return reflects the Fund's total performance over a specific
period of time. For the period from May 31, 1997 (start of performance) to
September 30, 1997, the cumulative total return figures for Institutional Shares
and Institutional Service Shares of the Fund were 5.12% and 5.07%, respectively.
These total return figures are representative of only 4 months of activity since
the Fund's date of initial public investment.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.
Yield
For the thirty-day period ended September 30, 1997, the yield for Institutional
Shares and Institutional Service Shares of the Fund were 7.27% and 6.99%,
respectively.
The yield of the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is 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 the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial institutions
and broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees. Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
<PAGE>
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in offering price over a
specific period of time. From time to time, the Fund will quote its Lipper
ranking in the "U.S. mortgage " category in advertising and sales
literature.
o Lehman Brothers Mortgage Backed Securities Index is composed of all fixed
rate, securitized mortgage pools by Federal Home Loan Mortgage Corp.
(Freddie Mac), Federal National Mortgage Association (Fannie Mae), and
Government National Mortgage Association (GNMA), including GNMA Graduated
Payment Mortgages. The minimum principal amount required for inclusion is
$50 million. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are unmanaged
and rebalanced monthly by market capitalization. Investments cannot be
made in an index.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time. Advertising
and other promotional literature may include charts, graphs and other
illustrations using the Fund's returns, or returns in general, that demonstrate
basic investment concepts such as tax-deferred compounding, dollar-cost
averaging and systematic investment. In addition, the Fund can compare its
performance, or performance for the types of securities in which it invests, to
a variety of other investments, such as bank savings accounts, certificates of
deposit, and Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute. About Federated Investors
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making--structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers. The company's disciplined security selection
process is firmly rooted in sound methodologies backed by fundamental and
technical research. Investment decisions are made and executed by teams of
portfolio managers, analysts, and traders dedicated to specific market sectors.
These traders handle trillions of dollars in annual trading volume. In the
government sector, as of December 31, 1996, Federated Investors managed 9
mortgage-backed, 5 government/agency and 17 government money market mutual
funds, with assets approximating $6.3 billion, $1.7 billion and $23.6 billion,
respectively. Federated trades approximately $309 million in U.S. government and
mortgage-backed securities daily and places approximately $17 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 nearly $30 billion in government funds within these
maturity ranges. J. Thomas Madden, Executive Vice President, oversees Federated
Investors' equity and high yield corporate bond management while William D.
Dawson, Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international and global portfolios.
<PAGE>
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 $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with 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 rankings 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 Division. ------ *source: Investment Company Institute
FEDERATED LIMITED DURATION GOVERNMENT FUND
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Limited Duration Government Fund (the
"Fund") offered by this prospectus represent interests in a diversified
investment portfolio of Federated Total Return Series, Inc. (the "Corporation"),
an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide total return consistent with
current income. The Fund pursues this investment objective by investing
primarily in securities which are guaranteed as to payment of principal and
interest by the U.S. government or U.S.
government agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
General Information 2
Investment Information 2
Investment Objective 2
Investment Policies 2
Investment Limitations 8
Hub and Spoke(registered trademark) Option 8
Net Asset Value 8
Investing in Institutional Shares 8
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Exchanging Securities for Fund Shares 9
Confirmations and Account Statements 9
Dividends and Distributions 9
Redeeming Institutional Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 10
Fund Information 11
Management of the Fund 11
Distribution of Institutional Shares 11
Administration of the Fund 12
Shareholder Information 12
Voting Rights 12
Tax 13
Federal Income Tax 13
State and Local Taxes 13
Performance Information 13
Other Classes of Shares 13
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)
None Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1) 0.11%
12b-1 Fee None
Total Other Expenses 0.24%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses (after waiver)(3) 0.35%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.40%.
(2) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1998.
If Institutional Shares were paying or accruing the shareholder services
fee, Institutional Shares would be able to pay up to 0.25% of its average
daily net assets for the shareholder services fee. See "Fund Information."
(3) The total operating expenses are estimated to be 0.64% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Institutional Shares operating expenses are estimated based on average
expenses expected to be incurred during the period ending September 30,
1998. During the course of this period, expenses may be more or less than
the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Institutional Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Fund Information". Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
<TABLE>
EXAMPLE
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $ 4
3 years $11
5 years $20
10 years $44
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. THIS EXAMPLE IS BASED ON ESTIMATED DATA FOR THE INSTITUTIONAL
SHARES' FISCAL YEAR ENDING SEPTEMBER 30, 1998.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for the Fund: Institutional Shares and Institutional Service Shares. This
prospectus relates only to the Institutional Shares of the Fund.
Institutional Shares ("Shares") of the Fund are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of U.S. government securities. A minimum initial
investment of $100,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return consistent with
current income. The investment objective cannot be changed without approval of
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, or capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares) or realized from the purchase and sale of securities, and
successful use of futures and options. Generally, over the long term, the total
return obtained by a portfolio investing primarily in fixed income securities is
not expected to be as great as that obtained by a portfolio that invests
primarily in equity securities. At the same time, the market risk and price
volatility of a fixed income portfolio is expected to be less than that of an
equity portfolio.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in U.S.
government securities. Under normal circumstances, the Fund will invest at least
65% of the value of its total assets in securities that are issued or guaranteed
by the U.S. government, its agencies or instrumentalities. The Fund's dollar
weighted-average duration will at all times be limited to three years or less.
(See the section entitled "Average Portfolio Duration" in this Prospectus.)
Unless indicated otherwise, the investment policies may be changed by the
Directors without the approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in U.S. government securities, including
mortgage-backed securities. These instruments are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
These securities include, but are not limited to:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, discount notes and mortgage-backed securities issued or
guaranteed by U.S. government agencies and instrumentalities supported
by the full faith and credit of the United States;
* notes, bonds, discount notes and mortgage-backed securities of U.S.
government agencies or instrumentalities which receive or have access to
federal funding;
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities;
and
* asset-backed securities and commercial mortgage securities rated BBB or better
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("Standard & Poor's"), or Fitch Investors Service, Inc. ("Fitch"), or which are
of comparable quality in the judgment of the adviser. As a matter of investment
policy, which may be changed by the Directors without shareholder approval, the
Fund does not intend to invest in asset-backed securities and commercial
mortgage securities, but reserves the right to invest in these securities in the
future. Shareholders will receive at least 30 days prior notice of any such
investment.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
GOVERNMENT SECURITIES
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government are backed by the full faith and credit of the
U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since
it is not obligated to do so. The instrumentalities are supported by:
* the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
* discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
* the credit of the agency or instrumentality.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security is an obligation of the issuer backed
by a mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Some mortgage-backed securities, such as collateralized mortgage
obligations ("CMOs"), make payments of both principal and interest at a variety
of intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of mortgage-backed
securities will likely be developed in the future, and the Fund may invest in
them if the investment adviser determines they are consistent with the Fund's
investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non- government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests generally are issued by
Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed by
the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund will invest only in CMOs that are rated A or better by a nationally
recognized statistical rating organization. The Fund may also invest in certain
CMOs which are issued by private entities such as investment banking firms and
companies related to the construction industry. The CMOs in which the Fund may
invest may be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (ii) securities which are
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; (iii) collateralized by pools of mortgages in which
payment of principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multiclass securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. Interest-only stripped mortgage-backed securities
yield to maturity is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage-backed securities. It
is possible that the Fund might not recover its original investment on
interest-only stripped mortgage-backed securities if there are substantial
prepayments on the underlying mortgages. Interest-only stripped mortgage-backed
securities generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by most
fixed income securities.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rising interest rates, mortgage-backed securities may also have less
potential for capital appreciation than other similar investments (e.g.,
investments with comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
mortgage-backed securities are purchased at a premium, mortgage foreclosures and
unscheduled principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if mortgage-backed
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit- enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will not treat
credit-enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any related
options to react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In these events, the Fund may lose money on the futures contract or option. It
is not certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stocks and bonds, derivatives
do not necessarily present greater market risks than traditional investments.
The Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
LEVERAGE AND BORROWING
The Fund is authorized to borrow money from banks or otherwise in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the bank or other borrowing. This
limitation may not be changed without the approval of shareholders. The Fund is
also authorized to borrow an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes such as clearance of portfolio
transactions and share repurchases. The Fund will only borrow when there is an
expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund also may borrow in order to effect share purchases and
tender offers.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of the Fund shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained. To the extent the income derived
from securities purchased with borrowed funds exceeds the interest the Fund will
have to pay, the Fund's net income will be greater than if borrowing were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The Fund may also
borrow for emergency purposes, for the payment of dividends for share
repurchases or for the clearance of transactions.
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but does not ensure
this result. When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are: segregated on the Trust's records at the trade date; marked to
market daily; and maintained until the transaction is settled.
The Fund may enter into "dollar rolls" in which the Fund sells securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered dollar roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. To the extent that dollar rolls are not covered rolls,
they will be included in the 33 1/3% borrowing limit.
The Fund expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with (i) the lender to act as
a subcustodian if the lender is a bank or otherwise qualifies as a custodian of
investment company assets or (ii) a suitable subcustodian. Because few or none
of its assets will consist of margin securities, the Fund does not expect to
borrow on margin.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy and will receive collateral
in the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
AVERAGE PORTFOLIO DURATION
Although the Fund will not maintain a stable net asset value, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
total return, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average duration of the Fund's portfolio. Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. The Fund
should be expected to maintain a higher average duration during periods of
falling interest rates, and a lower average duration during periods of rising
interest rates. In any event, the Fund's dollar-weighted average duration will
not exceed three years.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase U.S. government securities on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
The Fund does not attempt to set or meet any specific portfolio rate, since
turnover is incidental to transactions undertaken in an attempt to achieve the
Fund's investment objective. High turnover rates may result in higher brokerage
commissions and capital gains. See "Tax Information" in this prospectus.
INVESTMENT LIMITATIONS
The following limitation may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material change in this
limitation becomes effective.
The Fund will not invest more than 15% of the value of its net assets in
securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
HUB AND SPOKE [REGISTERED TRADEMARK] OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (which is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Limited Duration Government Fund -- Institutional Shares; Fund Number
(this number can be found on the account statement or by contacting the Fund);
Group Number or Order Number; Nominee or Institution Name; ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted. Questions on wire purchases should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
By Mail
To purchase shares of the Fund by mail, send a check made payable to Federated
Limited Duration Government Fund -- Institutional Shares to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
Orders by mail are considered received when payment by check is converted by
State Street Bank and Trust Company ("State Street Bank") into federal funds.
This is normally the next business day after State Street Bank receives the
check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time), on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Martin Luther King Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Shares. The Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, and must have a readily ascertainable market value. The market value of
any securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund. The Fund acquires the
exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Shares on the day the securities are valued. One Share will be issued for the
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value, unless cash payments are requested by
shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
If share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution,"as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $100,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to 0.40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
Susan M. Nason has been a portfolio manager of the Fund since inception.
Ms. Nason joined Federated Investors in 1987 and has been a Senior Vice
President of the Fund's investment adviser since April 1997. Ms. Nason
served as a Vice President of the investment adviser from 1993 to 1997,
and as an Assistant Vice President of the investment adviser from 1990
until 1992. Ms. Nason is a Chartered Financial Analyst and received her
M.S.I.A. concentrating in Finance from Carnegie Mellon University.
Todd A. Abraham has been a portfolio manager of the Fund since
inception. Mr. Abraham joined Federated Investors in 1993 as an
Investment Analyst and has been an Assistant Vice President of the
Fund's investment adviser since 1995. Mr. Abraham served as a Portfolio
Analyst at Ryland Mortgage Co. from 1992 to 1993. Mr. Abraham received
his M.B.A. in Finance from Loyola College.
Robert J. Ostrowski has a portfolio manager of the Fund since inception.
Mr. Ostrowski joined Federated Investors in 1987 as an Investment
Analyst and has been a Vice President of the Fund's investment adviser
since 1993. From 1990 to 1992, he served as an Assistant Vice President.
Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S.I.A.
concentrating in Finance from Carnegie Mellon University.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for
Institutional Shares of the Fund. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal distributor for a
number of investment companies. Federated Securities Corp. is a
subsidiary of Federated Investors.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to 0.25% of the average daily net asset value of the
Institutional Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services. Currently, Institutional Shares are accruing no shareholder services
fees. Shareholders will be notified if this changes.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's investment adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE DAILY
FEE NET ASSETS
- ------------ ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose to voluntarily waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Edgewood Services, Inc., who was the record owner of 153,879 (30.11%)
and Federated Management Co., who was the record owner of 251,239 (49.15%) of
the Institutional Shares and Federated Services Company, who was the record
owner of 19 (76.01%) of the Institutional Service Shares of the Fund, may for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
The Fund is not required to hold annual shareholder meetings. Shareholder
approval will be sought only for certain changes in the Fund's operation and for
the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund and are also subject to shareholder services fees.
Institutional Service Shares and Institutional Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Service
Shares and Institutional Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
[LOGO] FEDERATED INVESTORS
FEDERATED LIMITED DURATION GOVERNMENT FUND
(A portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc., an Open-
End, Management Investment Company
FEDERATED LIMITED DURATION GOVERNMENT FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
c/o Federated
Services 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 AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.federatedinvestors.com
Cusip 31428Q705
G01923-01-IS (11/97)
[RECYCLE LOGO]
FEDERATED LIMITED DURATION GOVERNMENT FUND
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Limited Duration Government Fund
(the "Fund") offered by this prospectus represent interests in a diversified
investment portfolio of Federated Total Return Series, Inc. (the "Corporation"),
an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide total return consistent with
current income. The Fund pursues this investment objective by investing
primarily in securities which are guaranteed as to payment of principal and
interest by the U.S. government or U.S.
government agencies or instrumentalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1997
TABLE OF CONTENTS
Summary of Fund Expenses 1
General Information 2
Investment Information 2
Investment Objective 2
Investment Policies 2
Investment Limitations 8
Hub and Spoke [registered trademark] Option 8
Net Asset Value 8
Investing in Institutional Service Shares 8
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Exchanging Securities for Fund Shares 9
Confirmations and Account Statements 9
Dividends and Distributions 9
Redeeming Institutional Service Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 10
Fund Information 10
Management of the Fund 10
Distribution of Institutional Service Shares 11
Administration of the Fund 12
Shareholder Information 12
Voting Rights 12
Tax Information 13
Federal Income Tax 13
State and Local Taxes 13
Performance Information 13
Other Classes of Shares 13
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1) 0.11%
12b-1 Fee (after waiver)(2) 0.05%
Total Other Expenses 0.49%
Shareholder Services Fee 0.25%
Total Operating Expenses (after waivers)(3) 0. 65%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.40%.
(2) The 12b-1 fee has been reduced to reflect the anticipated voluntary waiver
of a portion of the 12b-1 fee. The distributor can terminate the voluntary
waiver at any time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses are estimated to be 1.14% absent the
anticipated voluntary waiver of portions of the management fee and 12b-1
fee.
* Total Institutional Service Shares operating expenses are estimated based on
average expenses expected to be incurred during the period ending September
30, 1998. During the course of this period, expenses may be more or less
than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Institutional Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Fund Information". Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption
at the end of each time period.
<S> <C>
1 year $ 7
3 years $21
5 years $36
10 years $81
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE INSTITUTIONAL SERVICE SHARES' FISCAL YEAR
ENDING SEPTEMBER 30, 1998.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for the Fund: Institutional Service Shares and Institutional Shares. This
prospectus relates only to the Institutional Service Shares of the Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in U.S. government securities. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return consistent with
current income. The investment objective cannot be changed without approval of
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
The "total return" sought by the Fund will consist of interest and dividends
from underlying securities, or capital appreciation reflected in unrealized
increases in value of portfolio securities (realized by the shareholder only
upon selling shares) or realized from the purchase and sale of securities, and
successful use of futures and options. Generally, over the long term, the total
return obtained by a portfolio investing primarily in fixed income securities is
not expected to be as great as that obtained by a portfolio that invests
primarily in equity securities. At the same time, the market risk and price
volatility of a fixed income portfolio is expected to be less than that of an
equity portfolio.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in U.S.
government securities. Under normal circumstances, the Fund will invest at least
65% of the value of its total assets in securities that are issued or guaranteed
by the U.S. government, its agencies or instrumentalities. The Fund's dollar
weighted-average duration will at all times be limited to three years or less.
(See the section entitled "Average Portfolio Duration" in this Prospectus.)
Unless indicated otherwise, the investment policies may be changed by the
Directors without the approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in U.S. government securities, including
mortgage-backed securities. These instruments are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
These securities include, but are not limited to:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, discount notes and mortgage-backed securities issued or
guaranteed by U.S. government agencies and instrumentalities supported
by the full faith and credit of the United States;
* notes, bonds, discount notes and mortgage-backed securities of U.S.
government agencies or instrumentalities which receive or have access to
federal funding;
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities;
and
* asset-backed securities and commercial mortgage securities rated BBB or better
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("Standard & Poor's"), or Fitch Investors Service, Inc. ("Fitch"), or which are
of comparable quality in the judgment of the adviser. As a matter of investment
policy, which may be changed by the Directors without shareholder approval, the
Fund does not intend to invest in asset-backed securities and commercial
mortgage securities, but reserves the right to invest in these securities in the
future. Shareholders will receive at least 30 days prior notice of any such
investment.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
GOVERNMENT SECURITIES
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government are backed by the full faith and credit of the
U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since
it is not obligated to do so. The instrumentalities are supported by:
* the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
* discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
* the credit of the agency or instrumentality.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage-backed securities issued by government and
non-government entities such as banks, mortgage lenders, or other financial
institutions. A mortgage-backed security is an obligation of the issuer backed
by a mortgage or pool of mortgages or a direct interest in an underlying pool of
mortgages. Some mortgage-backed securities, such as collateralized mortgage
obligations ("CMOs"), make payments of both principal and interest at a variety
of intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of mortgage-backed
securities will likely be developed in the future, and the Fund may invest in
them if the investment adviser determines they are consistent with the Fund's
investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non- government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests generally are issued by
Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed by
the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac certificates, but may be collateralized by whole loans
or private pass-through securities. CMOs may have fixed or floating rates of
interest.
The Fund will invest only in CMOs that are rated A or better by a nationally
recognized statistical rating organization. The Fund may also invest in certain
CMOs which are issued by private entities such as investment banking firms and
companies related to the construction industry. The CMOs in which the Fund may
invest may be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (ii) securities which are
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; (iii) collateralized by pools of mortgages in which
payment of principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multiclass securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. Interest-only stripped mortgage-backed securities
yield to maturity is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage-backed securities. It
is possible that the Fund might not recover its original investment on
interest-only stripped mortgage-backed securities if there are substantial
prepayments on the underlying mortgages. Interest-only stripped mortgage-backed
securities generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by most
fixed income securities.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED
AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities.
While mortgage-backed securities generally entail less risk of a decline during
periods of rising interest rates, mortgage-backed securities may also have less
potential for capital appreciation than other similar investments (e.g.,
investments with comparable maturities) because as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
mortgage-backed securities are purchased at a premium, mortgage foreclosures and
unscheduled principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if mortgage-backed
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit- enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will not treat
credit-enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any related
options to react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In these events, the Fund may lose money on the futures contract or option. It
is not certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including, futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." Some
securities, such as stock rights, warrants and convertible securities, although
not typically referred to as derivatives, contain options that may affect their
value and performance. Derivative contracts and securities can be used to reduce
or increase the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stocks and bonds, derivatives
do not necessarily present greater market risks than traditional investments.
The Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, it will only do so in a
manner consistent with its investment objective, policies and limitations.
LEVERAGE AND BORROWING
The Fund is authorized to borrow money from banks or otherwise in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the bank or other borrowing. This
limitation may not be changed without the approval of shareholders. The Fund is
also authorized to borrow an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes such as clearance of portfolio
transactions and share repurchases. The Fund will only borrow when there is an
expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund also may borrow in order to effect share purchases and
tender offers.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of the Fund shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained. To the extent the income derived
from securities purchased with borrowed funds exceeds the interest the Fund will
have to pay, the Fund's net income will be greater than if borrowing were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The Fund may also
borrow for emergency purposes, for the payment of dividends for share
repurchases or for the clearance of transactions.
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but does not ensure
this result. When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are: segregated on the Trust's records at the trade date; marked to
market daily; and maintained until the transaction is settled.
The Fund may enter into "dollar rolls" in which the Fund sells securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered dollar roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. To the extent that dollar rolls are not covered rolls,
they will be included in the 33 1/3% borrowing limit.
The Fund expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with (i) the lender to act as
a subcustodian if the lender is a bank or otherwise qualifies as a custodian of
investment company assets or (ii) a suitable subcustodian. Because few or none
of its assets will consist of margin securities, the Fund does not expect to
borrow on margin.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Directors to be
liquid, interest rate swaps, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. 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.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy and will receive collateral
in the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
AVERAGE PORTFOLIO DURATION
Although the Fund will not maintain a stable net asset value, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
total return, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average duration of the Fund's portfolio. Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. The Fund
should be expected to maintain a higher average duration during periods of
falling interest rates, and a lower average duration during periods of rising
interest rates. In any event, the Fund's dollar-weighted average duration will
not exceed three years.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase U.S. government securities on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a price or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TURNOVER
The Fund does not attempt to set or meet any specific portfolio rate, since
turnover is incidental to transactions undertaken in an attempt to achieve the
Fund's investment objective. High turnover rates may result in higher brokerage
commissions and capital gains. See "Tax Information" in this prospectus.
INVESTMENT LIMITATIONS
The following limitation may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material change in this
limitation becomes effective.
The Fund will not invest more than 15% of the value of its net assets in
securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
HUB AND SPOKE [REGISTERED TRADEMARK] OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (which is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Limited Duration Government Fund -- Institutional Service Shares; Fund
Number (this number can be found on the account statement or by contacting the
Fund); Group Number or Order Number; Nominee or Institution Name; ABA Number
011000028. Shares cannot be purchased by wire on holidays when wire transfers
are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.
BY MAIL
To purchase Shares of the Fund by mail, send a check made payable to Federated
Limited Duration Government Fund -- Institutional Service Shares to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
Orders by mail are considered received when payment by check is converted by
State Street Bank & Trust Company ("State Street Bank") into federal funds. This
is normally the next business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time), on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Martin Luther King Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Shares. The Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, and must have a readily ascertainable market value. The market value of
any securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund. The Fund acquires the
exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Shares on the day the securities are valued. One Share will be issued for the
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value, unless cash payments are requested by
shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. Proceeds from
redemption requests received on holidays when wire transfers are restricted will
be wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
If share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to .40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
Both the Corporation and the adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Directors and could
result in severe penalties.
Susan M. Nason has been a portfolio manager of the Fund since inception.
Ms. Nason joined Federated Investors in 1987 and has been a Senior Vice
President of the Fund's investment adviser since April 1997. Ms. Nason
served as a Vice President of the investment adviser from 1993 to 1997,
and as an Assistant Vice President of the investment adviser from 1990
until 1992. Ms. Nason is a Chartered Financial Analyst and received her
M.S.I.A. concentrating in Finance from Carnegie Mellon University.
Todd A. Abraham has been a portfolio manager of the Fund since
inception. Mr. Abraham joined Federated Investors in 1993 as an
Investment Analyst and has been an Assistant Vice President of the
Fund's investment adviser since 1995. Mr. Abraham served as a Portfolio
Analyst at Ryland Mortgage Co. from 1992 to 1993. Mr. Abraham received
his M.B.A. in Finance from Loyola College.
Robert J. Ostrowski has a portfolio manager of the Fund since inception.
Mr. Ostrowski joined Federated Investors in 1987 as an Investment
Analyst and has been a Vice President of the Fund's investment adviser
since 1993. From 1990 to 1992, he served as an Assistant Vice President.
Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S.I.A.
concentrating in Finance from Carnegie Mellon University.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for
Institutional Service Shares. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary of
Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Fund in an amount computed at an annual rate of .25% of the average daily
net asset value of Institutional Service Shares of the Fund. The distributor may
select financial institutions such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or customers.
The Plan is a compensation-type plan. As such, the Fund makes no payments to the
distributor except as described above. Therefore, the Fund does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
Shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. Under the
Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund' s investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors as
specified below:
AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE
FEE FEDERATED FUNDS
- ------------ ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose to voluntarily waive a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Edgewood Services, Inc., who was the record owner of 153,879 (30.11%)
and Federated Management Co., who was the record owner of 251,239 (49.15%) of
the Institutional Shares and Federated Services Company, who was the record
owner of 19 (76.01%) of the Institutional Service Shares of the Fund, may for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders.
The Fund is not required to hold annual shareholder meetings. Shareholder
approval will be sought only for certain changes in the Fund's operation and for
the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Fund's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $100,000 over a 90- day period.
Institutional Shares are distributed with no 12b-1 Plan and are also subject to
shareholder services fees.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
[LOGO] FEDERATED INVESTORS
FEDERATED LIMITED DURATION GOVERNMENT FUND
(A portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
NOVEMBER 30, 1997
A Diversified Portfolio of Federated Total Return Series, Inc., an Open-
End, Management Investment Company
FEDERATED LIMITED DURATION GOVERNMENT FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.federatedinvestors.com
G01923-02-SS (11/97)
[RECYCLE LOGO]
Federated Limited Duration Government Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
Institutional Service Shares
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus(es) of Federated Limited Duration Government Fund (the "Fund"),
a portfolio of Federated Total Return Series, Inc. (the "Corporation")
dated November 30, 1997. This Statement is not a prospectus. You may
request a copy of a prospectus or a paper copy of this Statement, if you
have received it electronically, free of charge by calling 1-800-341-7400.
Federated Limited Duration Government Fund Federated Investors Funds 5800
Corporate Drive Pittsburgh, Pennsylvania 15237-7000
Statement dated November 30, 1997
[GRAPHIC OMITTED]
Cusip 31428Q705
Cusip 31428Q606
G01923-03(11/97)
<PAGE>
Table of Contents
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I
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOs") 1
Real Estate Mortgage Investment Conduits ("REMICs") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Futures and Options Transactions 3
Leveraging 5
Leverage Through Borrowing 5
Medium Term Notes and Deposit Notes 5
Average Life 5
Weighted Average Portfolio Duration 5
Lending of Portfolio Securities 6
When-Issued and Delayed Delivery Transactions 6
Repurchase Agreements 6
Reverse Repurchase Agreements 7
Investing in Securities of Other Investment Companies 7
Portfolio Turnover 7
Investment Limitations 7
Federated Total Return Series, Inc. Management 8
Fund Ownership 12
Directors' Compensation 13
Director Liability 13
Investment Advisory Services 14
Adviser to the Fund 14
Advisory Fees 14
Brokerage Transactions 14
Other Services 14
Fund Administration 14
Custodian and Portfolio Accountant 15
Transfer Agent 15
Independent Auditors 15
Purchasing Shares 15
Distribution Plan (Institutional
Service Shares only) and
Shareholder Services 15
Determining Net Asset Value 16
Determining Market Value of
Securities 16
Use of Amortized Cost 16
Redeeming Shares 16
Redemption in Kind 16
Tax Status 17
The Fund's Tax Status 17
Shareholders' Tax Status 17
Total Return 17
Yield 17
Performance Comparisons 18
Economic and Market Information 18
About Federated Investors 18
Mutual Fund Market 19
<PAGE>
Page 1
General Information About the Fund
The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. Shares of the Fund are offered in two
classes, known as Institutional Shares and Institutional Service Shares
(individually and collectively referred to as "Shares," as the context may
require). This Statement of Additional Information relates to the
above-mentioned Shares of the Fund. Investment Objective and Policies
The investment objective of the Fund is to provide total return consistent with
current income. The investment objective cannot be changed without approval of
shareholders. The investment policies stated below may be changed by the Board
of Directors ("Directors") without shareholder approval.
Shareholders will be notified before any material change in the investment
policies becomes effective.
Types of Investments
The Fund invests primarily in U.S. government securities. The Fund's
weighted-average portfolio duration will at all times be limited to three years
or less.
Adjustable Rate Mortgage Securities ("ARMS")
The ARMS in which the Fund invests generally will be issued by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. Unlike conventional bonds, ARMS pay back
principal over the life of the ARMS rather than at maturity. Thus, a holder of
the ARMS, such as the Fund, would receive monthly scheduled payments of
principal and interest, and may receive unscheduled principal payments
representing payments on the underlying mortgages. At the time that a holder of
the ARMS reinvests the payments and any unscheduled prepayments of principal
that it receives, the holder may receive a rate of interest which is actually
lower than the rate of interest paid on the existing ARMS. As a consequence,
ARMS may be a less effective means of "locking in" long-term interest rates than
other types of U.S. government securities. Like other U.S. government
securities, the market value of ARMS will generally vary inversely with changes
in market interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline. While ARMS
generally entail less risk of a decline during periods of rising rates, ARMS may
also have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because, as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if ARMS are purchased at a discount,
both a scheduled payment of principal and an unscheduled prepayment of principal
would increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. Collateralized Mortgage Obligations ("CMOs")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs; most of the CMOs in which the Fund invests use the same basic
structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities. The
first three (A, B, and C bonds) pay interest at their stated rates beginning
with the issue date, and the final class (Z bond) typically receives any excess
income from the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the shorter
maturity classes have been retired, but then receives all remaining principal
and interest payments;
<PAGE>
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities; and
(3) The classes of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity class (or A bond). When those
securities are completely retired, all principal payments are then directed to
the next shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off. Because the cash flow is distributed
sequentially instead of pro rata, as with pass-through securities, the cash
flows and average lives of CMOs are more predictable, and there is a period of
time during which the investors in the longer-maturity classes receive no
principal paydowns. The interest portion of these payments is distributed by the
Fund as income, and the capital portion is reinvested. Real Estate Mortgage
Investment Conduits ("REMICs")
REMICs are offerings of multiple class mortgage-backed securities which qualify
and elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property. Interest-Only and
Principal-Only Investments
Some of the securities purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on mortgage-backed
securities (stripped mortgage-backed securities or "SMBSs"). SMBSs are usually
structured with two classes and receive different proportions of the interest
and principal distributions on the pool of underlying mortgage-backed
securities. Due to the possibility of prepayments on the underlying mortgages,
SMBSs may be more interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which SMBSs were
issued, there may be substantial prepayments on the underlying mortgages,
leading to the relatively early prepayments of principal-only SMBSs (the
principal-only or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class). Because the
yield to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on the
underlying mortgages. The Fund's inability to fully recoup its investments in
these securities as a result of a rapid rate of principal prepayments may occur
even if the securities are rated by an NRSRO. Therefore, interest-only SMBSs
generally increase in value as interest rates rise and decrease in value as
interest rates fall, counter to changes in value experienced by most fixed
income securities. Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid. Resets of
Interest
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels.
<PAGE>
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMS which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market. Caps and
Floors
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages. Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income. The Fund currently does not intend to
invest more than 5% of its total assets in options transactions.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. In the fixed
income securities market, price moves inversely to interest rates. A rise
in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would agree to purchase securities in the future at a
predetermined price (i.e., "go long") to hedge against a decline in market
interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. The Fund would
purchase put options on futures contracts to protect portfolio securities
against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures
contracts will also decrease in value and the option will increase in
value. In such an event, the Fund will normally close out its option by
selling an identical option. If the hedge is successful, the proceeds
received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option
plus the decrease in value of the hedged securities. Alternatively, the
Fund may exercise its put option. To do so, it would simultaneously enter
into a futures contract of the type underlying the option (for a price
less than the strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for payment of the
strike price. If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
<PAGE>
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase. In other words, as the underlying futures
price goes down below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the premium received
for the option. This premium can offset the drop in value of the Fund's
fixed income portfolio which is occurring as interest rates rise. Prior to
the expiration of a call written by the Fund, or exercise of it by the
buyer, the Fund may close out the option by buying an identical option. If
the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then offset the decrease in value of the hedged
securities. The Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"Margin" In Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. A futures contract held by the Fund is valued daily
at the official settlement price of the exchange on which it is traded.
Each day the Fund pays or receives cash, called "variation margin," equal
to the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the futures
contract expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures
contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment
of the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right
to obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
<PAGE>
Leveraging
Leveraging exaggerates the effect on the net asset value of any increase or
decrease in the market value of the portfolio. Money borrowed for leveraging
will be limited to 33 1/3% of the value of the Fund's total assets. These
borrowings will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased; in certain cases, interest costs
may exceed the return received on the securities purchased. Leverage Through
Borrowing
For the borrowings for investment purposes, the Investment Company Act of 1940
requires the Fund to maintain continuous asset coverage (i.e., total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. If the required coverage should decline as a result of market
fluctuations or other reason, the Fund may be required to sell some of its
portfolio holdings within 3 days to reduce the debt and restore the 300%
coverage, even though it may be disadvantageous from an investment standpoint to
sell at that time. The Fund also may be required to maintain minimum average
balances in connection with such borrowings or to pay a commitment fee to
maintain a line of credit; either of those requirements would increase the cost
of borrowings over the stated rate. To the extent the Fund enters into a reverse
repurchase agreement, the Fund will maintain in a segregated custodial account
cash or U.S. governement securities or other high quality liquid debt securities
at least equal to the aggregate amount of its reverse repurchase obligations,
plus accrued interest in certain cases, in accordance with releases promulgated
by the SEC. The SEC views reverse repurchase transactions as collateralized
borrowings by the Fund. Medium Term Notes and Deposit Notes
Medium Term Notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years. Average
Life
Average Life, as applicable to asset-backed securities, is computed by
multiplying each principal repayment by the time of payment (months or years
from the evaluation date), summing these products, and dividing the sum by the
total amount of principal repaid. The weighted-average life is calculated by
multiplying the maturity of each security in a given pool by its remaining
balance, summing the products, and dividing the result by the total remaining
balance. Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. Duration is calculated by dividing the sum of the
time-weighted present values of cash flows of a security or portfolio of
securities, including principal and interest payments, by the sum of the present
values of the cash flows.
<PAGE>
The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.
Mathematically, duration is measured as follows:
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3)+ ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt= the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity. Certain debt
securities, such as mortgage-backed and asset-backed securities, may be subject
to prepayment at irregular intervals. The duration of these instruments will be
calculated based upon assumptions established by the investment adviser as the
probable amount and sequence of principal prepayments. Duration calculated in
this manner, commonly referred to as "effective duration," allows for changing
prepayment rates as interest rates change and expected future cash flows are
affected. The calculation of effective duration will depend upon the investment
adviser's assumed prepayment rate. Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment. When-Issued and Delayed
Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund`s
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Directors.
<PAGE>
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time. When
effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date. These securities are marked to market daily and
maintained until the transaction is settled.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Portfolio securities will be sold when the
adviser believes it is appropriate, regardless of how long those securities have
been held. The adviser does not anticipate that the Fund's portfolio turnover
rate will exceed 150%. Investment Limitations
The following limitations are fundamental [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 Securities and
Exchange Commission) in an open-end investment company with substantially the
same investment objectives]:
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for clearance
of purchases and sales of portfolio securities.
Concentration of Investments
The Fund will not acquire more than 25% of its total assets in securities of
issuers having their principal business activities in the same industry.
Borrowing Money
The Fund will not borrow money, except to the extent permitted under the 1940
Act (which currently limits borrowings to no more than 33 1/3% of the value of
the Fund's total assets). For purposes of this investment restriction, the entry
into options, forward contracts, futures contracts, including those related to
indices, options on futures contracts or indices, and dollar roll transactions
shall not constitute borrowing.
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 U.S. government, 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, and will not acquire more than 10%
of the outstanding voting securities of any one issuer.
<PAGE>
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 10% of the value of total assets at
the time of the borrowing.
Lending Cash or Securities
The Fund will not lend any assets except portfolio securities. (This will not
prevent the purchase or holding of bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements or
other transactions which are permitted by the Fund's investment objective and
policies or Articles of Incorporation).
Issuing Senior Securities
The Fund will not issue senior securities, except as permitted by its investment
objective and policies.
The above limitations cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Directors 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 Securities and Exchange
Commission) in an open-end investment company with substantially the same
investment objectives]. Shareholders will be notified before any material
changes in this limitation become effective.
Investing in Restricted and Illiquid Securities
The Fund will not invest more than 15% of its net assets in illiquid securities,
including certain restricted securities (except for Section 4(2) commercial
paper and certain other restricted securities which meet the criteria for
liquidity as established by the Directors), non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice. 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. As a matter of operating policy, the Fund will not purchase
any securities while borrowings in excess of 5% of its total assets are
outstanding. Federated Total Return Series, Inc. Management
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President and Director of the
Company.
<PAGE>
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Director
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
<PAGE>
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University 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 and Czech Management Center, Prague; Director or Trustee of the Funds.
<PAGE>
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board between meetings
of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; 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 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 Investment Portfolios; Federated Investment Trust; 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.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.
As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Edgewood Service, Inc.,
Pittsburgh, PA owned 153,879 (30.11%); Federated Management Co., Pittsburgh, PA
owned 251,239 (49.15%); and Federated Securities Corp., Pittsburgh, PA owned
92,893 (18.17%). As of October 28, 1997, the following shareholders of record
owned 5% or more of the outstanding Institutional Service Shares of the Fund:
Federated Services Company, Pittsburgh, PA, acting in numerous capacities for
various accounts, owned 19 (76.01%); and Federated Management, Pittsburgh, PA
owned 10 (33.89%).
<PAGE>
Directors' Compensation
<TABLE>
<CAPTION>
<S> <C> <C>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 54 other investment companies in the Fund Complex
Thomas G. Bigley $1,004 $86,331 for the Corporation and
Director 54 other investment companies in the Fund Complex
John T. Conroy, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
William J. Copeland, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 16 other investment companies in the Fund Complex
andDirector
James E. Dowd, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex
Peter E. Madden, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
John E. Murray, Jr., $1,004 $104,898 for the Corporationand
Director 54 other investment companies in the Fund Complex
Wesley W. Posvar, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
Marjorie P. Smuts, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended September 30, 1997 and the
Corporation was comprised of four portfolios.
+The information is provided for the last calendar year.
Director Liability
The Corporation's Articles of Incorporation provide that the Directors will not
be liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
<PAGE>
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. The Adviser shall not be liable to
the Fund or any shareholder for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted by
it, except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its contract
with the Fund. Advisory Fees
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally 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 makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Directors. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or by affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. Although investment
decisions for the Fund are made independently from those of the other accounts
managed by the Adviser, investments of the type the Fund may make may also be
made by those other accounts. When the Fund and one or more other accounts
managed by the Adviser are prepared to invest in, or desire to dispose of, the
same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to participate
in volume transactions will be to the benefit of the Fund. Other Services
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus.
<PAGE>
Custodian and Portfolio Accountant
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses. Transfer Agent
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based upon the size, type and
number of accounts and transactions made by shareholders. Independent Auditors
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
Purchasing Shares
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares of the Fund is explained in each
Share's prospectus under "Investing in the Institutional Shares" or "Investing
in Institutional Service Shares." Distribution Plan (Institutional Service
Shares only) and Shareholder Services
As explained in the respective prospectuses, with respect to Shares of the Fund,
the Fund has adopted a Shareholder Services Agreement, and, with respect to
Institutional Service Shares, has adopted a Distribution Plan. These
arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations and addresses. By
adopting the Plan, the Directors expect that the Fund will be able to achieve a
more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales. Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
<PAGE>
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
Determining Market Value of Securities
Market values of the Fund's securities, other than options, are determined as
follows:
o as provided by an independent pricing service;
o for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost unless the Directors determine this is not fair value; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data. The Fund will value futures contracts, options and put
options on financial futures at their market values established by the exchanges
at the close of option trading on such exchanges unless the Directors determine
in good faith that another method of valuing option positions is necessary. Use
of Amortized Cost
The Directors have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors. Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the Fund
Instituional Shares" or "Redeeming Institutional Service Shares." Although State
Street Bank does not charge for telephone redemptions, it reserves the right to
charge a fee for the cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
The Fund is obligated to redeem shares for any one shareholder solely in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during any
90-day period. Any redemption beyond this amount will also be in cash unless the
Directors determine that payments should be in kind. In such a case, the Fund
will pay all or a portion of the remainder of the redemption in portfolio
instruments, valued in the same way that net asset value is determined. The
portfolio instruments will be selected in a manner that the Directors deem fair
and equitable. Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their securities and selling
them before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
<PAGE>
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
Total Return
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.
Yield
The yield of the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is 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 the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial institutions
and broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees.
<PAGE>
Performance Comparisons
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o Merrill Lynch 1-3 Year Treasury Index is an unmanaged index tracking
short-term U.S. Treasury securities between 1 and 2.99 years. The index is
produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o Lipper Analytical Services, Inc. ranks funds in various 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 specific
period of time. From time to time, the Trust will quote its Lipper ranking
in the "short U.S. Treasury funds" category in advertising and sales
literature.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time. Advertising
and other promotional literature may include charts, graphs and other
illustrations using the Fund's returns, or returns in general, that demonstrate
basic investment concepts such as tax-deferred compounding, dollar-cost
averaging and systematic investment. In addition, the Fund can compare its
performance, or performance for the types of securities in which it invests, to
a variety of other investments, such as bank savings accounts, certificates of
deposit, and Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute. About Federated Investors
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making--structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers. The company's disciplined security selection
process is firmly rooted in sound methodologies backed by fundamental and
technical research. Investment decisions are made and executed by teams of
portfolio managers, analysts, and traders dedicated to specific market sectors.
These traders handle trillions of dollars in annual trading volume.
<PAGE>
In the government sector, as of December 31, 1996, Federated Investors managed 9
mortgage-backed, 5 government/agency and 17 government money market mutual
funds, with assets approximating $6.3 billion, $1.7 billion and $23.6 billion,
respectively. Federated trades approximately $309 million in U.S. government and
mortgage-backed securities daily and places approximately $17 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 nearly $30 billion in government funds within these
maturity ranges. J. Thomas Madden, Executive Vice President, oversees Federated
Investors' equity and high yield corporate bond management while William D.
Dawson, Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international and global portfolios. 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 $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with 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 rankings 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 Division. *source: Investment Company Institute
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: (1-3) Filed in Part A; (4) To be filed by amendment.
(b) Exhibits:
(1) (i) Conformed copy of Articles of Incorporation; (1)
(ii) Conformed copy of Articles of Amendment of Articles of
Incorporation; (2)
(2) Copy of By-Laws; (1)
(3) Not Applicable;
(4) Copy of Specimen Certificate for Shares of Capital Stock of the
Registrant; (10)
(5)(i) Copy of Investment Advisory Contract and conformed
copies of Exhibits A and B of Investment Advisory Contract;
(7) (ii) Conformed copies of Exhibits D and E of Investment
Advisory Contract; (11)
(6)(i) Copy of Distributor's Contract and conformed copies of
Exhibits A, B, C, and D to Distributor's Contract; (4) (ii)
Copy of Distributor's Contract and Conformed copies of
Exhibits E and F to Distributor's Contract; (10)
(iii) Conformed copies of Exhibits G and H to Distributor's Contract;(11)
(iv) The Registrant hereby incorporates the conformed copy
of the specimen Mutual Funds Sales and Service
Agreement; Mutual Funds Service Agreement; and Plan
Trustee/Mutual Funds Service Agreement from Item 24 (b)
(6) of the Cash Trust Series II Registration Statement
on Form N-1A, filed with the Commission on July 24,
1995. (File Numbers 33-38550 and 811-6269);
(7) Not Applicable;
(8)(i) Conformed copy of the Custodian Agreement of the
Registrant; (4) (ii) Conformed Copy of Fee Schedule to the
Custodian Agreement of the Registrant; (+)
(9) (i) Conformed copy of Fund Accounting Services, Administrative
Services, Transfer Agency Services, and Custody Services
Procurement Agreement of the Registrant; (+)
- --------------------------------------
+ All exhibits have been filed electronically.
(1) Response is incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A filed October 25, 1993. (File Nos. 33-50773 and
811-7115).
(2) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 21, 1993. (File Nos. 33-50773
and 811-7115).
(4) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed May 27, 1994. (File Nos. 33-50773 and
811-7115).
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.4 on Form N-1A filed June 6, 1995. (File Nos. 33-50773 and
811-7115).
(10) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed November 27, 1996. (File Nos. 33-50773
and 811-7115).
(11) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed March 31, 1997. (File Nos. 33-50773 and
811-7115).
<PAGE>
(ii) Conformed copy of Administrative Services Agreement; (4)
(iii) The responses described in Item 24 (b) (6) are hereby
incorporated by reference; (iv) Conformed Copy of Amended
and Restated Shareholder Services Agreement of the
Registrant; (+)
(10) Conformed copy of Opinion and Consent of Counsel as to
legality of shares being registered; (2) (11) Conformed copy of
Consent of Independent Auditors; (+) (12) Not Applicable; (13)
Conformed copy of Initial Capital Understanding; (3) (14) Not
Applicable; (15)(i) Conformed copy of Distribution Plan
including Exhibits A and B; (11)
(ii) Conformed copy of Exhibits C to Distribution Plan; (10)
(iii) Conformed copy of Exhibit D and E to Distribution Plan;
(11)
(iv) The responses described in Item 24(b)(6) are hereby incorporated by
reference;
(16)(i) Copy of Schedules for Computation of Fund Performance Data for the
Federated Limited Duration; (12)
(ii) Copy of Schedules of Computation of Fund Performance Data for
Federated Total Return Bond Fund and Federated Government Fund;
(+)
(17) Copies of Financial Data Schedules; (+)
(18) The Registrant hereby incorporates the conformed copy
of the specimen Multiple Class Plan from Item 24(b)(18)
of the World Investment Series, Inc. Registration
Statement on Form N-1A, filed with the Commission on
January 26, 1996. (File Nos.
33-52149 and 811-07141);
(19)(i) Conformed copy of Power of Attorney; (11)
(ii) Conformed copy of Limited Power of Attorney; (10)
- ------------------------------------
+ All exhibits have been filed electronically.
(2) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 21, 1993. (File Nos. 33-50773
and 811-7115).
(3) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 on Form N-1A filed January 13, 1994. (File Nos. 33-50773
and 811-7115).
(4) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed May 27, 1994. (File Nos. 33-50773 and
811-7115).
(10) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed November 27, 1996. (File Nos. 33-50773
and 811-7115).
(11) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed March 31, 1997. (File Nos. 33-50773 and
811-7115).
(12) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed May 28, 1997. (File Nos. 33-50773 and
811-7115).
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of October 28, 1997 _
Shares of capital stock
($0.001 per Share par value)
Federated Government Fund
Institutional Shares 1,026
Institutional Service Shares 1,005
Federated Total Return Bond Fund
Institutional Shares 1,048
Institutional Service Shares 1,018
Federated Limited Duration Fund
Institutional Shares 1,049
Institutional Service Shares 1,014
Federated Limited Duration Government Fund
Institutional Shares 13
Institutional Service Shares 5
Item 27. Indemnification: (1)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser, see
the section entitled "Management of the Corporation" 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 "Federated Total Return Series, Inc.
Management." 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.
The remaining Officers of the investment adviser are:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Peter R. Anderson
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson
- ---------------------------------------
(1) Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed October 25, 1993. (File
Nos. 33-50773 and 811-7115).
<PAGE>
Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
Randall S. Bauer
David F. Belton
David A. Briggs
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
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Marian R. Marinack
Sandra L. McInerney
Robert J. Ostrowski
Charles A. Ritter
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
William F. Stotz
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Assistant Vice Presidents: Todd A. Abraham
Stefanie L. Bachhuber
Arthur J. Barry
Micheal W. Casey
Robert E. Cauley
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
Robert M. Marsh
Joseph M. Natoli
Keith J. Sabol
Michael W. Sirianni
Gregg S. Tenser
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the investment adviser
is Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
These individuals are also officers of a majority of the investment
advisers to the Funds listed in Part B of this Registration Statement.
<PAGE>
Item 29. 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: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; 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 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 Investment Portfolios; Federated Investment Trust; 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.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; 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; Peachtree
Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The Virtus
Funds; The Wachovia Funds; The Wachovia Municipal Funds; Tower Mutual Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
Vision Group of Funds, Inc.; and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
<PAGE>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Richard B. Fisher Director, Chairman, Chief --
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary --
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
George D. Riedel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(c) Not applicable
Item 30. 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
Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
Transfer Agent, Dividend Pittsburgh, PA 15222-3779
Disbursing Agent and
Portfolio Recordkeeper
Federated Administrative Federated Investors Tower
Services Pittsburgh, PA 15222-3779
Federated Management Federated Investors Tower
Investment Adviser Pittsburgh, PA 15222-3779
State Street Bank and P.O. Box 8600
Trust Company Boston, Massachusetts 02266
Custodian
Item 31. Management Services: Not applicable.
<PAGE>
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Directors 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.
Registrant hereby undertakes to file a post-effective amendment on
behalf of Federated Limited Duration Government Fund, using
financial statements for Federated Limited Duration Government Fund,
which need not be certified, within four to six months from that
Fund's date of initial public investment.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED TOTAL RETURN SERIES,
INC. certifies that it meets all the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, all in the City of
Pittsburgh and Commonwealth of Pennsylvania, on the 26th day of November, 1997.
FEDERATED TOTAL RETURN SERIES, INC.
BY: /s/ Anthony R. Bosch
Anthony R. Bosch, Assistant Secretary
Attorney in Fact for John F. Donahue
November 26, 1997
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/ Anthony R. Bosch
Anthony R. Bosch Attorney In Fact November 26, 1997
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
Glen R. Johnson* President
J. Christopher Donahue* Executive Vice President
and Director
Edward C. Gonzales Executive Vice President
John W. McGonigle* Executive Vice President,
Treasurer and Secretary (Principal
Financial and
Accounting Officer)
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
John E. Murray, Jr.* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
* By Power of Attorney
Exhibit 8(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
STATE STREET
DOMESTIC CUSTODY
FEE SCHEDULE
Federated Funds
I. Custody Services
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions. Monitor corporate
actions.
ANNUAL FEES
ASSET
Per Fund .25 Basis Points
Wire Fees $3.00 per wire
Settlements:
o Each DTC Transaction $5.00
o Each Federal Reserve Book Entry Transaction $3.75
o Each Repo Transaction (All Repo) $3.75
o Each Physical Transaction (NY/Boston, Private Placement) $15.00
o Each Option Written/Exercised/Expired $18.75
Each Book Entry Muni (Sub-custody) Transaction $15.00
o Government Paydowns $5.00
o Maturity Collections $8.00
o PTC Transactions $6.00
II. Special Services
Fees for activities of a non-recurring nature such as fund consolidation
or reorganization, extraordinary security shipments and the preparation of
special reports will be subject to negotiation.
III. Balance Credit
Municipal Funds
A balance credit equal to 75% of the average demand deposit account
balance in the custodian account for the month billed times the 30 day
T-Bill Rate on the last Monday of the month billed, will be applied
against the month's custodian bill.
Transfer Agent
A balance credit equal to 100% of the average balance in the transfer
agent demand deposit accounts, less the reserve requirement and applicable
related expenses, times 75% of the 30 average Fed Funds Rate.
IV. Payment
The above fees will be charged against the funds' custodian checking
account thirty (30) days after the invoice is mailed to the funds' offices.
V. Term of Contract
The parties agree that this fee schedule shall become effective January 1,
1997.
FEDERATED SERVICES COMPANY STATE STREET
BY: /s/ Douglas L. Hein BY: /s/ Michael E. Hagerty
TITLE: Senior Vice President TITLE: Vice President
DATE: April 15, 1997 DATE: April 8, 1997
Exhibit 9(i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AGREEMENT
for
FUND ACCOUNTING SERVICES,
ADMINISTRATIVE SERVICES,
TRANSFER AGENCY SERVICES
and
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of March 1, 1996, by and between those investment companies
listed on Exhibit 1 as may be amended from time to time, having their principal
office and place of business at Federated Investors Tower, Pittsburgh, PA
15222-3779 (the "Investment Company"), on behalf of the portfolios (individually
referred to herein as a "Fund" and collectively as "Funds") of the Investment
Company, and FEDERATED SERVICES COMPANY, a Pennsylvania corporation, having its
principal office and place of business at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779 on behalf of itself and its subsidiaries (the
"Company").
WHEREAS, the Investment Company is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), with authorized and issued shares of capital stock or beneficial
interest ("Shares");
WHEREAS, the Investment Company may desire to retain the Company as fund
accountant to provide fund accounting services (as herein defined) including
certain pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so indicated
on Exhibit 1, and the Company desires to accept such appointment;
WHEREAS, the Investment Company may desire to appoint the Company as its
administrator to provide it with administrative services (as herein defined), if
so indicated on Exhibit, and the Company desires to accept such appointment;
WHEREAS, the Investment Company may desire to appoint the Company as its
transfer agent and dividend disbursing agent to provide it with transfer agency
services (as herein defined) if so indicated on Exhibit 1, and agent in
connection with certain other activities, and the Company desires to accept such
appointment; and
WHEREAS, the Investment Company may desire to appoint the Company as its
agent to select, negotiate and subcontract for custodian services from an
approved list of qualified banks if so indicated on Exhibit 1, and the Company
desires to accept such appointment; and
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
SECTION ONE: Fund Accounting.
Article 1. Appointment.
The Investment Company hereby appoints the Company to provide certain pricing
and accounting services to the Funds, and/or the Classes, for the period and on
the terms set forth in this Agreement. The Company accepts such appointment and
agrees to furnish the services herein set forth in return for the compensation
as provided in Article 3 of this Section.
Article 2. The Company's Duties.
Subject to the supervision and control of the Investment Company's Board of
Trustees or Directors ("Board"), the Company will assist the Investment Company
with regard to fund accounting for the Investment Company, and/or the Funds,
and/or the Classes, and in connection therewith undertakes to perform the
following specific services;
A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent pricing
services selected by the Company in consultation with the adviser, or
sources selected by the adviser, and reviewed by the board; secondarily, if
a designated pricing service does not provide a price for a security which
the Company believes should be available by market quotation, the Company
may obtain a price by calling brokers designated by the investment adviser
of the fund holding the security, or if the adviser does not supply the
names of such brokers, the Company will attempt on its own to find brokers
to price those securities; thirdly, for securities for which no market
price is available, the Pricing Committee of the Board will determine a
fair value in good faith. Consistent with Rule 2a-4 of the 40 Act,
estimates may be used where necessary or appropriate. The Company's
obligations with regard to the prices received from outside pricing
services and designated brokers or other outside sources, is to exercise
reasonable care in the supervision of the pricing agent. The Company is not
the guarantor of the securities prices received from such agents and the
Company is not liable to the Fund for potential errors in valuing a Fund's
assets or calculating the net asset value per share of such Fund or Class
when the calculations are based upon such prices. All of the above sources
of prices used as described are deemed by the Company to be authorized
sources of security prices. The Company provides daily to the adviser the
securities prices used in calculating the net asset value of the fund, for
its use in preparing exception reports for those prices on which the
adviser has comment. Further, upon receipt of the exception reports
generated by the adviser, the Company diligently pursues communication
regarding exception reports with the designated pricing agents;
B. Determine the net asset value per share of each Fund and/or Class, at
the time and in the manner from time to time determined by the Board and
as set forth in the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
D. Calculate realized capital gains or losses of each of the Funds resulting
from sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books and financial
records of the Investment Company, including for each Fund, and/or
Class, as required under Section 31(a) of the 1940 Act and the Rules
thereunder in connection with the services provided by the Company;
F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records to be maintained by Rule 31a-1 under the 1940 Act in connection
with the services provided by the Company. The Company further agrees
that all such records it maintains for the Investment Company are the
property of the Investment Company and further agrees to surrender
promptly to the Investment Company such records upon the Investment
Company's request;
G. At the request of the Investment Company, prepare various reports or
other financial documents in accordance with generally accepted
accounting principles as required by federal, state and other applicable
laws and regulations; and
H. Such other similar services as may be reasonably requested by the
Investment Company.
The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section One,
shall hereafter be referred to as "Fund Accounting Services."
Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for Fund Accounting Services in
accordance with the fees agreed upon from time to time between the
parties hereto. Such fees do not include out-of-pocket disbursements of
the Company for which the Funds shall reimburse the Company.
Out-of-pocket disbursements shall include, but shall not be limited to,
the items agreed upon between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall bear the cost of:
custodial expenses; membership dues in the Investment Company Institute
or any similar organization; transfer agency expenses; investment
advisory expenses; costs of printing and mailing stock certificates,
Prospectuses, reports and notices; administrative expenses; interest on
borrowed money; brokerage commissions; taxes and fees payable to
federal, state and other governmental agencies; fees of Trustees or
Directors of the Investment Company; independent auditors expenses;
legal and audit department expenses billed to the Company for work
performed related to the Investment Company, the Funds, or the Classes;
law firm expenses; organizational expenses; or other expenses not
specified in this Article 3 which may be properly payable by the Funds
and/or Classes.
C. The compensation and out-of-pocket expenses attributable to the Fund
shall be accrued by the Fund and shall be paid to the Company no less
frequently than monthly, and shall be paid daily upon request of the
Company. The Company will maintain detailed information about the
compensation and out-of-pocket expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly authorized
officer of the Company.
E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the full
month period. Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the
proportion which such period bears to the full month period. For
purposes of determining fees payable to the Company, the value of the
Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.
F. The Company, in its sole discretion, may from time to time subcontract
to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in performing
Fund Accounting Services. Such person or persons may be affiliates of
the Company, third-party service providers, or they may be officers and
employees who are employed by both the Company and the Investment
Company; provided, however, that the Company shall be as fully
responsible to each Fund for the acts and omissions of any such
subcontractor as it is for its own acts and omissions. The compensation
of such person or persons shall be paid by the Company and no obligation
shall be incurred on behalf of the Investment Company, the Funds, or the
Classes in such respect.
SECTION TWO: ADMINISTRATIVE SERVICES.
Article 4. Appointment.
The Investment Company hereby appoints the Company as Administrator for the
period on the terms and conditions set forth in this Agreement. The Company
hereby accepts such appointment and agrees to furnish the services set forth in
Article 5 of this Agreement in return for the compensation set forth in Article
9 of this Agreement.
Article 5. The Company's Duties.
As Administrator, and subject to the supervision and control of the Board and
in accordance with Proper Instructions (as defined hereafter) from the
Investment Company, the Company will provide facilities, equipment, and
personnel to carry out the following administrative services for operation of
the business and affairs of the Investment Company and each of its portfolios:
A. prepare, file, and maintain the Investment Company's governing documents
and any amendments thereto, including the Charter (which has already
been prepared and filed), the By-laws and minutes of meetings of the
Board and Shareholders;
B. prepare and file with the Securities and Exchange Commission and the
appropriate state securities authorities the registration statements for
the Investment Company and the Investment Company's shares and all
amendments thereto, reports to regulatory authorities and shareholders,
prospectuses, proxy statements, and such other documents all as may be
necessary to enable the Investment Company to make a continuous offering
of its shares;
C. prepare, negotiate, and administer contracts (if any) on behalf of the
Investment Company with, among others, the Investment Company's
investment advisers and distributors, subject to any applicable
restrictions of the Board or the 1940 Act;
D. calculate performance data of the Investment Company for dissemination
to information services covering the investment company industry;
E. prepare and file the Investment Company's tax returns;
F. coordinate the layout and printing of publicly disseminated
prospectuses and reports;
G. perform internal audit examinations in accordance with a charter to be
adopted by the Company and the Investment Company;
H. assist with the design, development, and operation of the Investment
Company and the Funds;
I. provide individuals reasonably acceptable to the Board for nomination,
appointment, or election as officers of the Investment Company, who will
be responsible for the management of certain of the Investment Company's
affairs as determined by the Investment Company's Board; and
J. consult with the Investment Company and its Board on matters
concerning the Investment Company and its affairs.
The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section Two,
shall hereafter be referred to as "Administrative Services."
Article 6. Records.
The Company shall create and maintain all necessary books and records in
accordance with all applicable laws, rules and regulations, including but not
limited to records required by Section 31(a) of the Investment Company act of
1940 and the rules thereunder, as the same may be amended from time to time,
pertaining to the Administrative Services performed by it and not otherwise
created and maintained by another party pursuant to contract with the Investment
Company. Where applicable, such records shall be maintained by the Company for
the periods and in the places required by Rule 31a-2 under the 1940 Act. The
books and records pertaining to the Investment Company which are in the
possession of the Company shall be the property of the Investment Company. The
Investment Company, or the Investment Company's authorized representatives,
shall have access to such books and records at all times during the Company's
normal business hours. Upon the reasonable request of the Investment Company,
copies of any such books and records shall be provided promptly by the Company
to the Investment Company or the Investment Company's authorized
representatives.
Article 7. Duties of the Fund.
The Fund assumes full responsibility for the preparation, contents and
distribution of its own offering document and for complying with all applicable
requirements the 1940 Act, the Internal Revenue Code, and any other laws, rules
and regulations of government authorities having jurisdiction.
Article 8. Expenses.
The Company shall be responsible for expenses incurred in providing office
space, equipment, and personnel as may be necessary or convenient to provide the
Administrative Services to the Investment Company, including the compensation of
the Company employees who serve as trustees or directors or officers of the
Investment Company. The Investment Company shall be responsible for all other
expenses incurred by the Company on behalf of the Investment Company, including
without limitation postage and courier expenses, printing expenses, travel
expenses, registration fees, filing fees, fees of outside counsel and
independent auditors, or other professional services, organizational expenses,
insurance premiums, fees payable to persons who are not the Company's employees,
trade association dues, and other expenses properly payable by the Funds and/or
the Classes.
Article 9. Compensation.
For the Administrative Services provided, the Investment Company hereby
agrees to pay and the Company hereby agrees to accept as full compensation for
its services rendered hereunder an administrative fee at an annual rate per
Fund, as specified below.
The compensation and out of pocket expenses attributable to the Fund shall be
accrued by the Fund and paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will maintain
detailed information about the compensation and out of pocket expenses by the
Fund.
Max. Admin. Average Daily Net Assets
Fee of the Funds
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
(Average Daily Net Asset break-points are on a complex-wide basis)
However, in no event shall the administrative fee received during any year of
the Agreement be less than, or be paid at a rate less than would aggregate
$125,000 per Fund and $30,000 per Class. The minimum fee set forth above in this
Article 9 may increase annually upon each March 1 anniversary of this Agreement
over the minimum fee during the prior 12 months, as calculated under this
agreement, in an amount equal to the increase in Pennsylvania Consumer Price
Index (not to exceed 6% annually) as last reported by the U.S. Bureau of Labor
Statistics for the twelve months immediately preceding such anniversary.
Article 10. Responsibility of Administrator.
A. The Company shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Investment Company in
connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
The Company shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Investment Company) on all
matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. Any person, even though also
an officer, director, trustee, partner, employee or agent of the
Company, who may be or become an officer, director, trustee, partner,
employee or agent of the Investment Company, shall be deemed, when
rendering services to the Investment Company or acting on any business
of the Investment Company (other than services or business in
connection with the duties of the Company hereunder) to be rendering
such services to or acting solely for the Investment Company and not
as an officer, director, trustee, partner, employee or agent or one
under the control or direction of the Company even though paid by the
Company.
B. The Company shall be kept indemnified by the Investment Company and be
without liability for any action taken or thing done by it in
performing the Administrative Services in accordance with the above
standards. In order that the indemnification provisions contained in
this Article 10 shall apply, however, it is understood that if in any
case the Investment Company may be asked to indemnify or hold the
Company harmless, the Investment Company shall be fully and promptly
advised of all pertinent facts concerning the situation in question,
and it is further understood that the Company will use all reasonable
care to identify and notify the Investment Company promptly concerning
any situation which presents or appears likely to present the
probability of such a claim for indemnification against the Investment
Company. The Investment Company shall have the option to defend the
Company against any claim which may be the subject of this
indemnification. In the event that the Investment Company so elects,
it will so notify the Company and thereupon the Investment Company
shall take over complete defense of the claim, and the Company shall
in such situation initiate no further legal or other expenses for
which it shall seek indemnification under this Article. The Company
shall in no case confess any claim or make any compromise in any case
in which the Investment Company will be asked to indemnify the Company
except with the Investment Company's written consent.
SECTION THREE: Transfer Agency Services.
Article 11. Terms of Appointment.
Subject to the terms and conditions set forth in this Agreement, the
Investment Company hereby appoints the Company to act as, and the Company agrees
to act as, transfer agent and dividend disbursing agent for each Fund's Shares,
and agent in connection with any accumulation, open-account or similar plans
provided to the shareholders of any Fund ("Shareholder(s)"), including without
limitation any periodic investment plan or periodic withdrawal program.
Article 12. Duties of the Company.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Investment Company as
to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate documentation
therefore to the custodian of the relevant Fund, (the
"Custodian"). The Company shall notify the Fund and the Custodian
on a daily basis of the total amount of orders and payments so
delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent,
shall countersign and mail by first class mail, a certificate to
the Shareholder at its address as set forth on the transfer books
of the Funds, and/or Classes, subject to any Proper Instructions
regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any reason,
the Company shall debit the Share account of the Shareholder by
the number of Shares that had been credited to its account upon
receipt of the check or other order, promptly mail a debit advice
to the Shareholder, and notify the Fund and/or Class of its
action. In the event that the amount paid for such Shares exceeds
proceeds of the redemption of such Shares plus the amount of any
dividends paid with respect to such Shares, the Fund and/the Class
or its distributor will reimburse the Company on the amount of
such excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as Dividend
Disbursing Agent for the Funds in accordance with the provisions
of its governing document and the then-current Prospectus of the
Fund. The Company shall prepare and mail or credit income, capital
gain, or any other payments to Shareholders. As the Dividend
Disbursing Agent, the Company shall, on or before the payment date
of any such distribution, notify the Custodian of the estimated
amount required to pay any portion of said distribution which is
payable in cash and request the Custodian to make available
sufficient funds for the cash amount to be paid out. The Company
shall reconcile the amounts so requested and the amounts actually
received with the Custodian on a daily basis. If a Shareholder is
entitled to receive additional Shares by virtue of any such
distribution or dividend, appropriate credits shall be made to the
Shareholder's account, for certificated Funds and/or Classes,
delivered where requested; and
(2) The Company shall maintain records of account for each Fund and Class
and advise the Investment Company, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set forth
in Proper Instructions, deliver the appropriate instructions
therefor to the Custodian. The Company shall notify the Funds on a
daily basis of the total amount of redemption requests processed
and monies paid to the Company by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from
the Custodian with respect to any redemption, the Company shall
pay or cause to be paid the redemption proceeds in the manner
instructed by the redeeming Shareholders, pursuant to procedures
described in the then-current Prospectus of the Fund.
(3) If any certificate returned for redemption or other request for
redemption does not comply with the procedures for redemption
approved by the Fund, the Company shall promptly notify the
Shareholder of such fact, together with the reason therefor, and
shall effect such redemption at the price applicable to the date
and time of receipt of documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and uncashed
checks for state escheat requirements on an annual basis and report
such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which are authorized,
based upon data provided to it by the Fund, and issued and
outstanding. The Company shall also provide the Fund on a regular
basis or upon reasonable request with the total number of Shares
which are authorized and issued and outstanding, but shall have no
obligation when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the issuance of such Shares
or to take cognizance of any laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Investment Company or the Fund to include a record for each
Shareholder's account of the following:
(a) Name, address and tax identification number (and whether such
number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current
maintenance of the account;
(g) Certificate numbers and denominations for any Shareholder holding
certificates;
(h) Any information required in order for the Company to perform
the calculations contemplated or required by this Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such record
retention shall be at the expense of the Company, and such records
may be inspected by the Fund at reasonable times. The Company may,
at its option at any time, and shall forthwith upon the Fund's
demand, turn over to the Fund and cease to retain in the Company's
files, records and documents created and maintained by the Company
pursuant to this Agreement, which are no longer needed by the
Company in performance of its services or for its protection. If
not so turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of creation,
during the first two of which such documents will be in readily
accessible form. At the end of the six year period, such records
and documents will either be turned over to the Fund or destroyed
in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the Fund
to the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption fees, or
other transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and, if
required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed
and mailed and shall withhold such sums as are required to be
withheld under applicable federal and state income tax laws, rules
and regulations.
(3) In addition to and not in lieu of the services set forth above,
the Company shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in connection
with accumulation, open-account or similar plans (including
without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to: maintaining
all Shareholder accounts, mailing Shareholder reports and
Prospectuses to current Shareholders, withholding taxes on
accounts subject to back-up or other withholding (including
non-resident alien accounts), preparing and filing reports on
U.S. Treasury Department Form 1099 and other appropriate forms
required with respect to dividends and distributions by federal
authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for
all purchases and redemptions of Shares and other conformable
transactions in Shareholder accounts, preparing and mailing
activity statements for Shareholders, and providing Shareholder
account information; and
(b) provide a system which will enable the Fund to monitor the
total number of Shares of each Fund (and/or Class) sold in
each state ("blue sky reporting"). The Fund shall by Proper
Instructions (i) identify to the Company those transactions
and assets to be treated as exempt from the blue sky
reporting for each state and (ii) verify the classification
of transactions for each state on the system prior to
activation and thereafter monitor the daily activity for
each state. The responsibility of the Company for each
Fund's (and/or Class's) state blue sky registration status
is limited solely to the recording of the initial
classification of transactions or accounts with regard to
blue sky compliance and the reporting of such transactions
and accounts to the Fund as provided above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders relating
to their Share accounts and such other correspondence as may from
time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail proxy
cards and other material supplied to it by the Fund in connection
with Shareholder meetings of each Fund; receive, examine and
tabulate returned proxies, and certify the vote of the
Shareholders;
(3) The Company shall establish and maintain facilities and procedures
for safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section Three,
shall hereafter be referred to as "Transfer Agency Services."
Article 13. Duties of the Investment Company.
A. Compliance
The Investment Company or Fund assume full responsibility for the
preparation, contents and distribution of their own and/or their
classes' Prospectus and for complying with all applicable requirements
of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act
and any laws, rules and regulations of government authorities having
jurisdiction.
B. Share Certificates
The Investment Company shall supply the Company with a sufficient supply
of blank Share certificates and from time to time shall renew such
supply upon request of the Company. Such blank Share certificates shall
be properly signed, manually or by facsimile, if authorized by the
Investment Company and shall bear the seal of the Investment Company or
facsimile thereof; and notwithstanding the death, resignation or removal
of any officer of the Investment Company authorized to sign
certificates, the Company may continue to countersign certificates which
bear the manual or facsimile signature of such officer until otherwise
directed by the Investment Company.
C. Distributions
The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.
Article 14. Compensation and Expenses.
A. Annual Fee
For performance by the Company pursuant to Section Three of this
Agreement, the Investment Company and/or the Fund agree to pay the
Company an annual maintenance fee for each Shareholder account as agreed
upon between the parties and as may be added to or amended from time to
time. Such fees may be changed from time to time subject to written
agreement between the Investment Company and the Company. Pursuant to
information in the Fund Prospectus or other information or instructions
from the Fund, the Company may sub-divide any Fund into Classes or other
sub-components for recordkeeping purposes. The Company will charge the
Fund the same fees for each such Class or sub-component the same as if
each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Investment
Company and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed upon
between the parties, as may be added to or amended from time to time. In
addition, any other expenses incurred by the Company at the request or
with the consent of the Investment Company and/or the Fund, will be
reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly authorized
officer of the Company.
SECTION FOUR: Custody Services Procurement.
Article 15. Appointment.
The Investment Company hereby appoints Company as its agent to evaluate and
obtain custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved by the
Board as eligible for selection by the Company as a custodian (the "Eligible
Custodian"). The Company accepts such appointment.
Article 16. The Company and Its Duties.
Subject to the review, supervision and control of the Board, the Company
shall:
A. evaluate and obtain custody services from a financial institution that
meets the criteria established in Section 17(f) of the 1940 Act and
has been approved by the Board as being eligible for selection by the
Company as an Eligible Custodian;
B. negotiate and enter into agreements with Eligible Custodians for the
benefit of the Investment Company, with the Investment Company as a
party to each such agreement. The Company may, as paying agent, be a
party to any agreement with any such Eligible Custodian;
C. establish procedures to monitor the nature and the quality of the
services provided by Eligible Custodians;
D. monitor and evaluate the nature and the quality of services provided
by Eligible Custodians;
E. periodically provide to the Investment Company (i) written reports on
the activities and services of Eligible Custodians; (ii) the nature
and amount of disbursements made on account of the each Fund with
respect to each custodial agreement; and (iii) such other information
as the Board shall reasonably request to enable it to fulfill its
duties and obligations under Sections 17(f) and 36(b) of the 1940 Act
and other duties and obligations thereof;
F. periodically provide recommendations to the Board to enhance Eligible
Custodian's customer services capabilities and improve upon fees being
charged to the Fund by Eligible Custodian; and
The foregoing, along with any additional services that Company shall agree in
writing to perform for the Fund under this Section Four, shall hereafter be
referred to as "Custody Services Procurement."
Article 17. Fees and Expenses.
A. Annual Fee
For the performance of Custody Services Procurement by the Company
pursuant to Section Four of this Agreement, the Investment Company
and/or the Fund agree to compensate the Company in accordance with the
fees agreed upon from time to time.
B. Reimbursements
In addition to the fee paid under Section 11A above, the Investment
Company and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed upon
between the parties, as may be added to or amended from time to time. In
addition, any other expenses incurred by the Company at the request or
with the consent of the Investment Company and/or the Fund, will be
reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly authorized
officer of the Company.
Article 18. Representations.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to enter into
this arrangement and to provide the services contemplated in Section Four of
this Agreement.
SECTION FIVE: General Provisions.
Article 19. Proper Instructions.
As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed to
be Proper Instructions if (a) the Company reasonably believes them to have been
given by a person previously authorized in Proper Instructions to give such
instructions with respect to the transaction involved, and (b) the Investment
Company, or the Fund, and the Company promptly cause such oral instructions to
be confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Investment Company, or the Fund, and the Company are satisfied that such
procedures afford adequate safeguards for the Fund's assets. Proper Instructions
may only be amended in writing.
Article 20. Assignment.
Except as provided below, neither this Agreement nor any of the rights or
obligations under this Agreement may be assigned by either party without the
written consent of the other party.
A. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
B. With regard to Transfer Agency Services, the Company may without further
consent on the part of the Investment Company subcontract for the
performance of Transfer Agency Services with
(1) its subsidiary, Federated Shareholder Service Company, a Delaware
business trust, which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended, or any succeeding statute ("Section 17A(c)(1)");
or
(2) such other provider of services duly registered as a transfer agent
under Section 17A(c)(1) as Company shall select.
The Company shall be as fully responsible to the Investment Company for
the acts and omissions of any subcontractor as it is for its own acts
and omissions.
C. With regard to Fund Accounting Services, Administrative Services and
Custody Procurement Services, the Company may without further consent on
the part of the Investment Company subcontract for the performance of
such services with Federated Administrative Services, a wholly-owned
subsidiary of the Company.
D. The Company shall upon instruction from the Investment Company
subcontract for the performance of services under this Agreement with an
Agent selected by the Investment Company, other than as described in B.
and C. above; provided, however, that the Company shall in no way be
responsible to the Investment Company for the acts and omissions of the
Agent.
Article 21. Documents.
A. In connection with the appointment of the Company under this Agreement,
the Investment Company shall file with the Company the following
documents:
(1) A copy of the Charter and By-Laws of the Investment Company and all
amendments thereto;
(2) A copy of the resolution of the Board of the Investment Company
authorizing this Agreement;
(3) Specimens of all forms of outstanding Share certificates of the
Investment Company or the Funds in the forms approved by the Board
of the Investment Company with a certificate of the Secretary of
the Investment Company as to such approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following documents:
(1) Each resolution of the Board of the Investment Company authorizing the
original issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments thereof
and orders relating thereto in effect with respect to the sale of
Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document and the
By-Laws of the Investment Company;
(4) Certified copies of each vote of the Board authorizing officers to
give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of any
Fund, accompanied by Board resolutions approving such forms;
(6) Such other certificates, documents or opinions which the Company may,
in its discretion, deem necessary or appropriate in the proper
performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
Article 22. Representations and Warranties.
A. Representations and Warranties of the Company
The Company represents and warrants to the Fund that:
(1) it is a corporation duly organized and existing and in good standing
under the laws of the Commonwealth of Pennsylvania;
(2) It is duly qualified to carry on its business in each jurisdiction
where the nature of its business requires such qualification, and in
the Commonwealth of Pennsylvania;
(3) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
(4) all requisite corporate proceedings have been taken to authorize it to
enter into and perform its obligations under this Agreement;
(5) it has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations
under this Agreement;
(6) it is in compliance with federal securities law requirements and in
good standing as an administrator and fund accountant; and
B. Representations and Warranties of the Investment Company
The Investment Company represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in good
standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform its obligations under this Agreement;
(3) All corporate proceedings required by said Charter and By-Laws have
been taken to authorize it to enter into and perform its obligations
under this Agreement;
(4) The Investment Company is an open-end investment company registered
under the 1940 Act; and
(5) A registration statement under the 1933 Act will be effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of each Fund being
offered for sale.
Article 23. Standard of Care and Indemnification.
A. Standard of Care
With regard to Sections One, Three and Four, the Company shall be held
to a standard of reasonable care in carrying out the provisions of this
Contract. The Company shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Investment Company) on all
matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice, provided that such action is not in
violation of applicable federal or state laws or regulations, and is in
good faith and without negligence.
B. Indemnification by Investment Company
The Company shall not be responsible for and the Investment Company or
Fund shall indemnify and hold the Company, including its officers,
directors, shareholders and their agents, employees and affiliates,
harmless against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liabilities arising out of or attributable
to:
(1) The acts or omissions of any Custodian, Adviser, Sub-adviser or other
party contracted by or approved by the Investment Company or Fund,
(2) The reliance on or use by the Company or its agents or subcontractors
of information, records and documents in proper form which
(a) are received by the Company or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
Shareholders or investors regarding the purchase, redemption
or transfer of Shares and Shareholder account information;
(b) are received by the Company from independent pricing services
or sources for use in valuing the assets of the Funds; or
(c) are received by the Company or its agents or subcontractors
from Advisers, Sub-advisers or other third parties
contracted by or approved by the Investment Company of Fund
for use in the performance of services under this Agreement;
(d) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the
Investment Company.
(3) The reliance on, or the carrying out by the Company or its agents or
subcontractors of Proper Instructions of the Investment Company or the
Fund.
(4) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in such
state or in violation of any stop order or other determination or
ruling by any federal agency or any state with respect to the
offer or sale of such Shares in such state.
Provided, however, that the Company shall not be protected by this
Article 23.B. from liability for any act or omission resulting
from the Company's willful misfeasance, bad faith, negligence or
reckless disregard of its duties or failure to meet the standard
of care set forth in 23.A. above.
C. Reliance
At any time the Company may apply to any officer of the Investment
Company or Fund for instructions, and may consult with legal counsel
with respect to any matter arising in connection with the services to be
performed by the Company under this Agreement, and the Company and its
agents or subcontractors shall not be liable and shall be indemnified by
the Investment Company or the appropriate Fund for any action reasonably
taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel provided such action is not in violation of
applicable federal or state laws or regulations. The Company, its agents
and subcontractors shall be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Investment Company
or the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained in this Article
23 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep
the other party advised with respect to all developments concerning such
claim. The party who may be required to indemnify shall have the option
to participate with the party seeking indemnification in the defense of
such claim. The party seeking indemnification shall in no case confess
any claim or make any compromise in any case in which the other party
may be required to indemnify it except with the other party's prior
written consent.
Article 24. Term and Termination of Agreement.
This Agreement shall be effective from March 1, 1996 and shall continue until
February 28, 2003 (`Term"). Thereafter, the Agreement will continue for 18 month
terms. The Agreement can be terminated by either party upon 18 months notice to
be effective as of the end of such 18 month period. In the event, however, of
willful misfeasance, bad faith, negligence or reckless disregard of its duties
by the Company, the Investment Company has the right to terminate the Agreement
upon 60 days written notice, if Company has not cured such willful misfeasance,
bad faith, negligence or reckless disregard of its duties within 60 days. The
termination date for all original or after-added Investment companies which are,
or become, a party to this Agreement. shall be coterminous. Investment Companies
that merge or dissolve during the Term, shall cease to be a party on the
effective date of such merger or dissolution.
Should the Investment Company exercise its rights to terminate, all
out-of-pocket expenses associated with the movement of records and materials
will be borne by the Investment Company or the appropriate Fund. Additionally,
the Company reserves the right to charge for any other reasonable expenses
associated with such termination. The provisions of Articles 10 and 23 shall
survive the termination of this Agreement.
Article 25. Amendment.
This Agreement may be amended or modified by a written agreement executed by
both parties.
Article 26. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Company and the
Investment Company may from time to time agree on such provisions interpretive
of or in addition to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement. Any such
interpretive or additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Charter. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Agreement.
Article 27. Governing Law.
This Agreement shall be construed and the provisions hereof interpreted under
and in accordance with the laws of the Commonwealth of Massachusetts
Article 28. Notices.
Except as otherwise specifically provided herein, Notices and other writings
delivered or mailed postage prepaid to the Investment Company at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such
other address as the Investment Company or the Company may hereafter specify,
shall be deemed to have been properly delivered or given hereunder to the
respective address.
Article 29. Counterparts.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original. Article 30. Limitations of Liability
of Trustees and Shareholders of the Company.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Company and signed by an authorized officer of the Company,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, and
the obligations of this Agreement are not binding upon any of the Trustees or
Shareholders of the Company, but bind only the appropriate property of the Fund,
or Class, as provided in the Declaration of Trust.
Article 31. Merger of Agreement.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
Article 32. Successor Agent.
If a successor agent for the Investment Company shall be appointed by the
Investment Company, the Company shall upon termination of this Agreement deliver
to such successor agent at the office of the Company all properties of the
Investment Company held by it hereunder. If no such successor agent shall be
appointed, the Company shall at its office upon receipt of Proper Instructions
deliver such properties in accordance with such instructions.
In the event that no written order designating a successor agent or Proper
Instructions shall have been delivered to the Company on or before the date when
such termination shall become effective, then the Company shall have the right
to deliver to a bank or trust company, which is a "bank" as defined in the 1940
Act, of its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $2,000,000, all
properties held by the Company under this Agreement. Thereafter, such bank or
trust company shall be the successor of the Company under this Agreement.
Article 33. Force Majeure.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage, power
or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
Article 34. Assignment; Successors.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign all of
or a substantial portion of its business to a successor, or to a party
controlling, controlled by, or under common control with such party. Nothing in
this Article 34 shall prevent the Company from delegating its responsibilities
to another entity to the extent provided herein.
Article 35. Severability.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
Article 36. Limitations of Liability of Trustees and Shareholders of the
Investment Company.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Investment Company and signed by an authorized officer of the
Investment Company, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, and the obligations of this Agreement are not binding upon any of
the Trustees or Shareholders of the Investment Company, but bind only the
property of the Fund, or Class, as provided in the Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
INVESTMENT COMPANIES (listed on
Exhibit 1)
By: /s/ S. Elliott Cohan
S. Elliott Cohan
Assistant Secretary
FEDERATED SERVICES COMPANY
By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
<PAGE>
EXHIBIT 1
CONTRACT
DATE INVESTMENT COMPANY
Portfolios
Classes
March 1, 1996 Federated Total Return Series, Inc.
Federated Government Fund
Institutional Shares
Institutional Service Shares
Federated Limited Duration Fund
Institutional Shares
Institutional Service Shares
Federated Limited Duration Government Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Bond Fund
Institutional Shares
Institutional Service Shares
FEDERATED SERVICES COMPANY provides the following services:
Fund Accounting, Administrative Services,
Transfer Agency Services and Custody
Services Procurement
Exhibit 9(iv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
Amended and Restated
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT, amended and restated as of the first day of September,
1995, (originally made and enterered into as of the first day of March, 1994),
by and between those investment companies listed on Exhibit 1, as may be amended
from time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have approved this
form of Agreement (individually referred to herein as a "Fund" and collectively
as "Funds") and Federated Shareholder Services, a Delaware business trust,
having its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 ("FSS").
1. The Funds hereby appoint FSS to render or cause to be rendered personal
services to shareholders of the Funds and/or the maintenance of accounts
of shareholders of the Funds ("Services"). In addition to providing
Services directly to shareholders of the Funds, FSS is hereby appointed
the Funds' agent to select, negotiate and subcontract for the performance
of Services. FSS hereby accepts such appointments. FSS agrees to provide
or cause to be provided Services which, in its best judgment (subject to
supervision and control of the Funds' Boards of Trustees or Directors, as
applicable), are necessary or desirable for shareholders of the Funds. FSS
further agrees to provide the Funds, upon request, a written description
of the Services which FSS is providing hereunder.
2. During the term of this Agreement, each Fund will pay FSS and FSS agrees
to accept as full compensation for its services rendered hereunder a fee
at an annual rate, calculated daily and payable monthly, up to 0.25% of 1%
of average net assets of each Fund.
For the payment period in which this Agreement becomes effective or
terminates with respect to any Fund, there shall be an appropriate
proration of the monthly fee on the basis of the number of days that this
Agreement is in effect with respect to such Fund during the month.
3. This Agreement shall continue in effect for one year from the date of its
execution, and thereafter for successive periods of one year only if the
form of this Agreement is approved at least annually by the Board of each
Fund, including a majority of the members of the Board of the Fund who are
not interested persons of the Fund ("Independent Board Members") cast in
person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated as follows:
(a) at any time, without the payment of any penalty, by the vote of a
majority of the Independent Board Members of any Fund or by a vote of
a majority of the outstanding voting securities of any Fund as
defined in the Investment Company Act of 1940 on sixty (60) days'
written notice to the parties to this Agreement;
(b) automatically in the event of the Agreement's assignment as defined in
the Investment Company Act of 1940; and
(c) by any party to the Agreement without cause by giving the other party
at least sixty (60) days' written notice of its intention to
terminate.
5. FSS agrees to obtain any taxpayer identification number certification from
each shareholder of the Funds to which it provides Services that is
required under Section 3406 of the Internal Revenue Code, and any
applicable Treasury regulations, and to provide each Fund or its designee
with timely written notice of any failure to obtain such taxpayer
identification number certification in order to enable the implementation
of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake of law or
for any loss suffered by any Fund in connection with the matters to
which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. FSS shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for
such Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice. Any
person, even though also an officer, trustee, partner, employee or
agent of FSS, who may be or become a member of such Fund's Board,
officer, employee or agent of any Fund, shall be deemed, when
rendering services to such Fund or acting on any business of such Fund
(other than services or business in connection with the duties of FSS
hereunder) to be rendering such services to or acting solely for such
Fund and not as an officer, trustee, partner, employee or agent or one
under the control or direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. FSS is expressly put on notice of the limitation of liability as set forth
in the Declaration of Trust of each Fund that is a Massachusetts business
trust and agrees that the obligations assumed by each such Fund pursuant
to this Agreement shall be limited in any case to such Fund and its assets
and that FSS shall not seek satisfaction of any such obligations from the
shareholders of such Fund, the Trustees, Officers, Employees or Agents of
such Fund, or any of them.
9. The execution and delivery of this Agreement have been authorized by the
Trustees of FSS and signed by an authorized officer of FSS, acting as
such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of
them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of FSS, but bind only the trust property of FSS
as provided in the Declaration of Trust of FSS.
10. Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to any Fund
and to such Fund at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to FSS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
11. This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof
whether oral or written. If any provision of this Agreement shall be held
or made invalid by a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Sections 3 and 4, hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and shall be governed by Pennsylvania law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or
regulation promulgated by the Securities and Exchange Commission
thereunder.
12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall be an
original, and all such counterparts shall together constitute one and the
same instrument.
13. This Agreement shall not be assigned by any party without the prior
written consent of FSS in the case of assignment by any Fund, or of the
Funds in the case of assignment by FSS, except that any party may assign
to a successor all of or a substantial portion of its business to a party
controlling, controlled by, or under common control with such party.
Nothing in this Section 14 shall prevent FSS from delegating its
responsibilities to another entity to the extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Investment Companies (listed on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Federated Shareholder Services
By: John W. McGonigle
President
Exhibit 11 under Form N-1A
Exhibit 23 under Item 601/Reg. S-K
Consent of Ernst & Young, LLP, Independent Auditors
We consent to the use of our firm under the caption "Financial Highlights" and
to the use of our report dated November 14, 1997, in Post-Effective Amendment
Number 13 to the Registration Statement (Form N-1A No. 33-50773) and the related
Prospectuses of Federated Government Fund, Federated Limited Duration Fund and
Federated Total Return Bond Fund dated November 30, 1997.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
November 24, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
Federated Government Fund Price/Share= $10.00
Institutional Shares
Return Since Inception 5/31/97 NAV= $10.26
ending 9/30/97
FYE: September 30, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
6/30/97 100.000 0.057720573 0.00000 $10.03 100.575 $10.03 $1,008.77
7/31/97 100.575 0.064077103 0.00000 $10.10 101.214 $10.10 $1,022.26
8/31/97 101.214 0.062607894 0.00000 $10.09 101.842 $10.09 $1,027.58
9/30/97 101.842 0.061435317 0.00000 $10.26 102.451 $10.26 $1,051.15
</TABLE>
Note: The Fund has not paid any ST capital gain dividends in FYE 9/30/97.
$1,000 (1+T) = Ending Value
T =
5.12%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Federated Government Fund
Institutional Shares
Yield = 2{( $30,892.94 - $0.00 )+1)^6-1}=
---------------------------------------------------------
Computation of SEC Yield 504,575 *( $10.26 - 0.00000 )
As of: September 30, 1997
SEC Yield = 7.27%
=========
Dividend and/or Interest
Inc for the 30 days ended $30,892.94
Net Expenses for $0.00
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 504,575
Maximum offering price $10.26
per share as of 9/30/97
Undistributed net income 0.00000
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
Federated Government Fund Price/Share= $10.00
Institutional Service Shares
Return Since Inception 5/31/97 NAV= $10.26
ending 9/30/97
FYE: September 30, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
6/30/97 100.000 0.057720573 0.00000 $10.03 100.575 $10.03 $1,008.77
7/31/97 100.575 0.064077103 0.00000 $10.10 101.214 $10.10 $1,022.26
8/31/97 101.214 0.060654991 0.00000 $10.09 101.822 $10.09 $1,027.38
9/30/97 101.822 0.058907287 0.00000 $10.26 102.407 $10.26 $1,050.69
Note: The Fund has not paid any ST capital gain dividends in FYE 9/30/97.
$1,000 (1+T) = Ending Value
T =
5.07%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
Federated Government Fund Price/Share= $10.00
Institutional Service Shares
Return Since Inception 5/31/97 NAV= $10.26
ending 9/30/97
FYE: September 30, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
6/30/97 100.000 0.057720573 0.00000 $10.03 100.575 $10.03 $1,008.77
7/31/97 100.575 0.064077103 0.00000 $10.10 101.214 $10.10 $1,022.26
8/31/97 101.214 0.060654991 0.00000 $10.09 101.822 $10.09 $1,027.38
9/30/97 101.822 0.058907287 0.00000 $10.26 102.407 $10.26 $1,050.69
Note: The Fund has not paid any ST capital gain dividends in FYE 9/30/97.
$1,000 (1+T) = Ending Value
T =
5.07%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
Federated Total Return Bond Fund Price/Share$10.00
Institutional Shares
Return Since Inception 10/1/96 NAV= $10.32
ending 9/30/97
FYE: September 30, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
10/31/96 100.000 0.055052761 0.00000 $10.15 100.542 $10.15 $1,020.51
11/30/96 100.542 0.058993266 0.00000 $10.29 101.119 $10.29 $1,040.51
12/31/96 101.119 0.060451802 0.00000 $10.13 101.722 $10.13 $1,030.45
1/31/97 101.722 0.060398891 0.00000 $10.11 102.330 $10.11 $1,034.56
2/28/97 102.330 0.060749758 0.00000 $10.10 102.945 $10.10 $1,039.75
3/31/97 102.945 0.061577067 0.00000 $9.94 103.583 $9.94 $1,029.62
4/30/97 103.583 0.061858553 0.00000 $10.03 104.222 $10.03 $1,045.35
5/31/97 104.222 0.061384824 0.00000 $10.07 104.857 $10.07 $1,055.91
6/30/97 104.857 0.059122898 0.00000 $10.15 105.468 $10.15 $1,070.50
7/31/97 105.468 0.059271430 0.00000 $10.37 106.071 $10.37 $1,099.96
8/31/97 106.071 0.058359522 0.00000 $10.22 106.677 $10.22 $1,090.24
9/30/97 106.677 0.057926820 0.00000 $10.32 107.275 $10.32 $1,107.08
Note: The Fund has not paid any ST capital gain dividends in FYE 9/30/97.
$1,000 (1+T) = Ending Value
T =
10.52%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Federated Total Return Bond Fund
Institutional Shares
Yield = $95,946.69- $0.00 )+1)^6-1}=
2{(
--------------------------------------------------------
Computation of SEC Yield 1,613,204 *( $10.32 - 0.00000 )
As of: September 30, 1997
SEC 7.02%
Yield =
===============
Dividend and/or Interest
Inc for the 30 days ended $95,946.69
Net Expenses for $0.00
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 1,613,204
Maximum offering price $10.32
per share as of 9/30/97
Undistributed net income 0.00000
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
Federated Total Return Bond Fund Price/Share= $10.00
Institutional Service Shares
Return Since Inception 10/1/96 NAV= $10.32
ending 9/30/97
FYE: September 30, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
10/31/96 100.000 0.055052761 0.00000 $10.15 100.542 $10.15 $1,020.51
11/30/96 100.542 0.056947764 0.00000 $10.29 101.099 $10.29 $1,040.31
12/31/96 101.099 0.057902197 0.00000 $10.13 101.677 $10.13 $1,029.98
1/31/97 101.677 0.057878809 0.00000 $10.11 102.259 $10.11 $1,033.84
2/28/97 102.259 0.058228035 0.00000 $10.10 102.848 $10.10 $1,038.77
3/31/97 102.848 0.059049710 0.00000 $9.94 103.459 $9.94 $1,028.39
4/30/97 103.459 0.059369051 0.00000 $10.03 104.072 $10.03 $1,043.84
5/31/97 104.072 0.058872246 0.00000 $10.07 104.680 $10.07 $1,054.13
6/30/97 104.680 0.056589763 0.00000 $10.15 105.264 $10.15 $1,068.43
7/31/97 105.264 0.056704978 0.00000 $10.37 105.839 $10.37 $1,097.55
8/31/97 105.839 0.055794842 0.00000 $10.22 106.417 $10.22 $1,087.58
9/30/97 106.417 0.055360991 0.00000 $10.32 106.988 $10.32 $1,104.12
Note: The Fund has not paid any ST capital gain dividends in FYE 9/30/97.
$1,000 (1+T) = Ending Value
T =
10.22%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Federated Total Return Bond Fund
Institutional Service Shares
Yield = 2{( $10,659.14 - $454.30 )+1)^6-1}=
------------------------------------------------------------
Computation of SEC Yield 179,017 *( $10.32 - 0.00000 )
As of: September 30, 1997
SEC Yield = 6.72%
==============
Dividend and/or Interest
Inc for the 30 days ended $10,659.14
Net Expenses for $454.30
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 179,017
Maximum offering price $10.32
per share as of 9/30/97
Undistributed net income 0.00000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Federated Total Return
Series, Inc
Federated Total Return Bond
Fund
Institutional Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 18,377,548
<INVESTMENTS-AT-VALUE> 18,643,784
<RECEIVABLES> 573,585
<ASSETS-OTHER> 16,858
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,234,227
<PAYABLE-FOR-SECURITIES> 104,203
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 141,255
<TOTAL-LIABILITIES> 245,458
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,795,167
<SHARES-COMMON-STOCK> 1,617,506
<SHARES-COMMON-PRIOR> 510,021
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (61)
<ACCUMULATED-NET-GAINS> (72,573)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 266,236
<NET-ASSETS> 16,699,722
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 599,075
<OTHER-INCOME> 0
<EXPENSES-NET> 1,929
<NET-INVESTMENT-INCOME> 597,146
<REALIZED-GAINS-CURRENT> 53,760
<APPREC-INCREASE-CURRENT> 266,236
<NET-CHANGE-FROM-OPS> 917,142
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 573,166
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,441,867
<NUMBER-OF-SHARES-REDEEMED> 1,335,737
<SHARES-REINVESTED> 1,355
<NET-CHANGE-IN-ASSETS> 13,888,254
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (126,333)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33,489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 370,278
<AVERAGE-NET-ASSETS> 8,889,523
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.720
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> 0.720
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.320
<EXPENSE-RATIO> 0.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Federated Total Return
Series, Inc
Federated Total Return Bond
Fund
Institutional Service Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 18,377,548
<INVESTMENTS-AT-VALUE> 18,643,784
<RECEIVABLES> 573,585
<ASSETS-OTHER> 16,858
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,234,227
<PAYABLE-FOR-SECURITIES> 104,203
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 141,255
<TOTAL-LIABILITIES> 245,458
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,795,167
<SHARES-COMMON-STOCK> 221,734
<SHARES-COMMON-PRIOR> 30
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (61)
<ACCUMULATED-NET-GAINS> (72,573)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 266,236
<NET-ASSETS> 2,289,047
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 599,075
<OTHER-INCOME> 0
<EXPENSES-NET> 1,929
<NET-INVESTMENT-INCOME> 597,146
<REALIZED-GAINS-CURRENT> 53,760
<APPREC-INCREASE-CURRENT> 266,236
<NET-CHANGE-FROM-OPS> 917,142
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 24,041
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 231,935
<NUMBER-OF-SHARES-REDEEMED> 10,420
<SHARES-REINVESTED> 189
<NET-CHANGE-IN-ASSETS> 13,888,254
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (126,333)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33,489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 370,278
<AVERAGE-NET-ASSETS> 8,889,523
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.690
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> 0.690
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.320
<EXPENSE-RATIO> 0.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> Federated Total Return
Series, Inc.
Federated Limited Duration
Fund
Institutional Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 10,733,404
<INVESTMENTS-AT-VALUE> 10,796,222
<RECEIVABLES> 113,236
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,909,458
<PAYABLE-FOR-SECURITIES> 251,099
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 344,977
<TOTAL-LIABILITIES> 596,076
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,220,716
<SHARES-COMMON-STOCK> 749,087
<SHARES-COMMON-PRIOR> 20
<ACCUMULATED-NII-CURRENT> 13,078
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,340
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,248
<NET-ASSETS> 7,589,231
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 398,708
<OTHER-INCOME> 0
<EXPENSES-NET> 2,106
<NET-INVESTMENT-INCOME> 396,602
<REALIZED-GAINS-CURRENT> 41,450
<APPREC-INCREASE-CURRENT> 61,248
<NET-CHANGE-FROM-OPS> 499,300
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 351,005
<DISTRIBUTIONS-OF-GAINS> 10,211
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,888,493
<NUMBER-OF-SHARES-REDEEMED> 1,139,806
<SHARES-REINVESTED> 380
<NET-CHANGE-IN-ASSETS> 10,312,882
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,589
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 580,787
<AVERAGE-NET-ASSETS> 6,284,603
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.660
<PER-SHARE-GAIN-APPREC> 0.140
<PER-SHARE-DIVIDEND> 0.650
<PER-SHARE-DISTRIBUTIONS> 0.020
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.130
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> Federated Total Return
Series, Inc.
Federated Limited Duration
Fund
Institutional Service Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 10,733,404
<INVESTMENTS-AT-VALUE> 10,796,222
<RECEIVABLES> 113,236
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,909,458
<PAYABLE-FOR-SECURITIES> 251,099
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 344,977
<TOTAL-LIABILITIES> 596,076
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,220,716
<SHARES-COMMON-STOCK> 268,871
<SHARES-COMMON-PRIOR> 30
<ACCUMULATED-NII-CURRENT> 13,078
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,340
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,248
<NET-ASSETS> 2,724,151
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 398,708
<OTHER-INCOME> 0
<EXPENSES-NET> 2,106
<NET-INVESTMENT-INCOME> 396,602
<REALIZED-GAINS-CURRENT> 41,450
<APPREC-INCREASE-CURRENT> 61,248
<NET-CHANGE-FROM-OPS> 499,300
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 45,407
<DISTRIBUTIONS-OF-GAINS> 11
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 279,256
<NUMBER-OF-SHARES-REDEEMED> 10,473
<SHARES-REINVESTED> 58
<NET-CHANGE-IN-ASSETS> 10,312,882
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,589
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 580,787
<AVERAGE-NET-ASSETS> 6,284,603
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> 0.150
<PER-SHARE-DIVIDEND> 0.630
<PER-SHARE-DISTRIBUTIONS> 0.020
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.130
<EXPENSE-RATIO> 0.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 071
<NAME> Federated Total Return
Series, Inc.
Federated Government Fund
Institutional Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 5,032,793
<INVESTMENTS-AT-VALUE> 5,180,402
<RECEIVABLES> 27,593
<ASSETS-OTHER> 4,379
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,212,374
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62,108
<TOTAL-LIABILITIES> 62,108
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,018,233
<SHARES-COMMON-STOCK> 501,264
<SHARES-COMMON-PRIOR> 30
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,576)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 147,609
<NET-ASSETS> 5,144,898
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 123,389
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 123,389
<REALIZED-GAINS-CURRENT> (15,576)
<APPREC-INCREASE-CURRENT> 147,609
<NET-CHANGE-FROM-OPS> 255,422
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 123,380
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,060,203
<NUMBER-OF-SHARES-REDEEMED> 558,966
<SHARES-REINVESTED> 27
<NET-CHANGE-IN-ASSETS> 5,150,266
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,692
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 204,995
<AVERAGE-NET-ASSETS> 4,089,823
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.250
<PER-SHARE-GAIN-APPREC> 0.260
<PER-SHARE-DIVIDEND> 0.250
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.260
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 072
<NAME> Federated Total Return
Series, Inc.
Federated Government Fund
Institutional Service Shares
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 5,032,793
<INVESTMENTS-AT-VALUE> 5,180,402
<RECEIVABLES> 27,593
<ASSETS-OTHER> 4,379
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,212,374
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62,108
<TOTAL-LIABILITIES> 62,108
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,018,233
<SHARES-COMMON-STOCK> 523
<SHARES-COMMON-PRIOR> 30
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,576)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 147,609
<NET-ASSETS> 5,368
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 123,389
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 123,389
<REALIZED-GAINS-CURRENT> (15,576)
<APPREC-INCREASE-CURRENT> 147,609
<NET-CHANGE-FROM-OPS> 255,422
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 523
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,150,266
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,692
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 204,995
<AVERAGE-NET-ASSETS> 4,089,823
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 24.000
<PER-SHARE-GAIN-APPREC> 0.260
<PER-SHARE-DIVIDEND> 0.240
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.260
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 061
<NAME> Federated Total Return
Series, Inc.
Federated Limited Duration
Government Fund
Institutional Shares
<PERIOD-TYPE> 8-Mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 4,987,377
<INVESTMENTS-AT-VALUE> 4,997,666
<RECEIVABLES> 63,150
<ASSETS-OTHER> 13,212
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,074,028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,314
<TOTAL-LIABILITIES> 29,314
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,005,074
<SHARES-COMMON-STOCK> 500,557
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29,047
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,290
<NET-ASSETS> 5,044,411
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 107,061
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 107,061
<REALIZED-GAINS-CURRENT> 28,850
<APPREC-INCREASE-CURRENT> 10,290
<NET-CHANGE-FROM-OPS> 107,061
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,526
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 4,024,509
<PER-SHARE-NAV-BEGIN> 10.080
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.080
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 062
<NAME> Federated Total Return
Series, Inc.
Federated Limited
Duration Government Fund
Institutional Service
Shares
<PERIOD-TYPE> 8-Mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Sep-30-1997
<INVESTMENTS-AT-COST> 4,987,377
<INVESTMENTS-AT-VALUE> 4,997,666
<RECEIVABLES> 63,150
<ASSETS-OTHER> 13,212
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,074,028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,314
<TOTAL-LIABILITIES> 29,314
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,005,074
<SHARES-COMMON-STOCK> 30
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29,047
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,290
<NET-ASSETS> 295
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 107,061
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 107,061
<REALIZED-GAINS-CURRENT> 28,850
<APPREC-INCREASE-CURRENT> 10,290
<NET-CHANGE-FROM-OPS> 107,061
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 31
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 4,024,509
<PER-SHARE-NAV-BEGIN> 10.080
<PER-SHARE-NII> 0.000
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.080
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
