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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. 23 | X | |
and/or | ||
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | X | |
Amendment No. 27 | X |
FEDERATED TOTAL RETURN SERIES, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) | |
X | on November 30, 2000 pursuant to paragraph (b) |
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
Robert J. Zutz, Esquire
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036
Federated
World-Class Investment Manager®
A Portfolio of Federated Total Return Series, Inc.
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NOVEMBER 30, 2000
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A mutual fund seeking to provide total return consistent with current income by investing primarily in a diversified portfolio of investment grade debt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE
Risk/Return Summary 1
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What are the Fund's Fees and Expenses? 5
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What are the Fund's Investment Strategies? 6
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What are the Principal Securities in Which the Fund Invests? 9
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What are the Specific Risks of Investing in the Fund? 15
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What Do Shares Cost? 19
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How is the Fund Sold? 19
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How to Purchase Shares 20
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How to Redeem Shares 21
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Account and Share Information 24
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Who Manages the Fund? 25
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Financial Information 26
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Independent Auditors' Report 42
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The Fund's investment objective is to provide total return consistent with current income. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.
The Fund's total return will consist of two components: (1) changes in the market value of its portfolio securities (both realized and unrealized appreciation); and (2) income received from its portfolio securities. The Fund expects that income will comprise the largest component of its total return.
The Fund invests primarily in a diversified portfolio of domestic and foreign investment grade fixed income securities consisting principally of corporate, government and privately issued mortgage backed and asset backed securities and other government securities. The Fund may invest up to 35% of its portfolio in non-investment grade fixed income securities. Federated Investment Management Company (Adviser) seeks to enhance the Fund's performance by allocating relatively more of its portfolio to the security type that the Adviser expects to offer the best balance between total return and risk.
Although the value of the Fund's shares will fluctuate, the Adviser will seek to manage the magnitude of fluctuation by limiting the Fund's dollar weighted average modified duration to one year or less. Duration measures the price sensitivity of a fixed income security to changes in interest rates. The Fund may use futures, options and interest rate swaps in an effort to maintain the Fund's targeted duration.
All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:
The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency.
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The following performance bar chart and total return table is for the Fund's other class of shares, Institutional Service Shares, which are not offered in this prospectus. A performance bar chart and total return table for Institutional Shares of the Fund will be provided after Institutional Shares has been in operation for a full calendar year. The total returns for the Institutional Service Shares has been in operation for a full calendar year. The total returns for Institutional Service Shares are disclosed here because Institutional Shares have only been offered since February 22, 2000
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[Graphic Representation Omitted - See Appendix]
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These total returns would be substantially similar to the annual returns for the Institutional Shares over the same period and would differ only to the extent that the two classes do not have the same expenses. It is anticipated that expenses of Institutional Shares will not exceed those of the Institutional Service Shares.
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The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a calendar year-end basis.
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The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value.
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The Fund's Institutional Service Shares total return for the nine-month period from January 1, 2000 to September 30, 2000 was 4.55%.
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Within the period shown in the chart, the Fund's Institutional Service Shares highest quarterly return was 2.30% (quarter ended September 30, 1998). Its lowest quarterly return was 1.24% (quarter ended June 30, 1998).
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The following table represents the Fund's Institutional Service Shares Average Annual Total Returns for the calendar period ended December 31, 1999. The table shows the Fund's Institutional Service Shares total returns averaged over a period of years relative to the Merrill Lynch 1-Year Treasury Bill Index ("ML1YT"), a broad-based market index tracking one-year U.S. government securities. Total returns for the index shown do not reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
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Calendar Period |
|
Fund |
|
ML1YT |
1 Year |
|
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|
4.03% |
Start of Performance1 |
|
6.36% |
|
5.21% |
1 The Fund's Institutional Service Shares start of performance date was May 31, 1997.
Past performance does not necessarily predict future performance. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Shares.
Shareholder Fees |
|
|
Fees Paid Directly From Your Investment |
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) |
|
None |
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable) |
|
None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) |
|
None |
Redemption Fee (as a percentage of amount redeemed, if applicable) |
|
None |
Exchange Fee |
|
None |
|
|
|
Annual Fund Operating Expenses (Before Waivers and Reimbursement)1 |
|
|
Expenses That are Deducted From Fund Assets (as a percentage of average net assets) |
|
|
Management Fee2 |
|
0.60% |
Distribution (12b-1) Fee |
|
None |
Shareholder Services Fee3 |
|
0.25% |
Other Expenses |
|
0.19% |
Total Annual Fund Operating Expenses4 |
|
1.04% |
1 Although not contractually obligated to do so, the Adviser and the shareholder services provider expect to waive and reimburse certain amounts. These are shown below along with the net expenses the Fund expects to pay for the fiscal year ending September 30, 2001. |
||
Total Reimbursement and Waivers of Fund Expenses |
|
0.69% |
Total Annual Fund Operating Expenses (after waivers and reimbursement) |
|
0.35% |
2 The Adviser expects to voluntarily waive a portion of the management fee. The Adviser can terminate this voluntary waiver at any time. The management fee expected to be paid by the Fund (after the anticipated voluntary waiver) will be 0.16% for the fiscal year ending September 30, 2001. |
||
3 The shareholder services fee is expected to be voluntarily reduced. The shareholder services provider may terminate this voluntary reduction at any time. The shareholder services fee (after the voluntary reduction) is anticipated to be 0.00% for the fiscal year ending September 30, 2001. |
||
4 For the period ended September 30, 2000, the Fund had Total Annual Fund Operating Expenses and Total Actual Annual Fund Operating Expenses of 1.08% and 0.35%, respectively. |
This Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Institutional Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Shares operating expenses are before waivers and reimbursements as estimated in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
1 Year |
|
$ |
106 |
|
|||
3 Years |
|
$ |
331 |
|
|||
5 Years |
|
$ |
574 |
|
|||
10 Years |
|
$ |
1,271 |
|
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The Fund invests in a diversified portfolio of domestic and foreign fixed income securities, including corporate, mortgage backed, other asset backed and U.S. government securities. The Fund's Adviser actively manages the Fund's portfolio seeking to limit fluctuation in the Fund's share price due to changes in market interest rates while selecting investments that should offer enhanced returns based upon the Adviser's credit analysis. The Adviser limits fluctuation in the Fund's share price by limiting the dollar-weighted average modified duration of the Fund's portfolio to one year or less. The Adviser then seeks higher returns through security selection than are possible in a portfolio limited exclusively to very high credit quality securities. The Fund is not a money market fund and is not subject to the special regulatory requirements (including maturity and credit-quality constraints) designed to enable money market funds to maintain a stable share price. A description of the various types of securities in which the Fund invests, and their risks, immediately follows this section.
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The Fund invests at least 65% of its portfolio in investment grade fixed income securities. The Fund may invest the remainder of its portfolio in non-investment grade fixed income securities. Investment grade securities are those rated BBB or higher by a nationally recognized statistical rating organization (NRSRO) or, if the securities are unrated, if they are deemed to be of equal quality by the Adviser. The Adviser attempts to select securities offering attractive risk-adjusted yields over comparable Treasury securities. Corporate and asset-backed securities offer higher yields compared to Treasury securities to compensate for their additional risks, such as credit risk. Mortgage backed securities, which usually have nominal credit risk, have higher yields due to their risk that the principal will be repaid faster than expected if the underlying mortgages are prepaid. In selecting securities, the Adviser seeks the higher relative returns of corporate and asset-backed (including mortgage backed) securities , while attempting to limit or manage their additional credit or prepayment risks.
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The Adviser's investment process first allocates the Fund's portfolio among different types of fixed income securities. The Adviser makes a greater allocation of the Fund's portfolio to those types of securities that the Adviser expects to offer the best balance between current income and risk and thus offers the greatest potential for return. The allocation process is based on the Adviser's continuing analysis of a variety of economic and market indicators in order to arrive at what the Adviser believes the yield "spread" should be of each security type. (The spread is the difference between the yield of a security versus the yield of a comparable U.S. Treasury security.)
Securities are selected by weighing projected spreads against the spreads at which the securities can currently be purchased. The Adviser also analyzes the prepayment risks and credit risks of individual securities in order to complete the analysis.
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The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage backed securities with characteristics that make prepayment fluctuations less likely. Characteristics that the Adviser may consider in selecting securities include the average interest rates of the underlying loans and the federal agencies (if any) that support the loans. The Adviser attempts to assess the relative returns and risks for mortgage backed securities by analyzing how the timing, amount and division of cash flows might change in response to changing economic and market conditions.
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The Adviser attempts to manage the Fund's credit risk by selecting securities that make default in the payment of principal and interest less likely. The Adviser analyzes a variety of factors, including macroeconomic analysis and corporate earnings analysis to determine which business sectors and credit ratings are most advantageous for investment by the Fund. In selecting individual corporate fixed income securities, the Adviser analyzes the issuer's business, competitive position, and general financial condition to assess whether the security's credit risk is commensurate with its potential return. In order to enhance returns, the Adviser may purchase lower rated securities that provide better returns than investment grade securities, and foreign securities that provide better returns than domestic securities. There is no assurance that the Adviser's efforts to enhance returns will be successful.
Within the Fund's one-year portfolio duration constraint, the Adviser may further manage interest rate risk by lengthening or shortening duration from time-to-time based on its interest rate outlook. If the Adviser expects interest rates to decline, it will generally lengthen the Fund's duration, and if the Adviser expects interest rates to increase, it will generally shorten the Fund's duration. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions in analyzing a variety of factors, such as:
There is no assurance that the Adviser's efforts to forecast market interest rates and assess the impact of market interest rates on particular securities will be successful.
Because the Fund will typically invest in fixed income securities with remaining maturities greater than one year, the Fund will use futures contracts and interest rate swaps to maintain the Fund's targeted duration.
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The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.
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Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the principal types of fixed income securities in which the Fund invests.
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a GSE). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
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The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
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Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
SEQUENTIAL CMOS
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
Privately issued mortgage securities (including privately issued CMOs) are issued by private entities, rather than U.S. government agencies. These securities involve credit risks and liquidity risks. The Fund may invest in privately issued mortgage backed securities that are rated BBB or higher by an NRSRO.
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Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of commercial paper, notes, or pass-through certificates. Asset backed securities have prepayment risks.
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Bank instruments are unsecured interest bearing deposits with banks. Bank instruments include bank accounts, time deposits, certificates of deposit and banker's acceptances. Yankee instruments are denominated in U.S. dollars and issued by U.S. branches of foreign banks. Eurodollar instruments are denominated in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.
Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:
Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.
In order to convert U.S. dollars into the currency needed to buy a foreign security, or to convert foreign currency received from the sale of a foreign security into U.S. dollars, the Fund may enter into spot currency trades. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.
Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts.
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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate and currency risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
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The Fund may trade in the following types of derivative contracts.
Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
The Fund may buy and sell the following types of futures contracts: financial futures, foreign currency forward contracts, and futures on securities indices.
Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
The Fund may also write call options on portfolio securities and futures contracts to generate income from premiums, and in anticipation of a decrease or only limited increase in the value of the underlying asset. If a call written by the Fund is exercised, the Fund foregoes any possible profit from an increase in the market price of the underlying asset over the exercise price plus the premium received.
The Fund may not buy or sell futures or related options if the margin deposits and premiums paid for these securities would exceed 5% of the Fund's total assets.
Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
INTEREST RATE SWAPSInterest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
CURRENCY SWAPS
Currency swaps are contracts which provide for interest payments in different currencies. The parties might agree to exchange the notional principal amount as well.
Non-investment grade securities (junk bonds) are rated below BBB by a NRSRO. These bonds have greater credit risk than investment grade securities.
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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade.
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If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
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Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
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Many fixed income securities receive credit ratings from services such as Standard & Poor's and Moody's Investor Services, Inc. These services assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment.
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Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline.
Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.
Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due) payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
Call risk is the possibility that an issuer may redeem a fixed income security before maturity (a call) at a price below its current market price. An increase in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds in other fixed income securities with lower interest rates, higher credit risks, or other less favorable characteristics.
Trading opportunities are more limited for fixed income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held.
Trading opportunities are more limited for CMOs that have complex terms or that are not widely held. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses.
OTC derivative contracts generally carry greater liquidity risk than exchange-traded contracts.
Securities rated below investment grade, also known as junk bonds, generally entail greater market, credit and liquidity risks than investment grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.
Foreign securities pose additional risks because foreign economic or political conditions may be less favorable than those of the United States. Securities in foreign markets may also be subject to taxation policies that reduce returns for U.S. investors.
<R>
Foreign companies may not provide information (including financial statements) as frequently or to as great an extent as companies in the United States. Foreign companies may also receive less coverage than U.S. companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.
</R>
Foreign countries may have restrictions on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund's investments.
<R>
Exchange rates for currencies fluctuate daily. The combination of currency risks and market risks tends to make securities traded in foreign markets more volatile than securities traded exclusively in the United States.
</R>
The Adviser attempts to manage currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.
<R>
</R>
<R>
Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such an investment magnify the Fund's risk of loss and potential for gain.
</R>
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in the prospectus) it is processed at the next calculated net asset value (NAV).
From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund's assets may change on days you cannot purchase or redeem Shares. The Fund does not charge a front-end sales charge. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values fixed income securities at the last sale price on a national securities exchange, if available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated" and Institutional Shares.
The required minimum initial investment for Fund Shares is $250,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $250,000 minimum is reached within 90 days. An institutional investor's minimum investment is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
The Fund offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.
The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to accounts for which financial institutions act in a fiduciary or agency capacity and to individuals, directly or through investment professionals.
When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
You may purchase Shares through an investment professional or directly from the Fund. The Fund reserves the right to reject any request to purchase Shares.
Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."
You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are restricted.
Make your check payable to The Federated Funds, note your account number on the check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will not accept third-party checks (checks originally payable to someone other than you or The Federated Funds).
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You should redeem Shares:
Submit your redemption request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.
<R>
You may redeem Shares by simply calling the Fund at 1-800-341-7400. If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day's NAV.
</R>
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
Call your investment professional or the Fund if you need special instructions.
Signatures must be guaranteed if:
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.
Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:
Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.
The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Fund does not issue share certificates.
You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.
The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the Fund declares a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.
Fund distributions are expected to be both dividends and capital gains. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.
The Board of Directors governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. The Adviser's address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 176 mutual funds and separate accounts, which totaled approximately $125 billion in assets as of December 31, 1999. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,900 employees. More than 4,000 investment professionals make Federated Funds available to their customers.
Randall S. Bauer has been the Fund's Portfolio Manager since October 1998 and is the overall manager of the Fund. Mr. Bauer joined Federated in 1989 and has been a Portfolio Manager and a Vice President of the Fund's Adviser since 1994. Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance from Pennsylvania State University.
Robert E. Cauley has been the Fund's Portfolio Manager since October 1998 and manages the mortgage backed securities asset category for the Fund. Mr. Cauley joined Federated in 1996 as a Senior Investment Analyst and an Assistant Vice President of the Fund's Adviser and has been a Portfolio Manager since 1997. Mr. Cauley has been a Vice President of the Adviser since 1999. Mr. Cauley was a member of the Asset-Backed Structuring Group at Lehman Brothers Holding, Inc. from 1994 to 1996. Mr. Cauley earned his M.S.I.A., concentrating in Finance and Economics, from Carnegie Mellon University.
<R>
Paige Wilhelm has been the Fund's Portfolio Manager since October 1998 and manages the money market instruments category for the Fund. Ms. Wilhelm joined Federated in 1985 and has been a Vice President of the Fund's Adviser since January 1997. She served as an Assistant Vice President of the Fund's Adviser from July 1994 to December 1996 and as an Investment Analyst from July 1991 through June 1994. Ms. Wilhelm earned her M.B.A. from Duquesne University.
</R>
The Adviser receives an annual investment advisory fee of 0.60% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.
<R>
The following Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years, or since inception, if the life of the Fund is shorter. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.
</R>
This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus.
(For a Share Outstanding Throughout Each Period)
Reference is made to the Independent Auditors' Report on page 42.
Period Ended September 30 |
|
2000 |
1 |
Net Asset Value, Beginning of Period |
|
$ 1.96 |
|
Income From Investment Operations: |
|
|
|
Net investment income |
|
0.08 |
|
Net realized and unrealized gain (loss) on investments and futures contracts |
|
0.00 |
4 |
|
|||
TOTAL FROM INVESTMENT OPERATIONS |
|
0.08 |
|
|
|||
Less Distributions: |
|
|
|
Distributions from net investment income |
|
(0.08 |
) |
|
|||
Net Asset Value, End of Period |
|
$ 1.96 |
|
|
|||
|
|
|
|
Total Return2 |
|
4.40 |
% |
|
|||
Ratios to Average Net Assets: |
|
|
|
|
|||
Expenses |
|
0.35 |
%5 |
|
|||
Net investment income |
|
7.37 |
%5 |
|
|||
Expense waiver/reimbursement3 |
|
0.72 |
%5 |
|
|||
Supplemental Data: |
|
|
|
|
|||
Net assets, end of period (000 omitted) |
|
$48,736 |
|
|
|||
Portfolio turnover |
|
43 |
% |
|
1 Reflects operations for the period from February 22, 2000 (date of initial public investment) to September 30, 2000.
2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
3 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above.
4 Amount represents less than $0.01 per share.
5 Computed on an annualized basis.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Principal |
|
|
|
Value |
||
|
|
|
ASSET-BACKED SECURITIES--59.6% |
|
|
|
|
|
|
Automobile--19.1% |
|
|
|
$ |
5,000,000 |
|
Associates Automobile Receivables Trust 2000-2, Class A3, 6.82%, 2/15/2005 |
|
$ |
5,009,400 |
|
5,000,000 |
|
First Security Auto Owner Trust 2000-2, Class A3, 6.83%, 7/15/2004 |
|
|
5,015,600 |
|
911,414 |
|
Fleetwood Credit Corp. Grantor Trust 1993-A, Class A, 6.00%, 1/15/2008 |
|
|
896,754 |
|
372,987 |
|
Fleetwood Credit Corp. Grantor Trust 1993-B, Class A, 4.95%, 8/15/2008 |
|
|
362,709 |
|
4,000,000 |
|
Ford Credit Auto Owner Trust 2000-B, Class A4, 7.03%, 11/15/2003 |
|
|
4,015,920 |
|
65,712 |
|
Green Tree Recreational Equipment & Consumer Trust Series 1997-B, Class A1, 6.55%, 7/15/2028 |
|
|
65,011 |
|
2,000,000 |
|
Harley-Davidson Eaglemark Motorcycle Trust 1998-2, Class A2, 5.87%, 4/15/2004 |
|
|
1,984,200 |
|
2,000,000 |
|
Harley-Davidson Eaglemark Motorcycle Trust 1999-1, Class A4, 5.52%, 2/15/2005 |
|
|
1,961,420 |
|
114,006 |
|
Household Auto Revolving Trust I 1998-1, Class B1, 6.30%, 5/17/2005 |
|
|
112,688 |
|
5,000,000 |
|
Household Auto Revolving Trust I 1999-1, Class A3, 6.33%, 6/17/2003 |
|
|
4,978,400 |
|
3,500,000 |
|
MMCA Auto Trust 1999-2, Class A2, 6.80%, 8/15/2003 |
|
|
3,506,335 |
|
4,225,785 |
|
Mellon Auto Grantor Trust 2000-1, Class B, 7.43%, 10/15/2006 |
|
|
4,265,275 |
|
3,000,000 |
|
Nissan Auto Receivables Owner Trust 1999-A, Class A3, 6.47%, 9/15/2003 |
|
|
2,993,160 |
|
3,200,000 |
|
Toyota Auto Receivables Owner Trust 1999-A, Class C, 6.70%, 8/16/2004 |
|
|
3,191,648 |
|
5,000,000 |
|
Toyota Auto Receivables Owner Trust 2000-B, Class A3, 6.76%, 8/15/2004 |
|
|
5,007,800 |
|
||||||
|
|
|
TOTAL |
|
|
43,366,320 |
|
||||||
|
|
|
Credit Card--13.0% |
|
|
|
|
4,000,000 |
|
ARRAN Master Trust 2000-C, Class C, 7.53%, 9/15/2007 |
|
|
3,997,520 |
|
3,000,000 |
|
Circuit City Credit Card Master Trust 2000-1, Class CTFS, 7.82%, 2/15/2006 |
|
|
3,005,775 |
|
3,750,000 |
|
Citibank Credit Card Issuance Trust 2000-C2, Class C2, 7.31%, 10/15/2007 |
|
|
3,744,375 |
|
5,000,000 |
|
Citibank Credit Card Master Trust I 1998-6, Class A, 5.85%, 4/10/2003 |
|
|
4,974,200 |
|
2,000,000 |
|
MBNA Master Credit Card Trust 1997-F, Class A, 6.60%, 11/15/2004 |
|
|
1,995,760 |
|
4,000,000 |
|
MBNA Master Credit Card Trust 1999-I, Class A, 6.40%, 1/18/2005 |
|
|
3,975,640 |
|
2,750,000 |
|
MBNA Master Credit Card Trust 1999-K, Class C, 7.57%, 3/15/2005 |
|
|
2,758,594 |
|
5,000,000 |
|
Providian Master Trust 1999-2, Class A, 6.60%, 4/16/2007 |
|
|
4,987,100 |
|
||||||
|
|
|
TOTAL |
|
|
29,438,964 |
|
||||||
|
|
|
Equipment Lease Contracts--6.6% |
|
|
|
|
5,000,000 |
|
CIT Equipment Collateral 2000-2, Class A3, 6.84%, 6/20/2004 |
|
|
5,004,685 |
|
3,000,000 |
|
Conseco Finance Securitization Corp. 2000-5, Class A2, 1.00%, 2/1/2032 |
|
|
2,999,061 |
|
4,000,000 |
|
Copelco Capital Funding Corp. Series 2000-A, Class R1, 7.57%, 11/18/2005 |
|
|
4,008,347 |
|
1,229,060 |
|
NationsCredit Grantor Trust 1997-1, Class A, 6.75%, 8/15/2013 |
|
|
1,228,777 |
|
1,008,047 |
|
Newcourt Equipment Trust Securities 1998-2, Class D, 7.21%, 9/15/2007 |
|
|
999,262 |
|
799,314 |
|
Newcourt Receivables Asset Trust 1997-1, Class A4, 6.19%, 5/20/2005 |
|
|
796,649 |
|
||||||
|
|
|
TOTAL |
|
|
15,036,781 |
|
||||||
|
|
|
ASSET-BACKED SECURITIES--continued |
|
|
|
|
|
|
Home Equity Loan--14.5% |
|
|
|
$ |
750,000 |
|
125 Home Loan Owner Trust 1998-1A, Class B-2, 12.16%, 2/15/2029 |
|
$ |
682,500 |
|
500,000 |
|
Amresco Residential Securities Mortgage Loan Trust 1996-1, Class A5, 7.05%, 4/25/2027 |
|
|
497,647 |
|
1,000,000 |
|
Chase Funding Mortgage Loan 1999-1, Class IIB, 9.37%, 6/25/2028 |
|
|
1,026,190 |
|
3,315,743 |
|
Cityscape Home Equity Loan Trust 1996-3, Class A6, 7.15%, 8/25/2011 |
|
|
3,304,718 |
|
943,879 |
|
Cityscape Home Equity Loan Trust 1997-1, Class A4, 7.23%, 3/25/2018 |
|
|
934,785 |
|
222,641 |
|
ContiMortgage Home Equity Loan Trust 1994-4, Class A6, 8.27%, 12/15/2024 |
|
|
223,407 |
|
1,000,000 |
|
ContiMortgage Home Equity Loan Trust 1997-1, Class A7, 7.32%, 9/15/2021 |
|
|
996,406 |
|
300,000 |
|
EQCC Home Equity Loan Trust 1995-4, Class A4, 6.95%, 3/15/2012 |
|
|
299,304 |
|
1,100,000 |
|
EQCC Home Equity Loan Trust 1995-4, Class A5, 7.25%, 3/15/2026 |
|
|
1,096,213 |
|
907,000 |
|
EQCC Home Equity Loan Trust 1997-2, Class A7, 6.89%, 2/15/2020 |
|
|
903,009 |
|
500,000 |
|
GE Capital Mortgage Services, Inc. 1997-HE4, Class A5, 6.80%, 12/25/2017 |
|
|
494,590 |
|
1,000,000 |
|
Green Tree Home Equity Loan Trust 1999-A, Class A3, 5.98%, 4/15/2018 |
|
|
981,670 |
|
235,661 |
|
Green Tree Home Improvement Loan Trust 1995-C, Class B1, 7.20%, 7/15/2020 |
|
|
232,130 |
|
220,000 |
|
Green Tree Home Improvement Loan Trust 1997-E, Class HEA3, 6.61%, 1/15/2029 |
|
|
219,596 |
|
227,789 |
|
Headlands Home Equity Loan Trust 1998-2, Class A3, 6.67%, 12/15/2024 |
|
|
223,127 |
|
4,165,000 |
|
Indymac Home Equity Loan Asset-Backed Trust 2000-B, Class MV2, 7.67%, 6/25/2030 |
|
|
4,188,428 |
|
2,000,000 |
|
Mellon Bank Home Equity Installment Loan 1999-1, Class B, 6.95%, 3/25/2015 |
|
|
1,884,540 |
|
1,794,634 |
1, 2 |
Merrill Lynch Mortgage Investors, Inc. 1998-FF3, Class BB, 5.50%, 11/20/2029 |
|
|
1,717,800 |
|
267,444 |
1 |
NC Finance Trust 1999-1, Class B, 8.75%, 1/25/2029 |
|
|
250,060 |
|
2,032,423 |
1 |
Option One Mortgage Securities Corp. 1999-3, Class CTFS, 10.80%, 12/26/2029 |
|
|
1,994,949 |
|
946,487 |
|
Option One Mortgage Securities Corp. 2000-5, Class CTFS, 10.65%, 10/26/2030 |
|
|
946,782 |
|
2,500,000 |
|
Salomon Brothers Mortgage Securities VII 1999-NC2, Class M3, 9.87%, 4/25/2029 |
|
|
2,500,000 |
|
3,000,000 |
|
Salomon Brothers Mortgage Securities VII 1999-NC3, Class M3, 9.72%, 7/25/2029 |
|
|
3,000,000 |
|
1,900,000 |
|
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
|
1,753,054 |
|
800,000 |
|
Saxon Asset Securities Trust 1999-1, Class BV1, 9.37%, 2/25/2029 |
|
|
799,272 |
|
1,131,401 |
|
Saxon Asset Securities Trust 1999-2, Class BV1A, 8.31%, 9/25/2001 |
|
|
1,126,547 |
|
22,497 |
|
The Money Store Home Equity Trust 1996-B, Class A7, 7.55%, 2/15/2020 |
|
|
22,494 |
|
11,666 |
|
The Money Store Home Equity Trust 1995-C, Class A3, 6.55%, 9/15/2021 |
|
|
11,633 |
|
70,000 |
|
The Money Store Home Equity Trust 1997-D, Class AV2, 6.49%, 10/15/2026 |
|
|
69,691 |
|
190,000 |
|
The Money Store Home Equity Trust 1998-B, Class AF4, 6.12%, 6/15/2021 |
|
|
186,635 |
|
500,000 |
|
UCFC Home Equity Loan 1997-C, Class A5, 6.88%, 9/15/2022 |
|
|
494,070 |
|
||||||
|
|
|
TOTAL |
|
|
33,061,247 |
|
||||||
|
|
|
ASSET-BACKED SECURITIES--continued |
|
|
|
|
|
|
Manufactured Housing--6.4% |
|
|
|
$ |
1,134,021 |
|
Bankamerica Manufactured Housing Contract Trust 1996-1, Class A3, 6.95%, 10/10/2026 |
|
$ |
1,135,268 |
|
900,579 |
|
Green Tree Financial Corp. 1993-4, Class B1, 7.20%, 1/15/2019 |
|
|
874,120 |
|
117,921 |
|
Green Tree Financial Corp. 1994-5, Class A4, 7.95%, 11/15/2019 |
|
|
118,418 |
|
500,000 |
|
Green Tree Financial Corp. 1994-7, Class A6, 8.95%, 3/15/2020 |
|
|
521,085 |
|
250,000 |
|
Green Tree Financial Corp. 1995-3, Class B1, 7.85%, 8/15/2025 |
|
|
239,230 |
|
517,386 |
|
Green Tree Financial Corp. 1996-10, Class A4, 6.42%, 11/15/2028 |
|
|
515,741 |
|
500,000 |
|
Green Tree Financial Corp. 1997-3, Class B1, 7.51%, 7/15/2028 |
|
|
460,755 |
|
401,112 |
|
Green Tree Financial Corp. 1997-4, Class A4, 6.65%, 2/15/2029 |
|
|
399,102 |
|
1,500,000 |
|
Green Tree Financial Corp. 1997-4, Class B1, 7.23%, 2/15/2029 |
|
|
1,361,010 |
|
454,899 |
|
Indymac Manufactured Housing Contract 1997-1, Class A3, 6.61%, 2/25/2028 |
|
|
451,437 |
|
4,000,000 |
1 |
Merit Securities Corp. 12, Class B1, 7.98%, 7/28/2033 |
|
|
3,640,000 |
|
2,000,000 |
|
Merit Securities Corp. 13, Class A4, 7.88%, 12/28/2033 |
|
|
2,002,186 |
|
2,392,434 |
|
Vanderbilt Mortgage Finance 1994-A, Class A3, 8.00%, 7/10/2019 |
|
|
2,416,311 |
|
500,000 |
|
Vanderbilt Mortgage Finance 1999-A, Class 2B2, 9.23%, 6/7/2016 |
|
|
492,700 |
|
||||||
|
|
|
TOTAL |
|
|
14,627,363 |
|
||||||
|
|
|
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $136,201,253) |
|
|
135,530,675 |
|
||||||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--16.1% |
|
|
|
|
|
|
Whole Loan--16.1% |
|
|
|
|
745,687 |
|
Bayview Financial Acquisition Trust 1998-1, Class MI1, 7.52%, 5/25/2029 |
|
|
711,199 |
|
472,848 |
|
Bayview Financial Acquisition Trust 1998-1, Class MII, 7.37%, 5/25/2029 |
|
|
462,948 |
|
613,105 |
|
Bear Stearns Mortgage Securities, Inc. 1996-8, Class B3, 8.00%, 11/25/2027 |
|
|
597,489 |
|
242,638 |
|
C-BASS ABS, LLC Series 1998-3, Class AF, 6.50%, 1/25/2033 |
|
|
232,932 |
|
3,094,302 |
1 |
C-BASS ABS, LLC Series 1999-3, Class B1, 4.14%, 2/3/2029 |
|
|
2,440,631 |
|
1,478,300 |
|
Countrywide Home Loans 1999-5, Class A1, 6.75%, 5/25/2028 |
|
|
1,430,884 |
|
1,668,812 |
|
GE Capital Mortgage Services, Inc. 1994-27, Class A3, 6.50%, 7/25/2024 |
|
|
1,655,804 |
|
63,149 |
|
GE Capital Mortgage Services, Inc. 1998-11, Class 1A13, 6.75%, 6/25/2028 |
|
|
62,713 |
|
789,454 |
|
Greenwich Capital Acceptance 1994-C, Class B1, 7.48%, 1/25/2025 |
|
|
782,016 |
|
2,200,000 |
|
Homeside Mortgage Securities, Inc. 1998-1, Class A2, 6.75%, 2/25/2028 |
|
|
2,061,851 |
|
100,000 |
|
Mellon Residential Funding Corp 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
|
76,422 |
|
630,091 |
|
Norwest Asset Securities Corp. 1998-2, Class A1, 6.50%, 2/25/2028 |
|
|
600,117 |
|
3,948,204 |
|
PNC Mortgage Securities Corp. 1999-5, Class 2A1, 6.75%, 7/25/2029 |
|
|
3,810,009 |
|
481,940 |
|
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
|
383,142 |
|
1,000,000 |
|
Residential Accredit Loans, Inc. 1997-QS12, Class A6, 7.25%, 11/25/2027 |
|
|
990,000 |
|
164,905 |
|
Residential Accredit Loans, Inc. 1998-QS14, Class A1, 6.75%, 10/25/2028 |
|
|
163,244 |
|
3,822,204 |
|
Residential Accredit Loans, Inc. 1998-QS14, Class A2, 6.50%, 10/25/2028 |
|
|
3,679,253 |
|
5,661,772 |
|
Residential Asset Securitization Trust 1997-A3, Class A13, 6.92%, 5/25/2027 |
|
|
5,490,560 |
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--continued |
|
|
|
|
|
|
Whole Loan--continued |
|
|
|
$ |
293,407 |
|
Residential Asset Securitization Trust 1998-A12, Class A1, 6.75%, 11/25/2028 |
|
$ |
290,155 |
|
393,068 |
|
Residential Asset Securitization Trust 1998-A5, Class A1, 6.75%, 6/25/2028 |
|
|
387,445 |
|
569,615 |
|
Residential Asset Securitization Trust 1998-A6, Class IA7, 6.75%, 7/25/2028 |
|
|
564,002 |
|
1,244,878 |
|
Residential Funding Mortgage Securities I 1994-S13, Class M1, 7.00%, 5/25/2024 |
|
|
1,195,618 |
|
1,080,844 |
|
Residential Funding Mortgage Securities I 1995-S4, Class M1, 8.00%, 4/25/2010 |
|
|
1,081,612 |
|
1,500,000 |
|
Residential Funding Mortgage Securities I 1996-S1, Class A11, 7.10%, 1/25/2026 |
|
|
1,444,485 |
|
480,202 |
|
Residential Funding Mortgage Securities I 1996-S25, Class M3, 7.75%, 12/25/2026 |
|
|
470,939 |
|
5,690,095 |
|
Structured Asset Securities Corp. 1999-ALS2, Class A2, 6.75%, 7/25/2029 |
|
|
5,467,928 |
|
||||||
|
|
|
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $37,749,264) |
|
|
36,533,398 |
|
||||||
|
|
|
CORPORATE BONDS--9.2% |
|
|
|
|
|
|
Finance - Automotive--0.9% |
|
|
|
|
2,000,000 |
|
Ford Motor Credit Co., Unsecd. Note, 7.75%, 11/15/2002 |
|
|
2,032,480 |
|
||||||
|
|
|
Finance - Retail--2.2% |
|
|
|
|
3,000,000 |
|
Banco Latinoamericano SA, Note, 7.20%, 5/15/2002 |
|
|
2,995,167 |
|
2,000,000 |
|
Wells Fargo Co., Note, 6.50%, 9/3/2002 |
|
|
1,993,540 |
|
||||||
|
|
|
TOTAL |
|
|
4,988,707 |
|
||||||
|
|
|
Financial Intermediaries--0.9% |
|
|
|
|
1,000,000 |
|
Lehman Brothers Holdings, Inc., Medium Term Note, 6.38%, 3/15/2001 |
|
|
996,870 |
|
1,000,000 |
|
Lehman Brothers Holdings, Inc., Sr. Sub. Note, 7.00%, 10/1/2002 |
|
|
994,320 |
|
||||||
|
|
|
TOTAL |
|
|
1,991,190 |
|
||||||
|
|
|
Technology Services--1.2% |
|
|
|
|
2,625,000 |
|
Unisys Corp., Sr. Note, 11.75%, 10/15/2004 |
|
|
2,782,500 |
|
||||||
|
|
|
Telecommunications & Cellular--1.0% |
|
|
|
|
2,000,000 |
|
MetroNet Communications Corp., Sr. Note, 12.00%, 8/15/2007 |
|
|
2,255,000 |
|
||||||
|
|
|
Utilities--3.0% |
|
|
|
|
2,000,000 |
|
Pennsylvania Power & Light Co., Note, 7.70%, 11/15/2002 |
|
|
1,975,960 |
|
5,000,000 |
|
Potomac Capital Investment Corp., Medium Term Note, 7.55%, 11/19/2001 |
|
|
4,998,100 |
|
||||||
|
|
|
TOTAL |
|
|
6,974,060 |
|
||||||
|
|
|
TOTAL CORPORATE BONDS (IDENTIFIED COST $21,055,019) |
|
|
21,023,937 |
|
||||||
|
|
|
U.S. TREASURY--1.0% |
|
|
|
|
2,153,040 |
|
U.S. Treasury Inflationary Index Note Series J-2002 3.625% 7/15/2002 (identified cost $2,148,330) |
|
|
2,151,016 |
|
||||||
|
|
|
PREFERRED STOCK--0.5% |
|
|
|
|
|
|
Telecommunications & Cellular--0.5% |
|
|
|
|
50,000 |
|
TCI Communications Financing I TR Originated Securities (identified cost $1,310,000) |
|
|
1,250,000 |
|
||||||
|
|
|
MUTUAL FUNDS--16.9% |
|
|
|
|
31,142,546 |
|
Prime Value Obligations Fund, Institutional Shares |
|
$ |
31,142,546 |
|
924,145 |
|
High Yield Bond Portfolio |
|
|
7,291,497 |
|
||||||
|
|
|
TOTAL MUTUAL FUNDS (IDENTIFIED COST $39,127,904) |
|
|
38,434,043 |
|
||||||
|
|
|
TOTAL INVESTMENTS (IDENTIFIED COST $237,591,770)3 |
|
$ |
234,923,069 |
|
1 Denotes a restricted security which is subject to restrictions on resale under federal securities laws. At September 30, 2000, these securities amounted to $33,846,223 which represents 14.9% of net assets. Included in these amounts, securities which have been deemed liquid amounted to $1,717,800 which represents 0.76% of net assets.
2 Denotes a restricted security that has been deemed liquid by the Fund's Adviser according to criteria approved by the Fund's Board of Directors.
3 The cost of investments for federal tax purposes amounts to $237,609,063. The net unrealized depreciation of investments on a federal tax basis amounts to $2,685,994 which is comprised of $336,826 appreciation and $3,022,820 depreciation at September 30, 2000.
Note: The categories of investments are shown as a percentage of net assets ($227,417,889) at September 30, 2000.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Assets: |
|
|
|
|
|
|
|
Total investments in securities, at value (identified cost $237,591,770 and tax cost $237,609,063) |
|
|
|
|
$ |
234,923,069 |
|
Cash |
|
|
|
|
|
3,361 |
|
Income receivable |
|
|
|
|
|
1,347,089 |
|
Receivable for shares sold |
|
|
|
|
|
349,292 |
|
Receivable for daily variation margin |
|
|
|
|
|
227,693 |
|
|
|||||||
TOTAL ASSETS |
|
|
|
|
|
236,850,504 |
|
|
|||||||
Liabilities: |
|
|
|
|
|
|
|
Payable for investments purchased |
|
$ |
7,999,550 |
|
|
|
|
Payable for shares redeemed |
|
|
891,467 |
|
|
|
|
Income distribution payable |
|
|
443,534 |
|
|
|
|
Capital gain distribution payable |
|
|
848 |
|
|
|
|
Accrued expenses |
|
|
97,216 |
|
|
|
|
|
|||||||
TOTAL LIABILITIES |
|
|
|
|
|
9,432,615 |
|
|
|||||||
Net assets for 116,123,764 shares outstanding |
|
|
|
|
$ |
227,417,889 |
|
|
|||||||
Net Assets Consist of: |
|
|
|
|
|
|
|
Paid in capital |
|
|
|
|
$ |
231,570,896 |
|
Net unrealized depreciation of investments and futures contracts |
|
|
|
|
|
(3,023,927 |
) |
Accumulated net realized loss on investments and futures contracts |
|
|
|
|
|
(1,329,124 |
) |
Accumulated undistributed net investment income |
|
|
|
|
|
200,044 |
|
|
|||||||
TOTAL NET ASSETS |
|
|
|
|
$ |
227,417,889 |
|
|
|||||||
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
|
|
|
|
|
|
|
Institutional Shares: |
|
|
|
|
|
|
|
$48,736,231 ÷ 24,874,657 shares outstanding |
|
|
|
|
|
$1.96 |
|
|
|||||||
Institutional Service Shares: |
|
|
|
|
|
|
|
$178,681,658 ÷ 91,249,107 shares outstanding |
|
|
|
|
|
$1.96 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30, 2000
Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
$ |
1,049,064 |
|
Interest |
|
|
|
|
|
|
|
|
|
|
14,278,690 |
|
|
||||||||||||
TOTAL INCOME |
|
|
|
|
|
|
|
|
|
|
15,327,754 |
|
|
||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment adviser fee |
|
|
|
|
|
$ |
1,238,998 |
|
|
|
|
|
Administrative personnel and services fee |
|
|
|
|
|
|
155,000 |
|
|
|
|
|
Custodian fees |
|
|
|
|
|
|
14,469 |
|
|
|
|
|
Transfer and dividend disbursing agent fees and expenses |
|
|
|
|
|
|
34,768 |
|
|
|
|
|
Directors'/Trustees' fees |
|
|
|
|
|
|
4,296 |
|
|
|
|
|
Auditing fees |
|
|
|
|
|
|
11,286 |
|
|
|
|
|
Legal fees |
|
|
|
|
|
|
6,651 |
|
|
|
|
|
Portfolio accounting fees |
|
|
|
|
|
|
83,231 |
|
|
|
|
|
Distribution services fee--Institutional Service Shares |
|
|
|
|
|
|
285,086 |
|
|
|
|
|
Shareholder services fee--Institutional Shares |
|
|
|
|
|
|
18,292 |
|
|
|
|
|
Shareholder services fee--Institutional Service Shares |
|
|
|
|
|
|
497,957 |
|
|
|
|
|
Share registration costs |
|
|
|
|
|
|
39,880 |
|
|
|
|
|
Printing and postage |
|
|
|
|
|
|
23,273 |
|
|
|
|
|
Insurance premiums |
|
|
|
|
|
|
1,297 |
|
|
|
|
|
Taxes |
|
|
|
|
|
|
9,675 |
|
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
2,586 |
|
|
|
|
|
|
||||||||||||
TOTAL EXPENSES |
|
|
|
|
|
|
2,426,745 |
|
|
|
|
|
|
||||||||||||
Waivers and Reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
Waiver of investment adviser fee |
|
$ |
(726,050 |
) |
|
|
|
|
|
|
|
|
Waiver of distribution services fee--Institutional Service Shares |
|
|
(57,017 |
) |
|
|
|
|
|
|
|
|
Waiver of shareholder services fee--Institutional Shares |
|
|
(18,292 |
) |
|
|
|
|
|
|
|
|
Reimbursement of investment adviser fee |
|
|
(411 |
) |
|
|
|
|
|
|
|
|
|
||||||||||||
TOTAL WAIVERS AND EXPENSE REDUCTIONS |
|
|
|
|
|
|
(801,770 |
) |
|
|
|
|
|
||||||||||||
Net expenses |
|
|
|
|
|
|
|
|
|
|
1,624,975 |
|
|
||||||||||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
13,702,779 |
|
|
||||||||||||
Realized and Unrealized Gain (Loss) on Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments and futures contracts |
|
|
|
|
|
|
|
|
|
|
(1,212,173 |
) |
Net realized gain on capital gain distributions from other investment companies |
|
|
|
|
|
|
|
|
|
|
20,281 |
|
Net change in unrealized depreciation of investments and futures contracts |
|
|
|
|
|
|
|
|
|
|
(827,989 |
) |
|
||||||||||||
Net realized and unrealized loss on investments and futures contracts |
|
|
|
|
|
|
|
|
|
|
(2,019,881 |
) |
|
||||||||||||
Change in net assets resulting from operations |
|
|
|
|
|
|
|
|
|
$ |
11,682,898 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30 |
|
|
2000 |
|
|
|
1999 |
|
Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
13,702,779 |
|
|
$ |
4,746,007 |
|
Net realized gain (loss) on investments and futures contracts ($96,718 and $410,570, respectively, as computed for federal tax purposes) |
|
|
(1,191,892 |
) |
|
|
370,056 |
|
Net change in unrealized depreciation of investments and futures contracts |
|
|
(827,989 |
) |
|
|
(2,195,938 |
) |
|
||||||||
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS |
|
|
11,682,898 |
|
|
|
2,920,125 |
|
|
||||||||
Distributions to Shareholders: |
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(534,143 |
) |
|
|
-- |
|
Institutional Service Shares |
|
|
(13,052,092 |
) |
|
|
(4,663,861 |
) |
Distributions from net realized gain on investments and futures contracts |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
-- |
|
|
|
-- |
|
Institutional Service Shares |
|
|
(507,288 |
) |
|
|
-- |
|
|
||||||||
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS |
|
|
(14,093,523 |
) |
|
|
(4,663,861 |
) |
|
||||||||
Share Transactions: |
|
|
|
|
|
|
|
|
Proceeds from sale of shares |
|
|
334,234,163 |
|
|
|
325,135,965 |
|
Net asset value of shares issued to shareholders in payment of distributions declared |
|
|
8,463,799 |
|
|
|
2,839,714 |
|
Cost of shares redeemed |
|
|
(308,900,965 |
) |
|
|
(130,300,447 |
) |
|
||||||||
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS |
|
|
33,796,997 |
|
|
|
197,675,232 |
|
|
||||||||
Change in net assets |
|
|
31,386,372 |
|
|
|
195,931,496 |
|
|
||||||||
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
196,031,517 |
|
|
|
100,021 |
|
|
||||||||
End of period (including undistributed net investment income of $200,044 and $83,500, respectively) |
|
$ |
227,417,889 |
|
|
$ |
196,031,517 |
|
|
See Notes which are an integral part of the Financial Statements
September 30, 2000
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 Ultrashort 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 investment objective of the Fund is to provide total return consistent with current income.
Effective February 22, 2000, the Fund began offering Institutional Shares in addition to the Institutional Service Shares previously offered.
On August 20, 1998, the Board of Directors (the "Directors") declared a stock split. The stock split was effected in the form of a dividend payable in shares of the Fund on October 21, 1998. The dividend consisted of 5.08 shares for one (1) share in order to establish a $2.00 per share net asset value. Per share data prior to October 21, 1998 has been restated to give effect to the split.
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.
U.S. government securities, listed corporate bonds and other fixed income and asset backed securities are generally valued at the mean of the latest bid and asked price as furnished by an independent pricing service. Listed equity securities are valued at the last sale price reported on a national securities exchange. 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. Investments in other open-end regulated investment companies are valued at net asset value.
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.
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. 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. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
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 provision for federal tax is necessary.
Net capital losses of $1,667,062 attributable to security transactions incurred after October 31, 1999 are treated as arising on October 1, 2000, the first day of the Fund's next taxable year.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
The Fund purchases and sells financial futures contracts to manage cashflows, enhance yield, and to potentially reduce transaction costs. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a "variation margin" account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. For the year ended September 30, 2000, the Fund had realized gains of $80,902 on futures contracts.
Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with changes in the value of the underlying securities.
At September 30, 2000, the Fund had outstanding futures contracts as set forth below:
Expiration Date |
|
Contracts to Deliver/Receive |
|
Position |
|
Unrealized |
|
December 2000 |
|
75 5-Year U.S Treasury Note Futures |
|
Short |
|
$ (13,476 |
) |
|
|||||||
June 2001 |
|
60 90-Day Euro Dollar Futures |
|
Short |
|
3,750 |
|
|
|||||||
December 2001 |
|
60 90-Day Euro Dollar Futures |
|
Short |
|
(18,000 |
) |
|
|||||||
September 2002 |
|
150 90-Day Euro Dollar Futures |
|
Short |
|
(240,625 |
) |
|
|||||||
September 2003 |
|
50 90-Day Euro Dollar Futures |
|
Short |
|
(86,875 |
) |
|
|||||||
NET UNREALIZED APPRECIATION/(DEPRECIATION) ON FUTURES CONTRACTS |
|
|
|
$(355,226 |
) |
||
|
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 Board of 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, 2000 is as follows:
Security |
|
Acquisition |
|
Acquisition |
Bayview Financial Acquisition Trust 1998-1, Class MII, 7.37%, 5/25/2029 |
|
03/12/1999 |
|
$ 445,934 |
|
||||
Bayview Financial Acquisition Trust 1998-1, Class MI1, 7.52%, 5/25/2029 |
|
12/08/1998 |
|
742,131 |
|
||||
C-BASS, ABS, LLC Series 1999-3, Class B1, 4.14%, 2/3/2029 |
|
07/09/1999 |
|
2,507,812 |
|
||||
Circuit City Credit Card Master Trust 2000-1, Class CTFS, 7.82%, 2/15/2006 |
|
02/23/2000 |
|
3,000,000 |
|
||||
Copelco Capital Funding Corp. Series 2000-A, Class R1, 7.57%, 11/18/2005 |
|
04/14/2000 |
|
3,999,048 |
|
||||
Ford Credit Auto Owner Trust 2000B, Class A4, 7.03%, 11/15/2003 |
|
04/13/2000 |
|
3,999,849 |
|
||||
MBNA Master Credit Card Trust 1999-K, Class C, 7.57%, 3/15/2005 |
|
10/22/1999 |
|
2,750,000 |
|
||||
Mellon Residential Funding Corp. 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
12/16/1998 |
|
88,669 |
|
||||
Merit Securities Corp. 12, Class B1, 7.98%, 7/28/2033 |
|
05/18/1999 |
|
3,915,108 |
|
||||
NC Finance Trust 1999-1, Class B, 8.75%, 1/25/2029 |
|
02/23/1999 |
|
265,137 |
|
||||
125 Home Loan Owner Trust 1998-1A, Class B-2, 12.16%, 2/15/2029 |
|
01/12/1999 |
|
462,356 |
|
||||
Option One Mortgage Securities Corp. 1999-3, Class CTFS, 10.80%, 12/26/2029 |
|
11/10/1999 |
|
1,956,451 |
|
||||
Option One Mortgage Securities Corp. 2000-5, Class CTFS, 10.65%, 10/26/2030 |
|
08/11/2000 |
|
901,685 |
|
||||
Potomac Capital Investment Corp., Medium Term Note, 7.55%, 11/19/2001 |
|
11/12/1999 |
|
5,000,000 |
|
||||
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
02/12/1999 |
|
410,718 |
|
||||
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
05/21/1999 |
|
1,756,434 |
|
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.
Investment transactions are accounted for on a trade date basis.
At September 30, 2000, par value shares ($0.001 per share) authorized were as follows:
Share Class Name |
|
Number of Par Value |
Institutional Shares |
|
1,000,000,000 |
Institutional Service Shares |
|
1,000,000,000 |
TOTAL |
|
2,000,000,000 |
Transactions in capital stock were as follows:
Period Ended September 30 |
|
20001 |
|
|
1999 |
|
||||||||
Institutional Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
|
|
Shares sold |
|
26,215,389 |
|
|
$ |
51,362,056 |
|
|
-- |
|
|
|
-- |
|
Shares issued to shareholders in payment of distributions declared |
|
213,695 |
|
|
|
418,156 |
|
|
-- |
|
|
|
-- |
|
Shares redeemed |
|
(1,554,427 |
) |
|
|
(3,039,626 |
) |
|
-- |
|
|
|
-- |
|
|
||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS |
|
24,874,657 |
|
|
$ |
48,740,586 |
|
|
-- |
|
|
|
-- |
|
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30 |
|
2000 |
|
|
1999 |
|
||||||||
Institutional Service Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
|
|
Shares sold |
|
144,009,760 |
|
|
$ |
282,872,107 |
|
|
162,741,803 |
|
|
$ |
325,135,965 |
|
Shares issued to shareholders in payment of distributions declared |
|
4,100,413 |
|
|
|
8,045,643 |
|
|
1,426,095 |
|
|
|
2,839,714 |
|
Shares redeemed |
|
(155,833,785 |
) |
|
|
(305,861,339 |
) |
|
(65,245,181 |
) |
|
|
(130,300,447 |
) |
|
||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE SHARE TRANSACTIONS |
|
(7,723,612 |
) |
|
$ |
(14,943,589 |
) |
|
98,922,717 |
|
|
$ |
197,675,232 |
|
|
||||||||||||||
NET CHANGE RESULTING FROM SHARE TRANSACTIONS |
|
17,151,045 |
|
|
$ |
33,796,997 |
|
|
98,922,717 |
|
|
$ |
197,675,232 |
|
|
1 For the period from February 22, 2000 (date of initial public investment) to September 30, 2000.
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment Adviser fee equal to 0.60% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee. The Adviser can modify or terminate this voluntary waiver at any time at its sole discretion.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in Prime Value Obligations Fund which is managed by the Adviser. The Adviser has agreed to reimburse certain investment adviser fees as a result of these transactions.
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 a scale that ranges from 0.15% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.
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 Fund 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 any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. FSSC may voluntarily choose to waive any portion of its fee. FSSC can modify or terminate this voluntary waiver at any time at its sole discretion.
FServ, through its subsidiary, 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.
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.
During the period ended September 30, 2000, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $87,969,710 and $54,389,698, respectively.
Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding short-term securities, for the period ended September 30, 2000, were as follows:
Purchases |
|
$ |
119,022,397 |
|
|||
Sales |
|
$ |
80,711,788 |
|
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments of the Federated Ultrashort Bond Fund (the "Fund") as of September 30, 2000, the related statement of operations and statement of changes in net assets for the years ended September 30, 2000 and 1999 and the financial highlights for the period ended September 30, 2000. 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 audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 the securities owned at September 30, 2000, by correspondence with the custodian and brokers; where replies were not received, we performed other auditing procedures. 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Ultrashort Bond Fund as of September 30, 2000, the results of its operations, and the changes in its net assets and its financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 13, 2000
<R>
A Statement of Additional Information (SAI) dated November 30, 2000, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.
</R>
<R>
You can obtain information about the Fund (including the SAI) by writing or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying charges.
</R>
Federated
World-Class Investment Manager®
Federated Ultrashort Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated Securities
Corp., Distributor
Investment Company Act File No. 811-7115
Cusip 31428Q879
<R>
25145 (11/00)
</R>
Federated is a registered mark of Federated Investors, Inc.
2000 ©Federated Investors, Inc.
Federated Ultrashort Bond Fund (Institutional Shares)
APPENDIX:
The graphic presentation displayed here consists of a bar chart representing the annual total returns of the Funds Institutional Service Shares as of the calendar year-end for each of two years.
The 'y' axis reflects the "% Total Return" beginning with "0" and increasing in increments of 2% up to 8%.
The 'x' axis represents calculation periods from the earliest first full calendar year-end of the Funds Institutional Service Shares start of business through the calendar year ended December 31,1999. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1998 through 1999. The percentages noted are 7.15% and 4.62%, respectively.
Federated
World-Class Investment Manager®
A Portfolio of Federated Total Return Series, Inc.
<R>
</R>
<R>
NOVEMBER 30, 2000
</R>
A mutual fund seeking to provide total return consistent with current income by investing primarily in a diversified portfolio of investment grade debt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE
Risk/Return Summary 1
<R>
What are the Fund's Fees and Expenses? 4
</R>
<R>
What are the Fund's Investment Strategies? 5
</R>
What are the Principal Securities in Which the Fund Invests? 7
<R>
What are the Specific Risks of Investing in the Fund? 13
</R>
<R>
What Do Shares Cost? 16
</R>
<R>
How is the Fund Sold? 17
</R>
<R>
How to Purchase Shares 17
</R>
<R>
How to Redeem Shares 19
</R>
<R>
Account and Share Information 21
</R>
<R>
Who Manages the Fund? 22
</R>
<R>
Financial Information 23
</R>
<R>
Independent Auditors' Report 39
</R>
The Fund's investment objective is to provide total return consistent with current income. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.
The Fund's total return will consist of two components: (1) changes in the market value of its portfolio securities (both realized and unrealized appreciation); and (2) income received from its portfolio securities. The Fund expects that income will comprise the largest component of its total return.
The Fund invests primarily in a diversified portfolio of domestic and foreign investment grade fixed income securities consisting principally of corporate, government and privately issued mortgage backed and asset backed securities and other government securities. The Fund may invest up to 35% of its portfolio in non-investment grade fixed income securities. Federated Investment Management Company (Adviser) seeks to enhance the Fund's performance by allocating relatively more of its portfolio to the security type that the Adviser expects to offer the best balance between total return and risk.
Although the value of the Fund's shares will fluctuate, the Adviser will seek to manage the magnitude of fluctuation by limiting the Fund's dollar weighted average modified duration to one year or less. Duration measures the price sensitivity of a fixed income security to changes in interest rates. The Fund may use futures, options and interest rate swaps in an effort to maintain the Fund's targeted duration.
All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:
The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency.
The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a calendar year-end basis.
<R>
The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value.
</R>
<R>
The Fund's Institutional Service Shares total return for the nine-month period from January 1, 2000 to September 30, 2000 was 4.55%.
</R>
<R>
Within the period shown in the chart, the Fund's Institutional Service Shares highest quarterly return was 2.30% (quarter ended September 30, 1998). Its lowest quarterly return was 1.24% (quarter ended June 30, 1998).
</R>
<R>
The following table represents the Fund's Institutional Service Shares Average Annual Total Returns for the calendar period ended December 31, 1999. The table shows the Fund's Institutional Service Shares total returns averaged over a period of years relative to the Merrill Lynch 1-Year Treasury Bill Index ("ML1YT"), a broad-based market index tracking one-year U.S. government securities. Total returns for the index shown do not reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
</R>
Calendar Period |
|
Fund |
|
ML1YT |
1 Year |
|
<R>4.62%</R> |
|
<R>4.03%</R> |
Start of Performance1 |
|
<R>6.36%</R> |
|
<R>5.21%</R> |
1 The Fund's Institutional Service Shares start of performance date was May 31, 1997.
Past performance does not necessarily predict future performance. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Service Shares.
Shareholder Fees |
|
|
Fees Paid Directly From Your Investment |
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) |
|
None |
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable) |
|
None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price). |
|
None |
Redemption Fee (as a percentage of amount redeemed, if applicable) |
|
None |
Exchange Fee |
|
None |
|
|
|
Annual Fund Operating Expenses (Before Waiver and Reimbursement)1 |
|
|
Expenses That are Deducted From Fund Assets (as a percentage of average net assets) |
|
|
Management Fee2 |
|
0.60% |
Distribution (12b-1) Fee3 |
|
0.25% |
Shareholder Services Fee |
|
0.25% |
Other Expenses |
|
0.19% |
Total Annual Fund Operating Expenses4 |
|
1.29% |
1 Although not contractually obligated to do so, the Adviser and the distributor expect to waive and reimburse certain amounts. These are shown below along with the net expenses the Fund expects to pay for the fiscal year ending September 30, 2001. | ||
Total Reimbursement and Waiver of Fund Expenses |
|
0.49% |
Total Annual Fund Operating Expenses (after reimbursement and waiver) |
|
0.80% |
2 The Adviser expects to voluntarily waive a portion of the management fee. The Adviser can terminate this voluntary waiver at any time. The management fee expected to be paid by the Fund (after the anticipated voluntary waiver) will be 0.16% for the fiscal year ending September 30, 2001. | ||
3 The distributor expects to voluntarily waive a portion of its distribution (12b-1) fee. The distributor can terminate this voluntary reduction at any time. The distribution (12b-1) fee paid by the Fund's Institutional Service Shares (after the anticipated voluntary waiver) will be 0.20% for the fiscal year ending September 30, 2001. | ||
4 For the fiscal year ended September 30, 2000, the Fund had Total Annual Fund Operating Expenses and Total Actual Annual Fund Operating Expenses of 1.18% and 0.80%, respectively. |
This Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds.
<R>
The Example assumes that you invest $10,000 in the Fund's Institutional Service Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Service Shares operating expenses are before waivers and reimbursements as estimated in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
</R>
1 Year |
$ |
<R>131</R> |
| ||
3 Years |
$ |
<R>409</R> |
| ||
5 Years |
$ |
<R>708</R> |
| ||
10 Years |
$ |
<R>1,556</R> |
|
<R>
The Fund invests in a diversified portfolio of domestic and foreign fixed income securities, including corporate, mortgage backed, other asset backed and U.S. government securities. The Fund's Adviser actively manages the Fund's portfolio seeking to limit fluctuation in the Fund's share price due to changes in market interest rates while selecting investments that should offer enhanced returns based upon the Adviser's credit analysis. The Adviser limits fluctuation in the Fund's share price by limiting the dollar-weighted average modified duration of the Fund's portfolio to one year or less. The Adviser then seeks higher returns through security selection than are possible in a portfolio limited exclusively to very high credit quality securities. The Fund is not a money market fund and is not subject to the special regulatory requirements (including maturity and credit-quality constraints) designed to enable money market funds to maintain a stable share price. A description of the various types of securities in which the Fund invests, and their risks, immediately follows this section.
</R>
<R>
The Fund invests at least 65% of its portfolio in investment grade fixed income securities. The Fund may invest the remainder of its portfolio in non-investment grade fixed income securities. Investment grade securities are those rated BBB or higher by a nationally recognized statistical rating organization (NRSRO) or, if the securities are unrated, if they are deemed to be of equal quality by the Adviser. The Adviser attempts to select securities offering attractive risk-adjusted yields over comparable Treasury securities. Corporate and asset backed securities offer higher yields compared to Treasury securities to compensate for their additional risks, such as credit risk. Mortgage backed securities, which usually have nominal credit risk, have higher yields due to their risk that the principal will be repaid faster than expected if the underlying mortgages are prepaid. In selecting securities, the Adviser seeks the higher relative returns of corporate and asset backed (including mortgage backed) securities, while attempting to limit or manage their additional credit or prepayment risks.
</R>
The Adviser's investment process first allocates the Fund's portfolio among different types of fixed income securities. The Adviser makes a greater allocation of the Fund's portfolio to those types of securities that the Adviser expects to offer the best balance between current income and risk and thus offers the greatest potential for return. The allocation process is based on the Adviser's continuing analysis of a variety of economic and market indicators in order to arrive at what the Adviser believes the yield "spread" should be of each security type. (The spread is the difference between the yield of a security versus the yield of a comparable U.S. Treasury security.)
Securities are selected by weighing projected spreads against the spreads at which the securities can currently be purchased. The Adviser also analyzes the prepayment risks and credit risks of individual securities in order to complete the analysis.
<R>
The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage backed securities with characteristics that make prepayment fluctuations less likely. Characteristics that the Adviser may consider in selecting securities include the average interest rates of the underlying loans and the federal agencies (if any) that support the loans. The Adviser attempts to assess the relative returns and risks for mortgage backed securities by analyzing how the timing, amount and division of cash flows might change in response to changing economic and market conditions.
</R>
The Adviser attempts to manage the Fund's credit risk by selecting securities that make default in the payment of principal and interest less likely. The Adviser analyzes a variety of factors, including macroeconomic analysis and corporate earnings analysis to determine which business sectors and credit ratings are most advantageous for investment by the Fund. In selecting individual corporate fixed income securities, the Adviser analyzes the issuer's business, competitive position, and general financial condition to assess whether the security's credit risk is commensurate with its potential return. In order to enhance returns, the Adviser may purchase lower rated securities that provide better returns than investment grade securities, and foreign securities that provide better returns than domestic securities. There is no assurance that the Adviser's efforts to enhance returns will be successful.
Within the Fund's one-year portfolio duration constraint, the Adviser may further manage interest rate risk by lengthening or shortening duration from time-to-time based on its interest rate outlook. If the Adviser expects interest rates to decline, it will generally lengthen the Fund's duration, and if the Adviser expects interest rates to increase, it will generally shorten the Fund's duration. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions in analyzing a variety of factors, such as:
There is no assurance that the Adviser's efforts to forecast market interest rates and assess the impact of market interest rates on particular securities will be successful.
Because the Fund will typically invest in fixed income securities with remaining maturities greater than one year, the Fund will use futures contracts and interest rate swaps to maintain the Fund's targeted duration.
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The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.
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Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the principal types of fixed income securities in which the Fund invests.
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a GSE). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
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The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
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Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
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Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and pre-payments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
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CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
SEQUENTIAL CMOS
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
Privately issued mortgage securities (including privately issued CMOs) are issued by private entities, rather than U.S. government agencies. These securities involve credit risks and liquidity risks. The Fund may invest in privately issued mortgage backed securities that are rated BBB or higher by an NRSRO.
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Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of commercial paper, notes, or pass through certificates. Asset backed securities have prepayment risks.
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Bank instruments are unsecured interest bearing deposits with banks. Bank instruments include bank accounts, time deposits, certificates of deposit and banker's acceptances. Yankee instruments are denominated in U.S. dollars and issued by U.S. branches of foreign banks. Eurodollar instruments are denominated in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.
Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:
Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.
In order to convert U.S. dollars into the currency needed to buy a foreign security, or to convert foreign currency received from the sale of a foreign security into U.S. dollars, the Fund may enter into spot currency trades. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.
Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts.
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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate and currency risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
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The Fund may trade in the following types of derivative contracts:
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Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
The Fund may buy and sell the following types of futures contracts: financial futures, foreign currency forward contracts, and futures on securities indices.
Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
The Fund may also write call options on portfolio securities and futures contracts to generate income from premiums, and in anticipation of a decrease or only limited increase in the value of the underlying asset. If a call written by the Fund is exercised, the Fund foregoes any possible profit from an increase in the market price of the underlying asset over the exercise price plus the premium received.
The Fund may not buy or sell futures or related options if the margin deposits and premiums paid for these securities would exceed 5% of the Fund's total assets.
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
INTEREST RATE SWAPS
Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
CURRENCY SWAPS
Currency swaps are contracts which provide for interest payments in different currencies. The parties might agree to exchange the notional principal amount as well.
Non-investment grade securities (junk bonds) are rated below BBB by a NRSRO. These bonds have greater credit risk than investment grade securities.
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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade.
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If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
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Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
Many fixed income securities receive credit ratings from services such as Standard & Poor's and Moody's Investor Services, Inc. These services assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment.
Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline.
Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.
Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due) payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
Call risk is the possibility that an issuer may redeem a fixed income security before maturity (a call) at a price below its current market price. An increase in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds in other fixed income securities with lower interest rates, higher credit risks, or other less favorable characteristics.
Trading opportunities are more limited for fixed income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held.
Trading opportunities are more limited for CMOs that have complex terms or that are not widely held. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses.
OTC derivative contracts generally carry greater liquidity risk than exchange-traded contracts.
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Securities rated below investment grade, also known as junk bonds, generally entail greater market, credit and liquidity risks than investment grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.
Foreign securities pose additional risks because foreign economic or political conditions may be less favorable than those of the United States. Securities in foreign markets may also be subject to taxation policies that reduce returns for U.S. investors.
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Foreign companies may not provide information (including financial statements) as frequently or to as great an extent as companies in the United States. Foreign companies may also receive less coverage than U.S. companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.
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Foreign countries may have restrictions on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund's investments.
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Exchange rates for currencies fluctuate daily. The combination of currency risks and market risks tends to make securities traded in foreign markets more volatile than securities traded exclusively in the United States.
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The Adviser attempts to manage currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.
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Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such an investment magnify the Fund's risk of loss and potential for gain.
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You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in the prospectus) it is processed at the next calculated net asset value (NAV).
From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund's assets may change on days you cannot purchase or redeem Shares. The Fund does not charge a front-end sales charge. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values fixed income securities at the last sale price on a national securities exchange, if available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated" and Institutional Service Shares.
The required minimum initial investment for Fund Shares is $25,000. There is no required minimum subsequent investment amount. 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 is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
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The Fund offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.
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The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions and to individuals, directly or through investment professionals.
When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Institutional Service Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.
You may purchase Shares through an investment professional or directly from the Fund. The Fund reserves the right to reject any request to purchase Shares.
Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."
You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are restricted.
Make your check payable to The Federated Funds, note your account number on the check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will not accept third-party checks (checks originally payable to someone other than you or The Federated Funds).
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You should redeem Shares:
Submit your redemption request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.
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You may redeem Shares by simply calling the Fund at 1-800-341-7400. If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day's NAV.
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You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
Call your investment professional or the Fund if you need special instructions.
Signatures must be guaranteed if:
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.
Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:
Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.
The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Fund does not issue share certificates.
You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.
The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the Fund declares a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.
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Fund distributions are expected to be both dividends and capital gains. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.
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The Board of Directors governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. The Adviser's address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
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The Adviser and other subsidiaries of Federated advise approximately 176 mutual funds and separate accounts, which totaled approximately $125 billion in assets as of December 31, 1999. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,900 employees. More than 4,000 investment professionals make Federated Funds available to their customers.
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Randall S. Bauer has been the Fund's Portfolio Manager since October 1998 and is the overall manager of the Fund. Mr. Bauer joined Federated in 1989 and has been a Portfolio Manager and a Vice President of the Fund's Adviser since 1994. Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance from Pennsylvania State University.
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Robert E. Cauley has been the Fund's Portfolio Manager since October 1998 and manages the mortgage backed securities asset category for the Fund. Mr. Cauley joined Federated in 1996 as a Senior Investment Analyst and an Assistant Vice President of the Fund's Adviser and has been a Portfolio Manager since 1997. Mr. Cauley has been a Vice President of the Adviser since 1999. Mr. Cauley was a member of the Asset-Backed Structuring Group at Lehman Brothers Holding, Inc. from 1994 to 1996. Mr. Cauley earned his M.S.I.A., concentrating in Finance and Economics, from Carnegie Mellon University.
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Paige Wilhelm has been the Fund's Portfolio Manager since October 1998 and manages the money market instruments category for the Fund. Ms. Wilhelm joined Federated in 1985 and has been a Vice President of the Fund's Adviser since January 1997. She served as an Assistant Vice President of the Fund's Adviser from July 1994 to December 1996 and as an Investment Analyst from July 1991 through June 1994. Ms. Wilhelm earned her M.B.A. from Duquesne University.
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The Adviser receives an annual investment advisory fee of 0.60% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.
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The following Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years, or since inception, if the life of the Fund is shorter. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.
This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus.
(For a Share Outstanding Throughout Each Period)
Reference is made to the Independent Auditors' Report on page 39.
|
|
Year Ended September 30, |
|
Period |
| ||||
|
|
2000 |
|
|
1999 |
1 |
|
9/30/1998 |
2, 3 |
Net Asset Value, Beginning of Period |
|
$ 1.98 |
|
|
$ 2.00 |
|
|
$ 1.99 |
|
Income From Investment Operations: |
|
|
|
|
|
|
|
|
|
Net investment income |
|
0.13 |
|
|
0.12 |
4 |
|
0.10 |
|
Net realized and unrealized gain (loss) on investments and futures contracts |
|
(0.02 |
) |
|
0.01 |
5 |
|
0.03 |
|
| |||||||||
TOTAL FROM INVESTMENT OPERATIONS |
|
0.11 |
|
|
0.13 |
|
|
0.13 |
|
| |||||||||
Less Distributions: |
|
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
(0.13 |
) |
|
(0.15 |
) |
|
(0.11 |
) |
Distributions from net realized gain on investments and futures contracts |
|
(0.00 |
)6 |
|
-- |
|
|
(0.01 |
) |
| |||||||||
TOTAL DISTRIBUTIONS |
|
(0.13 |
) |
|
(0.15 |
) |
|
(0.12 |
) |
| |||||||||
Net Asset Value, End of Period |
|
$ 1.96 |
|
|
$ 1.98 |
|
|
$ 2.00 |
|
| |||||||||
Total Return7 |
|
5.95 |
% |
|
5.32 |
% |
|
6.75 |
% |
| |||||||||
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets: |
|
|
|
|
|
|
|
|
|
| |||||||||
Expenses |
|
0.80 |
%8 |
|
0.77 |
% |
|
0.56 |
%8 |
| |||||||||
Net investment income |
|
6.61 |
%8 |
|
6.36 |
% |
|
5.18 |
%8 |
| |||||||||
Expense waiver/reimbursement9 |
|
0.38 |
%8 |
|
0.49 |
% |
|
6.83 |
%8 |
| |||||||||
Supplemental Data: |
|
|
|
|
|
|
|
|
|
| |||||||||
Net assets, end of period (000 omitted) |
|
$178,682 |
|
|
$196,032 |
|
|
$100 |
|
| |||||||||
Portfolio turnover |
|
43 |
% |
|
20 |
% |
|
501 |
% |
|
1 For the year ended September 30, 1999, the Fund was audited by Deloitte & Touche LLP. Each of the previous years was audited by others auditors.
2 Reflects operations for the period from October 3, 1997 (date of initial public investment) to September 30, 1998.
3 Per share amounts have been restated to reflect a share dividend as disclosed in the Notes.
4 Per share amount is based on the average number of shares outstanding.
5 The amount shown in this caption for a share outstanding does not correspond with the aggregate net realized and unrealized loss on investments and futures contracts for the year ended due to the timing of sales and repurchases of Fund shares in relation to fluctuating market values of the investments of the Fund.
6 Amount represents less than $(0.01) per Share.
7 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
8 Computed on an annualized basis.
9 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--59.6% |
|
|
|
|
|
|
Automobile--19.1% |
|
|
|
$ |
5,000,000 |
|
Associates Automobile Receivables Trust 2000-2, Class A3, 6.82%, 2/15/2005 |
|
$ |
5,009,400 |
|
5,000,000 |
|
First Security Auto Owner Trust 2000-2, Class A3, 6.83%, 7/15/2004 |
|
|
5,015,600 |
|
911,414 |
|
Fleetwood Credit Corp. Grantor Trust 1993-A, Class A, 6.00%, 1/15/2008 |
|
|
896,754 |
|
372,987 |
|
Fleetwood Credit Corp. Grantor Trust 1993-B, Class A, 4.95%, 8/15/2008 |
|
|
362,709 |
|
4,000,000 |
1 |
Ford Credit Auto Owner Trust 2000-B, Class A4, 7.03%, 11/15/2003 |
|
|
4,015,920 |
|
65,712 |
|
Green Tree Recreational Equipment & Consumer Trust Series 1997-B, Class A1, 6.55%, 7/15/2028 |
|
|
65,011 |
|
2,000,000 |
|
Harley-Davidson Eaglemark Motorcycle Trust 1998-2, Class A2, 5.87%, 4/15/2004 |
|
|
1,984,200 |
|
2,000,000 |
|
Harley-Davidson Eaglemark Motorcycle Trust 1999-1, Class A4, 5.52%, 2/15/2005 |
|
|
1,961,420 |
|
114,006 |
|
Household Auto Revolving Trust I 1998-1, Class B1, 6.30%, 5/17/2005 |
|
|
112,688 |
|
5,000,000 |
|
Household Auto Revolving Trust I 1999-1, Class A3, 6.33%, 6/17/2003 |
|
|
4,978,400 |
|
3,500,000 |
|
MMCA Auto Trust 1999-2, Class A2, 6.80%, 8/15/2003 |
|
|
3,506,335 |
|
4,225,785 |
|
Mellon Auto Grantor Trust 2000-1, Class B, 7.43%, 10/15/2006 |
|
|
4,265,275 |
|
3,000,000 |
|
Nissan Auto Receivables Owner Trust 1999-A, Class A3, 6.47%, 9/15/2003 |
|
|
2,993,160 |
|
3,200,000 |
|
Toyota Auto Receivables Owner Trust 1999-A, Class C, 6.70%, 8/16/2004 |
|
|
3,191,648 |
|
5,000,000 |
|
Toyota Auto Receivables Owner Trust 2000-B, Class A3, 6.76%, 8/15/2004 |
|
|
5,007,800 |
| ||||||
|
|
|
TOTAL |
|
|
43,366,320 |
| ||||||
|
|
|
Credit Card--13.0% |
|
|
|
|
4,000,000 |
|
ARRAN Master Trust 2000-C, Class C, 7.53%, 9/15/2007 |
|
|
3,997,520 |
|
3,000,000 |
1 |
Circuit City Credit Card Master Trust 2000-1, Class CTFS, 7.82%, 2/15/2006 |
|
|
3,005,775 |
|
3,750,000 |
|
Citibank Credit Card Issuance Trust 2000-C2, Class C2, 7.31%, 10/15/2007 |
|
|
3,744,375 |
|
5,000,000 |
|
Citibank Credit Card Master Trust I 1998-6, Class A, 5.85%, 4/10/2003 |
|
|
4,974,200 |
|
2,000,000 |
|
MBNA Master Credit Card Trust 1997-F, Class A, 6.60%, 11/15/2004 |
|
|
1,995,760 |
|
4,000,000 |
|
MBNA Master Credit Card Trust 1999-I, Class A, 6.40%, 1/18/2005 |
|
|
3,975,640 |
|
2,750,000 |
1 |
MBNA Master Credit Card Trust 1999-K, Class C, 7.57%, 3/15/2005 |
|
|
2,758,594 |
|
5,000,000 |
|
Providian Master Trust 1999-2, Class A, 6.60%, 4/16/2007 |
|
|
4,987,100 |
| ||||||
|
|
|
TOTAL |
|
|
29,438,964 |
| ||||||
|
|
|
Equipment Lease Contracts--6.6% |
|
|
|
|
5,000,000 |
|
CIT Equipment Collateral 2000-2, Class A3, 6.84%, 6/20/2004 |
|
|
5,004,685 |
|
3,000,000 |
|
Conseco Finance Securitization Corp. 2000-5, Class A2, 1.00%, 2/1/2032 |
|
|
2,999,061 |
|
4,000,000 |
1 |
Copelco Capital Funding Corp. Series 2000-A, Class R1, 7.57%, 11/18/2005 |
|
|
4,008,347 |
|
1,229,060 |
|
NationsCredit Grantor Trust 1997-1, Class A, 6.75%, 8/15/2013 |
|
|
1,228,777 |
|
1,008,047 |
|
Newcourt Equipment Trust Securities 1998-2, Class D, 7.21%, 9/15/2007 |
|
|
999,262 |
|
799,314 |
|
Newcourt Receivables Asset Trust 1997-1, Class A4, 6.19%, 5/20/2005 |
|
|
796,649 |
| ||||||
|
|
|
TOTAL |
|
|
15,036,781 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--continued |
|
|
|
|
|
|
Home Equity Loan--14.5% |
|
|
|
$ |
750,000 |
1 |
125 Home Loan Owner Trust 1998-1A, Class B-2, 12.16%, 2/15/2029 |
|
$ |
682,500 |
|
500,000 |
|
Amresco Residential Securities Mortgage Loan Trust 1996-1, Class A5, 7.05%, 4/25/2027 |
|
|
497,647 |
|
1,000,000 |
|
Chase Funding Mortgage Loan 1999-1, Class IIB, 9.37%, 6/25/2028 |
|
|
1,026,190 |
|
3,315,743 |
|
Cityscape Home Equity Loan Trust 1996-3, Class A6, 7.15%, 8/25/2011 |
|
|
3,304,718 |
|
943,879 |
|
Cityscape Home Equity Loan Trust 1997-1, Class A4, 7.23%, 3/25/2018 |
|
|
934,785 |
|
222,641 |
|
ContiMortgage Home Equity Loan Trust 1994-4, Class A6, 8.27%, 12/15/2024 |
|
|
223,407 |
|
1,000,000 |
|
ContiMortgage Home Equity Loan Trust 1997-1, Class A7, 7.32%, 9/15/2021 |
|
|
996,406 |
|
300,000 |
|
EQCC Home Equity Loan Trust 1995-4, Class A4, 6.95%, 3/15/2012 |
|
|
299,304 |
|
1,100,000 |
|
EQCC Home Equity Loan Trust 1995-4, Class A5, 7.25%, 3/15/2026 |
|
|
1,096,213 |
|
907,000 |
|
EQCC Home Equity Loan Trust 1997-2, Class A7, 6.89%, 2/15/2020 |
|
|
903,009 |
|
500,000 |
|
GE Capital Mortgage Services, Inc. 1997-HE4, Class A5, 6.80%, 12/25/2017 |
|
|
494,590 |
|
1,000,000 |
|
Green Tree Home Equity Loan Trust 1999-A, Class A3, 5.98%, 4/15/2018 |
|
|
981,670 |
|
235,661 |
|
Green Tree Home Improvement Loan Trust 1995-C, Class B1, 7.20%, 7/15/2020 |
|
|
232,130 |
|
220,000 |
|
Green Tree Home Improvement Loan Trust 1997-E, Class HEA3, 6.61%, 1/15/2029 |
|
|
219,596 |
|
227,789 |
|
Headlands Home Equity Loan Trust 1998-2, Class A3, 6.67%, 12/15/2024 |
|
|
223,127 |
|
4,165,000 |
|
Indymac Home Equity Loan Asset-Backed Trust 2000-B, Class MV2, 7.67%, 6/25/2030 |
|
|
4,188,428 |
|
2,000,000 |
|
Mellon Bank Home Equity Installment Loan 1999-1, Class B, 6.95%, 3/25/2015 |
|
|
1,884,540 |
|
1,794,634 |
1, 2 |
Merrill Lynch Mortgage Investors, Inc. 1998-FF3, Class BB, 5.50%, 11/20/2029 |
|
|
1,717,800 |
|
267,444 |
1 |
NC Finance Trust 1999-1, Class B, 8.75%, 1/25/2029 |
|
|
250,060 |
|
2,032,423 |
1 |
Option One Mortgage Securities Corp. 1999-3, Class CTFS, 10.80%, 12/26/2029 |
|
|
1,994,949 |
|
946,487 |
1 |
Option One Mortgage Securities Corp. 2000-5, Class CTFS, 10.65%, 10/26/2030 |
|
|
946,782 |
|
2,500,000 |
|
Salomon Brothers Mortgage Securities VII 1999-NC2, Class M3, 9.87%, 4/25/2029 |
|
|
2,500,000 |
|
3,000,000 |
|
Salomon Brothers Mortgage Securities VII 1999-NC3, Class M3, 9.72%, 7/25/2029 |
|
|
3,000,000 |
|
1,900,000 |
1 |
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
|
1,753,054 |
|
800,000 |
|
Saxon Asset Securities Trust 1999-1, Class BV1, 9.37%, 2/25/2029 |
|
|
799,272 |
|
1,131,401 |
|
Saxon Asset Securities Trust 1999-2, Class BV1A, 8.31%, 9/25/2001 |
|
|
1,126,547 |
|
22,497 |
|
The Money Store Home Equity Trust 1996-B, Class A7, 7.55%, 2/15/2020 |
|
|
22,494 |
|
11,666 |
|
The Money Store Home Equity Trust 1995-C, Class A3, 6.55%, 9/15/2021 |
|
|
11,633 |
|
70,000 |
|
The Money Store Home Equity Trust 1997-D, Class AV2, 6.49%, 10/15/2026 |
|
|
69,691 |
|
190,000 |
|
The Money Store Home Equity Trust 1998-B, Class AF4, 6.12%, 6/15/2021 |
|
|
186,635 |
|
500,000 |
|
UCFC Home Equity Loan 1997-C, Class A5, 6.88%, 9/15/2022 |
|
|
494,070 |
| ||||||
|
|
|
TOTAL |
|
|
33,061,247 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--continued |
|
|
|
|
|
|
Manufactured Housing--6.4% |
|
|
|
$ |
1,134,021 |
|
Bankamerica Manufactured Housing Contract Trust 1996-1, Class A3, 6.95%, 10/10/2026 |
|
$ |
1,135,268 |
|
900,579 |
|
Green Tree Financial Corp. 1993-4, Class B1, 7.20%, 1/15/2019 |
|
|
874,120 |
|
117,921 |
|
Green Tree Financial Corp. 1994-5, Class A4, 7.95%, 11/15/2019 |
|
|
118,418 |
|
500,000 |
|
Green Tree Financial Corp. 1994-7, Class A6, 8.95%, 3/15/2020 |
|
|
521,085 |
|
250,000 |
|
Green Tree Financial Corp. 1995-3, Class B1, 7.85%, 8/15/2025 |
|
|
239,230 |
|
517,386 |
|
Green Tree Financial Corp. 1996-10, Class A4, 6.42%, 11/15/2028 |
|
|
515,741 |
|
500,000 |
|
Green Tree Financial Corp. 1997-3, Class B1, 7.51%, 7/15/2028 |
|
|
460,755 |
|
401,112 |
|
Green Tree Financial Corp. 1997-4, Class A4, 6.65%, 2/15/2029 |
|
|
399,102 |
|
1,500,000 |
|
Green Tree Financial Corp. 1997-4, Class B1, 7.23%, 2/15/2029 |
|
|
1,361,010 |
|
454,899 |
|
Indymac Manufactured Housing Contract 1997-1, Class A3, 6.61%, 2/25/2028 |
|
|
451,437 |
|
4,000,000 |
1 |
Merit Securities Corp. 12, Class B1, 7.98%, 7/28/2033 |
|
|
3,640,000 |
|
2,000,000 |
|
Merit Securities Corp. 13, Class A4, 7.88%, 12/28/2033 |
|
|
2,002,186 |
|
2,392,434 |
|
Vanderbilt Mortgage Finance 1994-A, Class A3, 8.00%, 7/10/2019 |
|
|
2,416,311 |
|
500,000 |
|
Vanderbilt Mortgage Finance 1999-A, Class 2B2, 9.23%, 6/7/2016 |
|
|
492,700 |
| ||||||
|
|
|
TOTAL |
|
|
14,627,363 |
| ||||||
|
|
|
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $136,201,253) |
|
|
135,530,675 |
| ||||||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--16.1% |
|
|
|
|
|
|
Whole Loan--16.1% |
|
|
|
|
745,687 |
1 |
Bayview Financial Acquisition Trust 1998-1, Class MI1, 7.52%, 5/25/2029 |
|
|
711,199 |
|
472,848 |
1 |
Bayview Financial Acquisition Trust 1998-1, Class MII, 7.37%, 5/25/2029 |
|
|
462,948 |
|
613,105 |
|
Bear Stearns Mortgage Securities, Inc. 1996-8, Class B3, 8.00%, 11/25/2027 |
|
|
597,489 |
|
242,638 |
|
C-BASS ABS, LLC Series 1998-3, Class AF, 6.50%, 1/25/2033 |
|
|
232,932 |
|
3,094,302 |
1 |
C-BASS ABS, LLC Series 1999-3, Class B1, 4.14%, 2/3/2029 |
|
|
2,440,631 |
|
1,478,300 |
|
Countrywide Home Loans 1999-5, Class A1, 6.75%, 5/25/2028 |
|
|
1,430,884 |
|
1,668,812 |
|
GE Capital Mortgage Services, Inc. 1994-27, Class A3, 6.50%, 7/25/2024 |
|
|
1,655,804 |
|
63,149 |
|
GE Capital Mortgage Services, Inc. 1998-11, Class 1A13, 6.75%, 6/25/2028 |
|
|
62,713 |
|
789,454 |
|
Greenwich Capital Acceptance 1994-C, Class B1, 7.48%, 1/25/2025 |
|
|
782,016 |
|
2,200,000 |
|
Homeside Mortgage Securities, Inc. 1998-1, Class A2, 6.75%, 2/25/2028 |
|
|
2,061,851 |
|
100,000 |
1 |
Mellon Residential Funding Corp 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
|
76,422 |
|
630,091 |
|
Norwest Asset Securities Corp. 1998-2, Class A1, 6.50%, 2/25/2028 |
|
|
600,117 |
|
3,948,204 |
|
PNC Mortgage Securities Corp. 1999-5, Class 2A1, 6.75%, 7/25/2029 |
|
|
3,810,009 |
|
481,940 |
1 |
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
|
383,142 |
|
1,000,000 |
|
Residential Accredit Loans, Inc. 1997-QS12, Class A6, 7.25%, 11/25/2027 |
|
|
990,000 |
|
164,905 |
|
Residential Accredit Loans, Inc. 1998-QS14, Class A1, 6.75%, 10/25/2028 |
|
|
163,244 |
|
3,822,204 |
|
Residential Accredit Loans, Inc. 1998-QS14, Class A2, 6.50%, 10/25/2028 |
|
|
3,679,253 |
|
5,661,772 |
|
Residential Asset Securitization Trust 1997-A3, Class A13, 6.92%, 5/25/2027 |
|
|
5,490,560 |
Principal |
|
|
|
Value | ||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--continued |
|
|
|
|
|
|
Whole Loan--continued |
|
|
|
$ |
293,407 |
|
Residential Asset Securitization Trust 1998-A12, Class A1, 6.75%, 11/25/2028 |
|
$ |
290,155 |
|
393,068 |
|
Residential Asset Securitization Trust 1998-A5, Class A1, 6.75%, 6/25/2028 |
|
|
387,445 |
|
569,615 |
|
Residential Asset Securitization Trust 1998-A6, Class IA7, 6.75%, 7/25/2028 |
|
|
564,002 |
|
1,244,878 |
|
Residential Funding Mortgage Securities I 1994-S13, Class M1, 7.00%, 5/25/2024 |
|
|
1,195,618 |
|
1,080,844 |
|
Residential Funding Mortgage Securities I 1995-S4, Class M1, 8.00%, 4/25/2010 |
|
|
1,081,612 |
|
1,500,000 |
|
Residential Funding Mortgage Securities I 1996-S1, Class A11, 7.10%, 1/25/2026 |
|
|
1,444,485 |
|
480,202 |
|
Residential Funding Mortgage Securities I 1996-S25, Class M3, 7.75%, 12/25/2026 |
|
|
470,939 |
|
5,690,095 |
|
Structured Asset Securities Corp. 1999-ALS2, Class A2, 6.75%, 7/25/2029 |
|
|
5,467,928 |
| ||||||
|
|
|
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $37,749,264) |
|
|
36,533,398 |
| ||||||
|
|
|
CORPORATE BONDS--9.2% |
|
|
|
|
|
|
Finance - Automotive--0.9% |
|
|
|
|
2,000,000 |
|
Ford Motor Credit Co., Unsecd. Note, 7.75%, 11/15/2002 |
|
|
2,032,480 |
| ||||||
|
|
|
Finance - Retail--2.2% |
|
|
|
|
3,000,000 |
|
Banco Latinoamericano SA, Note, 7.20%, 5/15/2002 |
|
|
2,995,167 |
|
2,000,000 |
|
Wells Fargo Co., Note, 6.50%, 9/3/2002 |
|
|
1,993,540 |
| ||||||
|
|
|
TOTAL |
|
|
4,988,707 |
| ||||||
|
|
|
Financial Intermediaries--0.9% |
|
|
|
|
1,000,000 |
|
Lehman Brothers Holdings, Inc., Medium Term Note, 6.38%, 3/15/2001 |
|
|
996,870 |
|
1,000,000 |
|
Lehman Brothers Holdings, Inc., Sr. Sub. Note, 7.00%, 10/1/2002 |
|
|
994,320 |
| ||||||
|
|
|
TOTAL |
|
|
1,991,190 |
| ||||||
|
|
|
Technology Services--1.2% |
|
|
|
|
2,625,000 |
|
Unisys Corp., Sr. Note, 11.75%, 10/15/2004 |
|
|
2,782,500 |
| ||||||
|
|
|
Telecommunications & Cellular--1.0% |
|
|
|
|
2,000,000 |
|
MetroNet Communications Corp., Sr. Note, 12.00%, 8/15/2007 |
|
|
2,255,000 |
| ||||||
|
|
|
Utilities--3.0% |
|
|
|
|
2,000,000 |
|
Pennsylvania Power & Light Co., Note, 7.70%, 11/15/2002 |
|
|
1,975,960 |
|
5,000,000 |
1 |
Potomac Capital Investment Corp., Medium Term Note, 7.55%, 11/19/2001 |
|
|
4,998,100 |
| ||||||
|
|
|
TOTAL |
|
|
6,974,060 |
| ||||||
|
|
|
TOTAL CORPORATE BONDS (IDENTIFIED COST $21,055,019) |
|
|
21,023,937 |
| ||||||
|
|
|
U.S. TREASURY--1.0% |
|
|
|
|
2,153,040 |
|
U.S. Treasury Inflationary Index Note Series J-2002 3.625% 7/15/2002 (identified cost $2,148,330) |
|
|
2,151,016 |
| ||||||
|
|
|
PREFERRED STOCK--0.5% |
|
|
|
|
|
|
Telecommunications & Cellular--0.5% |
|
|
|
|
50,000 |
|
TCI Communications Financing I TR Originated Securities (identified cost $1,310,000) |
|
|
1,250,000 |
| ||||||
Shares |
|
|
|
Value | ||
|
|
|
MUTUAL FUNDS--16.9% |
|
|
|
|
31,142,546 |
|
Prime Value Obligations Fund, Institutional Shares |
|
$ |
31,142,546 |
|
924,145 |
|
High Yield Bond Portfolio |
|
|
7,291,497 |
| ||||||
|
|
|
TOTAL MUTUAL FUNDS (IDENTIFIED COST $39,127,904) |
|
|
38,434,043 |
| ||||||
|
|
|
TOTAL INVESTMENTS (IDENTIFIED COST $237,591,770)3 |
|
$ |
234,923,069 |
|
1 Denotes a restricted security which is subject to restrictions on resale under federal securities laws. At September 30, 2000, these securities amounted to $33,846,223 which represents 14.9% of net assets. Included in these amounts, securities which have been deemed liquid amounted to $1,717,800 which represents 0.76% of net assets.
2 Denotes a restricted security that has been deemed liquid by the Fund's Adviser according to criteria approved by the Fund's Board of Directors.
3 The cost of investments for federal tax purposes amounts to $237,609,063. The net unrealized depreciation of investments on a federal tax basis amounts to $2,685,994 which is comprised of $336,826 appreciation and $3,022,820 depreciation at September 30, 2000.
Note: The categories of investments are shown as a percentage of net assets ($227,417,889) at September 30, 2000.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Assets: |
|
|
|
|
|
|
|
Total investments in securities, at value (identified cost $237,591,770 and tax cost $237,609,063) |
|
|
|
|
$ |
234,923,069 |
|
Cash |
|
|
|
|
|
3,361 |
|
Income receivable |
|
|
|
|
|
1,347,089 |
|
Receivable for shares sold |
|
|
|
|
|
349,292 |
|
Receivable for daily variation margin |
|
|
|
|
|
227,693 |
|
| |||||||
TOTAL ASSETS |
|
|
|
|
|
236,850,504 |
|
| |||||||
Liabilities: |
|
|
|
|
|
|
|
Payable for investments purchased |
|
$ |
7,999,550 |
|
|
|
|
Payable for shares redeemed |
|
|
891,467 |
|
|
|
|
Income distribution payable |
|
|
443,534 |
|
|
|
|
Capital gain distribution payable |
|
|
848 |
|
|
|
|
Accrued expenses |
|
|
97,216 |
|
|
|
|
| |||||||
TOTAL LIABILITIES |
|
|
|
|
|
9,432,615 |
|
| |||||||
Net assets for 116,123,764 shares outstanding |
|
|
|
|
$ |
227,417,889 |
|
| |||||||
Net Assets Consist of: |
|
|
|
|
|
|
|
Paid in capital |
|
|
|
|
$ |
231,570,896 |
|
Net unrealized depreciation of investments and futures contracts |
|
|
|
|
|
(3,023,927 |
) |
Accumulated net realized loss on investments and futures contracts |
|
|
|
|
|
(1,329,124 |
) |
Accumulated undistributed net investment income |
|
|
|
|
|
200,044 |
|
| |||||||
TOTAL NET ASSETS |
|
|
|
|
$ |
227,417,889 |
|
| |||||||
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
|
|
|
|
|
|
|
Institutional Shares: |
|
|
|
|
|
|
|
$48,736,231 ÷ 24,874,657 shares outstanding |
|
|
|
|
|
$1.96 |
|
| |||||||
Institutional Service Shares: |
|
|
|
|
|
|
|
$178,681,658 ÷ 91,249,107 shares outstanding |
|
|
|
|
|
$1.96 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30, 2000
Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
$ |
1,049,064 |
|
Interest |
|
|
|
|
|
|
|
|
|
|
14,278,690 |
|
| ||||||||||||
TOTAL INCOME |
|
|
|
|
|
|
|
|
|
|
15,327,754 |
|
| ||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment adviser fee |
|
|
|
|
|
$ |
1,238,998 |
|
|
|
|
|
Administrative personnel and services fee |
|
|
|
|
|
|
155,000 |
|
|
|
|
|
Custodian fees |
|
|
|
|
|
|
14,469 |
|
|
|
|
|
Transfer and dividend disbursing agent fees and expenses |
|
|
|
|
|
|
34,768 |
|
|
|
|
|
Directors'/Trustees' fees |
|
|
|
|
|
|
4,296 |
|
|
|
|
|
Auditing fees |
|
|
|
|
|
|
11,286 |
|
|
|
|
|
Legal fees |
|
|
|
|
|
|
6,651 |
|
|
|
|
|
Portfolio accounting fees |
|
|
|
|
|
|
83,231 |
|
|
|
|
|
Distribution services fee--Institutional Service Shares |
|
|
|
|
|
|
285,086 |
|
|
|
|
|
Shareholder services fee--Institutional Shares |
|
|
|
|
|
|
18,292 |
|
|
|
|
|
Shareholder services fee--Institutional Service Shares |
|
|
|
|
|
|
497,957 |
|
|
|
|
|
Share registration costs |
|
|
|
|
|
|
39,880 |
|
|
|
|
|
Printing and postage |
|
|
|
|
|
|
23,273 |
|
|
|
|
|
Insurance premiums |
|
|
|
|
|
|
1,297 |
|
|
|
|
|
Taxes |
|
|
|
|
|
|
9,675 |
|
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
2,586 |
|
|
|
|
|
| ||||||||||||
TOTAL EXPENSES |
|
|
|
|
|
|
2,426,745 |
|
|
|
|
|
| ||||||||||||
Waivers and Reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
Waiver of investment adviser fee |
|
$ |
(726,050 |
) |
|
|
|
|
|
|
|
|
Waiver of distribution services fee--Institutional Service Shares |
|
|
(57,017 |
) |
|
|
|
|
|
|
|
|
Waiver of shareholder services fee--Institutional Shares |
|
|
(18,292 |
) |
|
|
|
|
|
|
|
|
Reimbursement of investment adviser fee |
|
|
(411 |
) |
|
|
|
|
|
|
|
|
| ||||||||||||
TOTAL WAIVERS AND EXPENSE REDUCTIONS |
|
|
|
|
|
|
(801,770 |
) |
|
|
|
|
| ||||||||||||
Net expenses |
|
|
|
|
|
|
|
|
|
|
1,624,975 |
|
| ||||||||||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
13,702,779 |
|
| ||||||||||||
Realized and Unrealized Gain (Loss) on Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments and futures contracts |
|
|
|
|
|
|
|
|
|
|
(1,212,173 |
) |
Net realized gain on capital gain distributions from other investment companies |
|
|
|
|
|
|
|
|
|
|
20,281 |
|
Net change in unrealized depreciation of investments and futures contracts |
|
|
|
|
|
|
|
|
|
|
(827,989 |
) |
| ||||||||||||
Net realized and unrealized loss on investments and futures contracts |
|
|
|
|
|
|
|
|
|
|
(2,019,881 |
) |
| ||||||||||||
Change in net assets resulting from operations |
|
|
|
|
|
|
|
|
|
$ |
11,682,898 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30 |
|
|
2000 |
|
|
|
1999 |
|
Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
13,702,779 |
|
|
$ |
4,746,007 |
|
Net realized gain (loss) on investments and futures contracts ($96,718 and $410,570, respectively, as computed for federal tax purposes) |
|
|
(1,191,892 |
) |
|
|
370,056 |
|
Net change in unrealized depreciation of investments and futures contracts |
|
|
(827,989 |
) |
|
|
(2,195,938 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS |
|
|
11,682,898 |
|
|
|
2,920,125 |
|
| ||||||||
Distributions to Shareholders: |
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(534,143 |
) |
|
|
-- |
|
Institutional Service Shares |
|
|
(13,052,092 |
) |
|
|
(4,663,861 |
) |
Distributions from net realized gain on investments and futures contracts |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
-- |
|
|
|
-- |
|
Institutional Service Shares |
|
|
(507,288 |
) |
|
|
-- |
|
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS |
|
|
(14,093,523 |
) |
|
|
(4,663,861 |
) |
| ||||||||
Share Transactions: |
|
|
|
|
|
|
|
|
Proceeds from sale of shares |
|
|
334,234,163 |
|
|
|
325,135,965 |
|
Net asset value of shares issued to shareholders in payment of distributions declared |
|
|
8,463,799 |
|
|
|
2,839,714 |
|
Cost of shares redeemed |
|
|
(308,900,965 |
) |
|
|
(130,300,447 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS |
|
|
33,796,997 |
|
|
|
197,675,232 |
|
| ||||||||
Change in net assets |
|
|
31,386,372 |
|
|
|
195,931,496 |
|
| ||||||||
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
196,031,517 |
|
|
|
100,021 |
|
| ||||||||
End of period (including undistributed net investment income of $200,044 and $83,500, respectively) |
|
$ |
227,417,889 |
|
|
$ |
196,031,517 |
|
|
See Notes which are an integral part of the Financial Statements
September 30, 2000
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 Ultrashort 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 investment objective of the Fund is to provide total return consistent with current income.
Effective February 22, 2000, the Fund began offering Institutional Shares in addition to the Institutional Service Shares previously offered.
On August 20, 1998, the Board of Directors (the "Directors") declared a stock split. The stock split was effected in the form of a dividend payable in shares of the Fund on October 21, 1998. The dividend consisted of 5.08 shares for one (1) share in order to establish a $2.00 per share net asset value. Per share data prior to October 21, 1998 has been restated to give effect to the split.
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.
U.S. government securities, listed corporate bonds, and other fixed income and asset backed securities are generally valued at the mean of the latest bid and asked price as furnished by an independent pricing service. Listed equity securities are valued at the last sale price reported on a national securities exchange. 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. Investments in other open-end regulated investment companies are valued at net asset value.
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.
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. 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. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
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 provision for federal tax is necessary.
Net capital losses of $1,667,062 attributable to security transactions incurred after October 31, 1999 are treated as arising on October 1, 2000, the first day of the Fund's next taxable year.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
The Fund purchases and sells financial futures contracts to manage cashflows, enhance yield, and to potentially reduce transaction costs. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a "variation margin" account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. For the year ended September 30, 2000, the Fund had realized gains of $80,902 on futures contracts.
Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with changes in the value of the underlying securities.
At September 30, 2000, the Fund had outstanding futures contracts as set forth below:
Expiration Date |
|
Contracts to Deliver/Receive |
|
Position |
|
Unrealized | |
December 2000 |
|
75 5-Year U.S Treasury Note Futures |
|
Short |
|
$ (13,476 |
) |
| |||||||
June 2001 |
|
60 90-Day Euro Dollar Futures |
|
Short |
|
3,750 |
|
| |||||||
December 2001 |
|
60 90-Day Euro Dollar Futures |
|
Short |
|
(18,000 |
) |
| |||||||
September 2002 |
|
150 90-Day Euro Dollar Futures |
|
Short |
|
(240,625 |
) |
| |||||||
September 2003 |
|
50 90-Day Euro Dollar Futures |
|
Short |
|
(86,875 |
) |
| |||||||
NET UNREALIZED APPRECIATION/(DEPRECIATION) ON FUTURES CONTRACTS |
|
|
|
$(355,226 |
) | ||
|
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 Board of 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, 2000 is as follows:
Security |
|
Acquisition |
|
Acquisition |
Bayview Financial Acquisition Trust 1998-1, Class MII, 7.37%, 5/25/2029 |
|
03/12/1999 |
|
$ 445,934 |
| ||||
Bayview Financial Acquisition Trust 1998-1, Class MI1, 7.52%, 5/25/2029 |
|
12/08/1998 |
|
742,131 |
| ||||
C-BASS, ABS, LLC Series 1999-3, Class B1, 4.14%, 2/3/2029 |
|
07/09/1999 |
|
2,507,812 |
| ||||
Circuit City Credit Card Master Trust 2000-1, Class CTFS, 7.82%, 2/15/2006 |
|
02/23/2000 |
|
3,000,000 |
| ||||
Copelco Capital Funding Corp. Series 2000-A, Class R1, 7.57%, 11/18/2005 |
|
04/14/2000 |
|
3,999,048 |
| ||||
Ford Credit Auto Owner Trust 2000-B, Class A4, 7.03%, 11/15/2003 |
|
04/13/2000 |
|
3,999,849 |
| ||||
MBNA Master Credit Card Trust 1999-K, Class C, 7.57%, 3/15/2005 |
|
10/22/1999 |
|
2,750,000 |
| ||||
Mellon Residential Funding Corp. 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
12/16/1998 |
|
88,669 |
| ||||
Merit Securities Corp. 12, Class B1, 7.98%, 7/28/2033 |
|
05/18/1999 |
|
3,912,969 |
| ||||
NC Finance Trust 1999-1, Class B, 8.75%, 1/25/2029 |
|
02/23/1999 |
|
265,137 |
| ||||
125 Home Loan Owner Trust 1998-1A, Class B-2, 12.16%, 2/15/2029 |
|
01/12/1999 |
|
462,356 |
| ||||
Option One Mortgage Securities Corp. 1999-3, Class CTFS, 10.80%, 12/26/2029 |
|
11/10/1999 |
|
1,956,451 |
| ||||
Option One Mortgage Securities Corp. 2000-5, Class CTFS, 10.65%, 10/26/2030 |
|
08/11/2000 |
|
901,685 |
| ||||
Potomac Capital Investment Corp., Medium Term Note, 7.55%, 11/19/2001 |
|
11/12/1999 |
|
5,000,000 |
| ||||
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
02/12/1999 |
|
410,718 |
| ||||
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
05/21/1999 |
|
1,756,434 |
|
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.
Investment transactions are accounted for on a trade date basis.
At September 30, 2000, par value shares ($0.001 per share) authorized were as follows:
Share Class Name |
|
Number of Par Value |
Institutional Shares |
|
1,000,000,000 |
Institutional Service Shares |
|
1,000,000,000 |
TOTAL |
|
2,000,000,000 |
Transactions in capital stock were as follows:
Period Ended September 30 |
|
20001 |
|
|
1999 |
| ||||||||
Institutional Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
| |
Shares sold |
|
26,215,389 |
|
|
$ |
51,362,056 |
|
|
-- |
|
|
|
-- |
|
Shares issued to shareholders in payment of distributions declared |
|
213,695 |
|
|
|
418,156 |
|
|
-- |
|
|
|
-- |
|
Shares redeemed |
|
(1,554,427 |
) |
|
|
(3,039,626 |
) |
|
-- |
|
|
|
-- |
|
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS |
|
24,874,657 |
|
|
$ |
48,740,586 |
|
|
-- |
|
|
|
-- |
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Service Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
| |
Shares sold |
|
144,009,760 |
|
|
$ |
282,872,107 |
|
|
162,741,803 |
|
|
$ |
325,135,965 |
|
Shares issued to shareholders in payment of distributions declared |
|
4,100,413 |
|
|
|
8,045,643 |
|
|
1,426,095 |
|
|
|
2,839,714 |
|
Shares redeemed |
|
(155,833,785 |
) |
|
|
(305,861,339 |
) |
|
(65,245,181 |
) |
|
|
(130,300,447 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE SHARE TRANSACTIONS |
|
(7,723,612 |
) |
|
$ |
(14,943,589 |
) |
|
98,922,717 |
|
|
$ |
197,675,232 |
|
| ||||||||||||||
NET CHANGE RESULTING FROM SHARE TRANSACTIONS |
|
17,151,045 |
|
|
$ |
33,796,997 |
|
|
98,922,717 |
|
|
$ |
197,675,232 |
|
|
1 For the period from February 22, 2000 (date of initial public investment) to September 30, 2000.
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment Adviser fee equal to 0.60% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee. The Adviser can modify or terminate this voluntary waiver at any time at its sole discretion.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in Prime Value Obligations Fund which is managed by the Adviser. The Adviser has agreed to reimburse certain investment adviser fees as a result of these transactions.
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 a scale that ranges from 0.15% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.
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 Fund 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 any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. FSSC may voluntarily choose to waive any portion of its fee. FSSC can modify or terminate this voluntary waiver at any time at its sole discretion.
FServ, through its subsidiary 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.
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.
During the period ended September 30, 2000, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $87,969,710 and $54,389,698, respectively.
Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding short-term securities, for the period ended September 30, 2000, were as follows:
Purchases |
|
$ |
119,022,397 |
| |||
Sales |
|
$ |
80,711,788 |
|
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments of the Federated Ultrashort Bond Fund (the "Fund") as of September 30, 2000, and the related statement of operations for the year then ended, the statement of changes in net assets for the years ended September 30, 2000 and 1999, and the financial highlights for the years 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 audit. The financial highlights for the period from October 3, 1998 (date of initial public investment) to September 30, 1999 were audited by other auditors whose report dated October 22, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 the securities owned at September 30, 2000, by correspondence with the custodian and brokers; where replies were not received, we performed other auditing procedures. 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, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Ultrashort Bond Fund as of September 30, 2000, the results of its operations, and the changes in its net assets and its financial highlights for the years ended September 30, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 13, 2000
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A Statement of Additional Information (SAI) dated November 30, 2000, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.
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You can obtain information about the Fund (including the SAI) by writing or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at [email protected] or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying charges.
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Federated
World-Class Investment Manager®
Federated Ultrashort
Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
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Investment Company Act File No. 811-7115
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Cusip 31428Q606
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G02481-01 (11/00)
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Federated is a registered mark of Federated Investors, Inc.
2000 ©Federated
Investors, Inc.
Federated Ultrashort Bond Fund (Institutional Service Shares)
APPENDIX:
The graphic presentation displayed here consists of a bar chart representing the annual total returns of the Funds Institutional Service Shares as of the calendar year-end for each of two years.
The 'y' axis reflects the "% Total Return" beginning with "0" and increasing in increments of 2% up to 8%.
The 'x' axis represents calculation periods from the earliest first full calendar year-end of the Funds Institutional Service Shares start of business through the calendar year ended December 31,1999. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1998 through 1999. The percentages noted are 7.15% and 4.62%, respectively.
A Portfolio of Federated Total Return Series, Inc.
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November 30, 2000
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This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Federated Ultrashort Bond Fund--Institutional Shares and Institutional Service Shares (Fund), dated November 30, 2000. Obtain the prospectus and the Annual Report's Management Discussion of Fund Performance without charge by calling 1-800-341-7400.
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Federated
World-Class Investment Manager®
Federated Ultrashort
Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
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G025145 (11/00)
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Federated is a registered mark of Federated Investors, Inc. 2000© Federated Investors, Inc.
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
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What Do Shares Cost? 9
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How is the Fund Sold? 9
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Subaccounting Services 9
Redemption in Kind 9
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Account and Share Information 10
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Tax Information 10
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Who Manages and Provides Services to the Fund? 11
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How Does the Fund Measure Performance? 14
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Who is Federated Investors, Inc.? 15
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Investment Ratings 17
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Addresses 19
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The Fund is a diversified portfolio of Federated Total Return Series, Inc. (Corporation). The Corporation is an open-end, management investment company that was established under the laws of the State of Maryland on October 11, 1993. The Corporation may offer separate series of shares representing interests in separate portfolios of securities. The Corporation changed its name from Insight Institutional Series, Inc. to Federated Total Return Series, Inc. on March 21, 1995. On August 20, 1998, the Board of Directors approved changing the name of the Fund from Federated Limited Duration Government Fund to Federated Ultrashort Bond Fund.
The Board of Directors (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to both classes of Shares. The Fund's investment adviser is Federated Investment Management Company (Adviser). Effective March 31, 1999, Federated Management, former Adviser to the Fund, became Federated Investment Management Company (formerly, Federated Advisers).
In pursuing its investment strategy, the Fund may invest in the following securities for any purpose that is consistent with its investment objective.
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the types of fixed income securities in which the Fund invests.
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
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Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a "GSE"). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
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The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine months. Companies typically issue commercial paper to pay for current expenditures. Most issuers constantly reissue their commercial paper and use the proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue to obtain liquidity in this fashion, its commercial paper may default. The short maturity of commercial paper reduces both the market and credit risks as compared to other debt securities of the same issuer.
DEMAND INSTRUMENTS
Demand instruments are corporate debt securities that the issuer must repay upon demand. Other demand instruments require a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond one year.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
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CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
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Sequential CMOs
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
PACs, TACs and Companion Classes
More sophisticated CMOs include planned amortization classes (PACs) and targeted amortization classes (TACs). PACs and TACs are issued with companion classes. PACs and TACs receive principal payments and prepayments at a specified rate. The companion classes receive principal payments and prepayments in excess of the specified rate. In addition, PACs will receive the companion classes' share of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs and TACs to control prepayment risks by increasing the risks to their companion classes.
IOs and POs
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CMOs may allocate interest payments to one class (Interest Only or IOs) and principal payments to another class (Principal Only or POs). POs increase in value when prepayment rates increase. In contrast, IOs decrease in value when prepayments increase, because the underlying mortgages generate less interest payments. However, IOs tend to increase in value when interest rates rise (and prepayments decrease), making IOs a useful hedge against interest rate risks.
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Floaters and Inverse Floaters
Another variant allocates interest payments between two classes of CMOs. One class (Floaters) receives a share of interest payments based upon a market index such as LIBOR. The other class (Inverse Floaters) receives any remaining interest payments from the underlying mortgages. Floater classes receive more interest (and Inverse Floater classes receive correspondingly less interest) as interest rates rise. This shifts prepayment and interest rate risks from the Floater to the Inverse Floater class, reducing the price volatility of the Floater class and increasing the price volatility of the Inverse Floater class.
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Z Classes and Residual Classes
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CMOs must allocate all payments received from the underlying mortgages to some class. To capture any unallocated payments, CMOs generally have an accrual (Z) class. Z classes do not receive any payments from the underlying mortgages until all other CMO classes have been paid off. Once this happens, holders of Z class CMOs receive all payments and prepayments. Similarly, REMICs have residual interests that receive any mortgage payments not allocated to another REMIC class.
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PRIVATELY ISSUED MORTGAGE BACKED SECURITIES
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Privately issued mortgage securities (including privately issued CMOs) are issued by private entities, rather than U.S. government agencies. These securities involve credit risks and liquidity risks. The Fund may invest in privately issued mortgage backed securities that are rated BBB or higher by an NRSRO.
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Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of commercial paper, notes, or pass-through certificates. Asset backed securities have prepayment risks. Like CMOs, asset backed securities may be structured like Floaters, Inverse Floaters, IOs and POs.
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Zero coupon securities do not pay interest or principal until final maturity unlike debt securities that provide periodic payments of interest (referred to as a coupon payment). Investors buy zero coupon securities at a price below the amount payable at maturity. The difference between the purchase price and the amount paid at maturity represents interest on the zero coupon security. Investors must wait until maturity to receive interest and principal, which increases the interest rate and credit risks of a zero coupon security. A zero coupon step-up security converts to a coupon security before final maturity.
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There are many forms of zero coupon securities. Some are issued at a discount and are referred to as zero coupon or capital appreciation bonds. Others are created from interest bearing bonds by separating the right to receive the bond's coupon payments from the right to receive the bond's principal due at maturity, a process known as coupon stripping. Treasury STRIPs, IOs and POs are the most common forms of stripped zero coupon securities. In addition, some securities give the issuer the option to deliver additional securities in place of cash interest payments, thereby increasing the amount payable at maturity. These are referred to as pay-in-kind or PIK securities.
Bank instruments are unsecured interest bearing deposits with banks. Bank instruments include bank accounts, time deposits, certificates of deposit and banker's acceptances. Yankee instruments are denominated in U.S. dollars and issued by U.S. branches of foreign banks. Eurodollar instruments are denominated in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.
Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
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Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
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Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:
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Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.
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In order to convert U.S. dollars into the currency needed to buy a foreign security, or to convert foreign currency received from the sale of a foreign security into U.S. dollars, the Fund may enter into spot currency trades. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.
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Foreign government securities generally consist of fixed income securities supported by national, state or provincial governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, such as international organizations designed or supported by governmental entities to promote economic reconstruction or development, international banking institutions and related government agencies. Examples of these include, but are not limited to, the International Bank for Reconstruction and Development (the World Bank), the Asian Development Bank, the European Investment Bank and the Inter-American Development Bank.
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Foreign government securities also include fixed income securities of quasi-governmental agencies that are either issued by entities owned by a national, state or equivalent government or are obligations of a political unit that are not backed by the national government's full faith and credit. Further, foreign government securities include mortgage-related securities issued or guaranteed by national, state or provincial governmental instrumentalities, including quasi-governmental agencies.
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Brady Bonds are U.S. dollar denominated debt obligations that foreign governments issue in exchange for commercial bank loans. The International Monetary Fund (IMF) typically negotiates the exchange to cure or avoid a default by restructuring the terms of the bank loans. The principal amount of some Brady Bonds is collateralized by zero coupon U.S. Treasury securities which have the same maturity as the Brady Bonds. However, neither the U.S. government nor the IMF has guaranteed the repayment of any Brady Bond.
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Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts.
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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate and currency risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
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The Fund may trade in the following types of derivative contracts:
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Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
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The Fund may buy and sell the following types of futures contracts: financial futures, foreign currency forward contracts, and futures on securities indices.
Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
The Fund may also write call options on portfolio securities and futures contracts to generate income from premiums, and in anticipation of a decrease or only limited increase in the value of the underlying asset. If a call written by the Fund is exercised, the Fund foregoes any possible profit from an increase in the market price of the underlying asset over the exercise price plus the premium received.
The Fund may not buy or sell futures or related options if the margin deposits and premiums paid for these securities would exceed 5% of the Fund's total assets.
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
INTEREST RATE SWAPS
Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
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CURRENCY SWAPS
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Currency swaps are contracts which provide for interest payments in different currencies. The parties might agree to exchange the notional principal amount as well.
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CAPS AND FLOORS
Caps and Floors are contracts in which one party agrees to make payments only if an interest rate or index goes above (Cap) or below (Floor) a certain level in return for a fee from the other party.
TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make payments of the total return from the underlying asset during the specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another underlying asset.
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Non-investment grade securities (junk bonds) are rated below BBB by an NRSRO. These bonds have greater credit risk than investment grade securities.
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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more NRSRO. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
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Repurchase agreements are transactions in which the Fund buys a security from a dealer or bank and agrees to sell the security back at a mutually agreed upon time and price. The repurchase price exceeds the sale price, reflecting the Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions, such as securities dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities subject to repurchase agreements. The Adviser or subcustodian will monitor the value of the underlying security each day to ensure that the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
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Reverse repurchase agreements are repurchase agreements in which the Fund is the seller (rather than the buyer) of the securities, and agrees to repurchase them at an agreed upon time and price. A reverse repurchase agreement may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In addition, reverse repurchase agreements create leverage risks because the Fund must repurchase the underlying security at a higher price, regardless of the market value of the security at the time of repurchase. The Fund may borrow an amount up to one third of the Fund's net assets (exclusive of such borrowings) for leverage purposes.
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Delayed delivery transactions, including when-issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default.
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TO BE ANNOUNCED SECURITIES (TBAS)
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As with other delayed delivery transactions, a seller agrees to issue a TBA security at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms. For example, in a TBA mortgage backed transaction, the Fund and the seller would agree upon the issuer, interest rate and terms of the underlying mortgages. The seller would not identify the specific underlying mortgages until it issues the security. TBA mortgage backed securities increase interest rate risks because the underlying mortgages may be less favorable than anticipated by the Fund.
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DOLLAR ROLLS
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Dollar rolls are transactions where the Fund sells mortgage backed securities with a commitment to buy similar, but not identical, mortgage backed securities on a future date at a lower price. Normally, one or both securities involved are TBA mortgage backed securities. Dollar rolls are subject to interest rate risks and credit risks. These transactions create leverage risks.
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The Fund may lend portfolio securities to borrowers that the Adviser deems creditworthy. In return, the Fund receives cash or liquid securities from the borrower as collateral. The borrower must furnish additional collateral if the market value of the loaned securities increases. Also, the borrower must pay the Fund the equivalent of any dividends or interest received on the loaned securities.
The Fund will reinvest cash collateral in securities that qualify as an acceptable investment for the Fund. However, the Fund must pay interest to the borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower. The Fund will not have the right to vote on securities while they are on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash collateral to a securities lending agent or broker.
Securities lending activities are subject to interest rate and credit risks.
<R>
In order to secure its obligations in connection with derivatives contracts or special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on derivative contracts or special transactions.
</R>
The SEC has granted an exemption that permits the Fund and all other funds advised by subsidiaries of Federated Investors, Inc. ("Federated funds") to lend and borrow money for certain temporary purposes directly to and from other Federated funds. Participation in this inter-fund lending program is voluntary for both borrowing and lending funds, and an inter-fund loan is only made if it benefits each participating fund. Federated administers the program according to procedures approved by the Fund's Board, and the Board monitors the operation of the program. Any inter-fund loan must comply with certain conditions set out in the exemption, which are designed to assure fairness and protect all participating funds.
For example, inter-fund lending is permitted only (a) to meet shareholder redemption requests, and (b) to meet commitments arising from "failed" trades. All inter-fund loans must be repaid in seven days or less. The Fund's participation in this program must be consistent with its investment policies and limitations, and must meet certain percentage tests. Inter-fund loans may be made only when the rate of interest to be charged is more attractive to the lending fund than market-competitive rates on overnight repurchase agreements (the "Repo Rate") and more attractive to the borrowing fund than the rate of interest that would be charged by an unaffiliated bank for short-term borrowings (the "Bank Loan Rate"), as determined by the Board. The interest rate imposed on inter-fund loans is the average of the Repo Rate and the Bank Loan Rate.
The Fund may invest its assets in securities of other investment companies, including the securities of affiliated money market funds, as an efficient means of carrying out its investment policies and managing its uninvested cash.
The Fund may invest in mortgage backed and high yield securities primarily by investing in another investment company (which is not available for general investment by the public) that owns those securities and that is advised by an affiliate of the Adviser. This other investment company is managed independently of the Fund and may incur additional administrative expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional expenses. The Fund may also invest in such securities directly.
<R>
There are many factors which may affect an investment in the Fund. The Fund's principal risks are described in its prospectus. Additional risk factors are outlined below.
</R>
<R>
</R>
<R>
</R>
The Fund's investment objective is to provide total return consistent with current income. The investment objective may not be changed by the Fund's Directors without shareholder approval.
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 Fund will not acquire more than 25% of its total assets in securities of issuers having their principal business activities in the same industry.
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.
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.
<R>
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.
</R>
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).
The Fund will not issue senior securities, except as permitted by its investment objective and policies.
The above limitations cannot be changed unless authorized by the Board and by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act of 1940 (1940 Act). The following limitations, however, may be changed by the Board without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective.
The Fund will not invest more than 15% of its net assets in illiquid securities, including certain restricted securities not determined to be liquid under criteria 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.
<R>
For purposes of the above 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."
</R>
Market values of the Fund's portfolio securities are determined as follows:
<R>
Prices provided by independent pricing services may be determined without relying exclusively on quoted prices and may consider institutional trading in similar groups of securities, yield, quality, stability, risk, coupon rate, maturity, type of issue, trading characteristics and other market data or factors. From time to time, when prices cannot be obtained from an independent pricing service, securities may be valued based on quotes from broker/dealers or other financial institutions that trade the securities.
</R>
The Fund's net asset value (NAV) per Share fluctuates and is based on the market value of all securities and other assets of the Fund.
The NAV for each class of Shares may differ 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.
Under the Distributor's Contract with the Fund, the Distributor (Federated Securities Corp.) offers Shares on a continuous, best-efforts basis.
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per share expenses, and provide cash for orderly portfolio management and Share redemptions. In addition, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee.
The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees.
Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Company (but not out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-related or shareholder services such as sponsoring sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software programs and systems. Also, investment professionals may be paid cash or promotional incentives, such as reimbursement of certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. These payments will be based upon the amount of Shares the investment professional sells or may sell and/or upon the type and nature of sales or marketing support furnished by the investment professional.
<R>
Certain investment professionals may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent may charge a fee based on the level of subaccounting services rendered. Investment professionals holding Shares in a fiduciary, agency, custodial or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services that may be related to the ownership of Shares. This information should, therefore, be read together with any agreement between the customer and the investment professional about the services provided, the fees charged for those services, and any restrictions and limitations imposed.
</R>
Although the Fund intends to pay Share redemptions in cash, it reserves the right, as described below, to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the 1940 Act, the Fund is obligated to pay Share redemptions to any one shareholder in cash only up to the lesser of $250,000 or 1% of the net assets represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash unless the Fund's Board determines that payment should be in kind. In such a case, the Fund will pay all or a portion of the remainder of the redemption in portfolio securities, valued in the same way as the Fund determines its NAV. The portfolio securities will be selected in a manner that the Fund's Board deems fair and equitable and, to the extent available, such securities will be readily marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving the portfolio securities and selling them before their maturity could receive less than the redemption value of the securities and could incur certain transaction costs.
Each share of the Fund gives the shareholder one vote in Director elections and other matters submitted to shareholders for vote. All Shares of the Corporation have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote.
Directors may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Corporation's outstanding shares of all series entitled to vote.
<R>
As of November 7, 2000, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Shares:
</R>
<R>Name and Address |
|
<R>Percentage and Name of |
<R>Charles Schwab & Co. Inc. |
|
<R>13.36% Institutional Shares |
<R>Catholic Institute of Greensburg Pennsylvania |
|
<R>7.96% Institutional Shares</R> |
<R>Catholic Institute of Greensburg Pennsylvania |
|
<R>5.43% Institutional Shares</R> |
<R>FTC & Co. |
|
<R>44.93% Institutional Shares</R> |
<R>STC & Co. |
|
<R>13.28% Institutional Shares</R> |
<R>TRUCOJO |
|
<R>6.30% Institutional Service Shares</R> |
<R>Federated Services Corp. |
|
<R>11.73% Institutional Service Shares</R> |
Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders.
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Corporation's other portfolios will be separate from those realized by the Fund.
<R>
</R>
<R>
If the Fund purchases foreign securities, their investment income may be subject to foreign withholding or other taxes that could reduce the return on these securities. Tax treaties between the United States and foreign countries, however, may reduce or eliminate the amount of foreign taxes to which the Fund would be subject. The effective rate of foreign tax cannot be predicted since the amount of Fund assets to be invested within various countries is uncertain. However, the Fund intends to operate so as to qualify for treaty-reduced tax rates when applicable.
</R>
<R>
Distributions from a Fund may be based on estimates of book income for the year. Book income generally consists solely of the coupon income generated by the portfolio, whereas tax-basis income includes gains or losses attributable to currency fluctuation. Due to differences in the book and tax treatment of fixed-income securities denominated in foreign currencies, it is difficult to project currency effects on an interim basis. Therefore, to the extent that currency fluctuations cannot be anticipated, a portion of distributions to shareholders could later be designated as a return of capital, rather than income, for income tax purposes, which may be of particular concern to simple trusts.
</R>
<R>
If the Fund invests in the stock of certain foreign corporations, they may constitute Passive Foreign Investment Companies (PFIC), and the Fund may be subject to Federal income taxes upon disposition of PFIC investments.
</R>
<R>
If more than 50% of the value of the Fund's assets at the end of the tax year is represented by stock or securities of foreign corporations, the Fund intends to qualify for certain Code stipulations that would allow shareholders to claim a foreign tax credit or deduction on their U.S. income tax returns. The Code may limit a shareholder's ability to claim a foreign tax credit. Shareholders who elect to deduct their portion of the Fund's foreign taxes rather than take the foreign tax credit must itemize deductions on their income tax returns.
</R>
<R>
The Board is responsible for managing the Corporation's business affairs and for exercising all the Corporation's powers except those reserved for the shareholders. Information about each Board member is provided below and includes each person's: name; address; birth date; present position(s) held with the Corporation; principal occupations for the past five years and positions held prior to the past five years; total compensation received as a Director from the Corporation for its most recent fiscal year, if applicable; and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Corporation is comprised of four funds and the Federated Fund Complex is comprised of 43 investment companies, whose investment advisers are affiliated with the Fund's Adviser.
</R>
<R>
As of November 7, 2000, the Fund's Board and Officers as a group owned less than 1% of the Fund's outstanding Institutional Service Shares and Institutional Shares.
</R>
Name |
|
Principal Occupations |
|
Aggregate |
|
Total |
John F. Donahue*# |
|
Chief Executive Officer and Director or Trustee of the Federated Fund Complex; Chairman and Director, Federated Investors, Inc.; Chairman, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd.; formerly: Trustee, Federated Investment Management Company and Chairman and Director, Federated Investment Counseling. |
|
$0 |
|
$0 for the Corporation |
Thomas G. Bigley |
|
Director or Trustee of the Federated Fund Complex; Director, Member of Executive Committee, Children's Hospital of Pittsburgh; Director and Chairman of Audit Committee, Robroy Industries, Inc. (coated steel conduits/computer storage equipment); formerly: Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc. (physician practice management); Director, Member of Executive Committee, University of Pittsburgh. |
|
$1,413.94 |
|
$116,760.63 for the |
John T. Conroy, Jr. |
|
Director or Trustee of the Federated Fund Complex; Chairman of the Board, Investment Properties Corporation; Partner or Trustee in private real estate ventures in Southwest Florida; formerly: President, Investment Properties Corporation; Senior Vice President, John R. Wood and Associates, Inc., Realtors; President, Naples Property Management, Inc. and Northgate Village Development Corporation. |
|
$1,445.29 |
|
$128,455.37 for the |
Nicholas P. Constantakis |
|
Director or Trustee of the Federated Fund Complex; Director and Chairman of the Audit Committee, Michael Baker Corporation (engineering, construction, operations and technical services); formerly: Partner, Andersen Worldwide SC. |
|
$1,413.94 |
|
$73,191.21 for the |
John F. Cunningham |
|
Director or Trustee of some of the Federated Fund Complex; Chairman,
President and Chief Executive Officer, Cunningham & Co., Inc.
(strategic business consulting); Trustee Associate, Boston College;
Director, Iperia Corp. communications/software); formerly: Director,
Redgate Communications and EMC Corporation (computer storage
systems). |
|
$1,313.72 |
|
$93,190.48 for the |
Lawrence D. Ellis, M.D.* |
|
Director or Trustee of the Federated Fund Complex; Professor of Medicine, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center -- Downtown; Hematologist, Oncologist and Internist, University of Pittsburgh Medical Center; Member, National Board of Trustees, Leukemia Society of America. |
|
$1,313.72 |
|
$116,760.63 for the |
Peter E. Madden |
|
Director or Trustee of the Federated Fund Complex; formerly:
Representative, Commonwealth of Massachusetts General Court; President,
State Street Bank and Trust Company and State Street Corporation.
|
|
$1,345.08 |
|
$109,153.60 for the |
|
|
|
|
|
|
|
Charles F. Mansfield, Jr. |
|
Director or Trustee of some of the Federated Fund Complex; Management
Consultant; formerly: Executive Vice President, Legal and External
Affairs, DVC Group, Inc. (formerly, Dugan Valva Contess, Inc.) (marketing,
communications, technology and consulting). |
|
$1,445.29 |
|
$102,573.91 for the in the Fund Complex |
John E. Murray, Jr., J.D., S.J.D.# |
|
Director or Trustee of the Federated Fund Complex; President, Law
Professor, Duquesne University; Consulting Partner, Mollica & Murray;
Director, Michael Baker Corp. (engineering, construction, operations and
technical services). |
|
$1,345.08 |
|
$128,455.37 for the |
Marjorie P. Smuts |
|
Director or Trustee of the Federated Fund Complex; Public
Relations/Marketing/Conference Planning. |
|
$1,313.72 |
|
$116,760.63 for the |
John S. Walsh |
|
Director or Trustee of some of the Federated Fund Complex; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc.; Director, Walsh & Kelly, Inc. (heavy highway contractor); formerly: Vice President, Walsh & Kelly, Inc. |
|
$1,313.72 |
|
$94,536.85 for the |
J. Christopher Donahue* |
|
President or Executive Vice President of the Federated Fund Complex; Director or Trustee of some of the Funds in the Federated Fund Complex; President, Chief Executive Officer and Director, Federated Investors, Inc.; President, Chief Executive Officer and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; President, Chief Executive Officer and Director, Federated Global Investment Management Corp.; President and Chief Executive Officer, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company; formerly: President, Federated Investment Counseling. |
|
$0 |
|
$0 for the Corporation |
William D. Dawson III |
|
Chief Investment Officer of this Fund and various other Funds in the Federated Fund Complex; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp., Federated Investment Management Company and Passport Research, Ltd.; Director, Federated Global Investment Management Corp. and Federated Investment Management Company; Registered Representative, Federated Securities Corp.; Portfolio Manager, Federated Administrative Services; Vice President, Federated Investors, Inc.; formerly: Executive Vice President and Senior Vice President, Federated Investment Counseling Institutional Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd. |
|
$0 |
|
$0 for the Corporation |
Edward C. Gonzales |
|
President, Executive Vice President and Treasurer of some of the Funds in the Federated Fund Complex; Vice Chairman, Federated Investors, Inc.; Trustee, Federated Administrative Services; formerly: Trustee or Director of some of the Funds in the Federated Fund Complex; CEO and Chairman, Federated Administrative Services; Vice President, Federated Investment Management Company, Federated Investment Counseling, Federated Global Investment Management Corp. and Passport Research, Ltd.; Director and Executive Vice President, Federated Securities Corp.; Director, Federated Services Company; Trustee, Federated Shareholder Services Company. |
|
$0 |
|
$0 for the Corporation |
John W. McGonigle |
|
Executive Vice President and Secretary of the Federated Fund Complex; Executive Vice President, Secretary and Director, Federated Investors, Inc.; formerly: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
|
$0 |
|
$0 for the Corporation |
|
|
|
|
|
|
|
Joseph M. Balestrino |
|
Mr. Balestrino joined Federated in 1986 and has been a Senior Portfolio Manager and Senior Vice President of the Fund's Adviser since 1998. He was a Portfolio Manager and a Vice President of the Fund's Adviser from 1995 to 1998. Mr. Balestrino served as a Portfolio Manager and an Assistant Vice President of the Adviser from 1993 to 1995. Mr. Balestrino is a Chartered Financial Analyst and received his Master's Degree in Urban and Regional Planning from the University of Pittsburgh. |
|
$0 |
|
$0 for the Corporation |
Richard J. Thomas |
|
Treasurer of the Federated Fund Complex; Senior Vice President, Federated Administrative Services; formerly: Vice President, Federated Administrative Services; held various management positions within Funds Financial Services Division of Federated Investors, Inc. |
|
$0 |
|
$0 for the Corporation |
|
|
|
|
|
|
|
<R>
* An asterisk denotes a Director who is deemed to be an interested person as defined in the1940 Act.
</R>
# A pound sign denotes a Member of the Board's Executive Committee, which handles the Board's responsibilities between its meetings.
<R>
Mr. Donahue is the father of J. Christopher Donahue, President and Director of the Corporation.
</R>
The Adviser conducts investment research and makes investment decisions for the Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Corporation or any Fund shareholder for any losses that may be sustained in the purchase, holding, or sale of any security or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Corporation.
Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of Fund Shares offered by the Distributor.
<R>
</R>
<R>
As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted codes of ethics. These codes govern securities trading activities of investment personnel, Fund Directors, and certain other employees. Although they do permit these people to trade in securities, including those that the Fund could buy, they also contain significant safeguards designed to protect the Fund and its shareholders from abuses in this area, such as requirements to obtain prior approval for, and to report, particular transactions.
</R>
When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. The Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. In selecting among firms believed to meet these criteria, the Adviser may give consideration to those firms which have sold or are selling Shares of the Fund and other funds distributed by the Distributor and its affiliates. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Fund's Board.
<R>
Investment decisions for the Fund are made independently from those of other accounts managed by the Adviser. When the Fund and one or more of those accounts invests in, or disposes of, the same security, available investments or opportunities for sales will be allocated among the Fund and the account(s) in a manner believed by the Adviser to be equitable. While the coordination and ability to participate in volume transactions may benefit the Fund, it is possible that this procedure could adversely impact the price paid or received and/or the position obtained or disposed of by the Fund.
</R>
Federated Services Company, a subsidiary of Federated, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Services Company provides these at the following annual rate of the average aggregate daily net assets of all Federated Funds as specified below:
Maximum Administrative Fee |
|
Average Aggregate Daily |
0.150 of 1% |
|
on the first $250 million |
0.125 of 1% |
|
on the next $250 million |
0.100 of 1% |
|
on the next $250 million |
0.075 of 1% |
|
on assets in excess of $750 million |
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses.
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank.
<R>
Federated Services Company, through its registered transfer agent subsidiary Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type and number of accounts and transactions made by shareholders.
</R>
<R>
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs its audit so that it may provide an opinion as to whether the Fund's financial statements and financial highlights are free of material misstatement in accordance with accounting principles generally accepted in the United States of America.
</R>
For the Year Ended September 30 |
|
<R>2000</R> |
|
<R>1999</R> |
<R> </R> |
<R>19981</R> |
Advisory Fee Earned |
|
<R>$1,238,998</R> |
|
<R>$447,691</R> |
<R> </R> |
<R>$17,399</R> |
| ||||||
Advisory Fee Reduction |
|
<R>726,461</R> |
|
<R>258,911</R> |
<R> </R> |
<R>17,399</R> |
| ||||||
<R>Administrative Fee</R> |
|
<R>155,000</R> |
|
<R>111,301</R> |
<R> </R> |
<R>143,535</R> |
| ||||||
<R>12b-1 Fee:</R> |
|
<R> </R> |
|
|
<R> </R> |
|
| ||||||
Institutional Service Shares |
|
<R>228,069</R> |
|
<R>--</R> |
|
<R>--</R> |
| ||||||
<R>Shareholder Services Fee:</R> |
|
<R> </R> |
|
|
|
|
| ||||||
Institutional Shares |
|
<R>0</R> |
|
<R>--</R> |
|
<R>--</R> |
| ||||||
Institutional Service Shares |
|
<R>497,957</R> |
|
<R>--</R> |
|
<R>--</R> |
|
<R>
1 For the period October 3, 1997 (date of initial public investment) to September 30, 1998. Institutional Shares were not offered until February 22, 2000.
</R>
Fees are allocated among classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable class of Shares.
The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information.
The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings fluctuate daily. Both net earnings and offering price per Share are factors in the computation of yield and total return.
<R>
Total returns for the Institutional Service Shares are given for the one-year and Start of Performance periods ended September 30, 2000. Yield is given for the 30-day period ended September 30, 2000.
|
|
30-Day Period |
|
1 Year |
|
Start of Performance on |
Institutional Service Shares: |
|
|
|
|
|
|
Total Return |
|
N/A |
|
5.95% |
|
6.30% |
Yield |
|
6.74% |
|
N/A |
|
N/A |
</R>
<R>
Cumulative total returns for Institutional Shares is given for the period ending September 30, 2000. Yield is given for the 30-day period ended September 30, 2000
|
|
30-Day Period |
|
1 Year |
|
Start of Performance on |
Institutional Shares: |
|
|
|
|
|
|
Total Return |
|
N/A |
|
N/A |
|
4.40% |
Yield |
|
7.09% |
|
N/A |
|
N/A |
</R>
Total return represents the change (expressed as a percentage) in the value of Shares over a specific period of time, and includes the investment of income and capital gains distributions.
The average annual total return for Shares is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of Shares owned at the end of the period by the NAV per Share at the end of the period. The number of Shares owned at the end of the period is based on the number of Shares purchased at the beginning of the period with $1,000, less any applicable sales charge, adjusted over the period by any additional Shares, assuming the annual reinvestment of all dividends and distributions.
When Shares of a Fund are in existence for less than a year, the Fund may advertise cumulative total return for that specific period of time, rather than annualizing the total return.
The yield of Shares is calculated by dividing: (i) the net investment income per Share earned by the Shares over a 30-day period; by (ii) the maximum offering price per Share on the last day of the period. This number is then annualized using semi-annual compounding. This means that the amount of income generated during the 30-day period is assumed to be generated each month over a 12-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by Shares because of certain adjustments required by the SEC and, therefore, may not correlate to the dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in connection with services provided in conjunction with an investment in Shares, the Share performance is lower for shareholders paying those fees.
Advertising and sales literature may include:
<R>
The Fund may compare its performance, or performance for the types of securities in which it invests, to a variety of other investments, including federally insured bank products such as bank savings accounts, certificates of deposit and Treasury bills.
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The Fund may quote information from reliable sources regarding individual countries and regions, world stock exchanges, and economic and demographic statistics.
You may use financial publications and/or indices to obtain a more complete view of Share performance. When comparing performance, you should consider all relevant factors such as the composition of the index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include:
Lipper Ultrashort Bond Fund Average ranks funds that invest 65% of their assets in investment grade debt issues and maintain a portfolio dollar-weighted average maturity between 91 and 365 days.
Salomon Smith Barney U.S. Treasury Benchmarks (On-The- Run) Indexes is composed of total returns for the current 1-year, 2-year, 3-year, 5-year, 10-year and 30-year on-the-run Treasury that has been in existence for the entire month.
Merrill Lynch 1-Year Treasury Index is an unmanaged index tracking 1-year U.S. Government securities.
Merrill Lynch 1--3 Year U.S. Treasury Index is an unmanaged index tracking short-term U.S. Government securities with maturities between 1 and 2.99 years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
Federated is dedicated to meeting investor needs by making structured, straightforward and consistent investment decisions. Federated investment products have a history of competitive performance and have gained the confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound methodologies backed by fundamental and technical research. At Federated, success in investment management does not depend solely on the skill of a single portfolio manager. It is a fusion of individual talents and state-of-the-art industry tools and resources. Federated's investment process involves teams of portfolio managers and analysts, and investment decisions are executed by traders who are dedicated to specific market sectors and who handle trillions of dollars in annual trading volume.
In the municipal sector, as of December 31, 1999, Federated managed 12 bond funds with approximately $2.0 billion in assets and 24 money market funds with approximately $13.1 billion in total assets. In 1976, Federated introduced one of the first municipal bond mutual funds in the industry and is now one of the largest institutional buyers of municipal securities. The Funds may quote statistics from organizations including The Tax Foundation and the National Taxpayers Union regarding the tax obligations of Americans.
In the equity sector, Federated has more than 29 years' experience. As of December 31, 1999, Federated managed 53 equity funds totaling approximately $18.3 billion in assets across growth, value, equity income, international, index and sector (i.e. utility) styles. Federated's value-oriented management style combines quantitative and qualitative analysis and features a structured, computer-assisted composite modeling system that was developed in the 1970s.
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In the corporate bond sector, as of December 31, 1999, Federated managed 13 money market funds and 29 bond funds with assets approximating $35.7 billion and $7.7 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 27 years of experience in the corporate bond sector. In 1972, Federated introduced one of the first high-yield bond funds in the industry. In 1983, Federated was one of the first fund managers to participate in the asset backed securities market, a market totaling more than $209 billion.
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In the government sector, as of December 31, 1999, Federated managed 9 mortgage backed, 11 government/agency and 16 government money market mutual funds, with assets approximating $4.7 billion, $1.6 billion and $34.1 billion, respectively. Federated trades approximately $450 million in U.S. government and mortgage backed securities daily and places approximately $25 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $43.8 billion in government funds within these maturity ranges.
In the money market sector, Federated gained prominence in the mutual fund industry in 1974 with the creation of the first institutional money market fund. Simultaneously, the company pioneered the use of the amortized cost method of accounting for valuing shares of money market funds, a principal means used by money managers today to value money market fund shares. Other innovations include the first institutional tax-free money market fund. As of December 31, 1999, Federated managed more than $83.0 billion in assets across 54 money market funds, including 16 government, 13 prime, 24 municipal and 1 euro-denominated with assets approximating $34.1 billion, $35.7 billion, $13.1 billion and $115 million, respectively.
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The Chief Investment Officers responsible for oversight of the various investment sectors within Federated are: U.S. equity and high yield--J. Thomas Madden; U.S. fixed income--William D. Dawson III; and global equities and fixed income--Henry A. Frantzen. The Chief Investment Officers are Executive Vice Presidents of the Federated advisory companies.
</R>
Thirty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $5 trillion to the more than 7,300 funds available, according to the Investment Company Institute.
Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include:
Federated meets the needs of approximately 1,160 institutional clients nationwide by managing and servicing separate accounts and mutual funds for a variety of purposes, including defined benefit and defined contribution programs, cash management, and asset/liability management. Institutional clients include corporations, pension funds, tax exempt entities, foundations/endowments, insurance companies, and investment and financial advisers. The marketing effort to these institutional clients is headed by John B. Fisher, President, Institutional Sales Division, Federated Securities Corp.
Other institutional clients include more than 1,600 banks and trust organizations. Virtually all of the trust divisions of the top 100 bank holding companies use Federated Funds in their clients' portfolios. The marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank Marketing & Sales.
Federated Funds are available to consumers through major brokerage firms nationwide--we have over 2,200 broker/dealer and bank broker/dealer relationships across the country--supported by more wholesalers than any other mutual fund distributor. Federated's service to financial professionals and institutions has earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for service quality measurement. The marketing effort to these firms is headed by James F. Getz, President, Broker/Dealer Sales Division, Federated Securities Corp.
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.
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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.
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B--Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
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CCC--Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
</R>
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.
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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.
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AA--Bonds which are rated AA are judged to be of high quality by all standards. Together with the AAA group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in AAA securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA--Bonds which are rated CA represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest-rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
AAA--Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
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:
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.
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-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.
Institutional Shares
Institutional Service Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
Federated Securities Corp.
Federated Investors Tower
1001 Liberty
Avenue
Pittsburgh, PA 15222-3779
Federated Investment Management Company
Federated Investors Tower
1001
Liberty Avenue
Pittsburgh, PA 15222-3779
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA
02266-8600
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA
02266-8600
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
Federated
World-Class Investment Manager®
A Portfolio of Federated Total Return Series, Inc.
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</R>
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November 30, 2000
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A mutual fund seeking to provide total return by investing at least 65% of its assets in a diversified portfolio of mortgage backed securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
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What are the Principal Securities in Which the Fund Invests? 6
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<R>
What are the Specific Risks of Investing in the Fund? 13
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<R>
What Do Shares Cost? 15
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<R>
How is the Fund Sold? 16
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<R>
How to Purchase Shares 16
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<R>
How to Redeem Shares 18
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Account and Share Information 20
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Who Manages the Fund? 21
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Financial Information 22
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Independent Auditors' Report 34
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The Fund's investment objective is to provide total return. The Fund's total return will consist of two components: 1) changes in the market value of its portfolio of securities (both realized and unrealized appreciation); and 2) income received from its portfolio of securities. The Fund expects that income will comprise the largest component of its total return. The Fund seeks to provide the appreciation component of total return by selecting those securities whose prices will, in the opinion of the investment adviser (Adviser), benefit from anticipated changes in economic and market conditions. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.
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The Fund pursues its investment objective by investing at least 65% of its assets in governmental and non-governmental investment grade mortgage backed securities.
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All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:
The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
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The bar chart shows the variability of the Fund's Institutional Shares total returns on a calendar year-end basis.
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The Fund's Institutional Shares are sold without a sales charge (load). The total returns displayed above are based upon net asset value.
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The Fund's Institutional Shares total return for the nine-month period from January 1, 2000 to September 30, 2000 was 7.24%.
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Within the period shown in the chart, the Fund's Institutional Shares highest quarterly return was 2.23% (quarter ended September 30, 1998). Its lowest quarterly return was (0.50%) (quarter ended June 30, 1999).
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The following table represents the Fund's Institutional Shares Average Annual Total Returns for the calendar periods ended December 31, 1999. The table shows the Fund's Institutional Shares total returns averaged over a period of years relative to the Lehman Brothers Mortgage-Backed Securities Index (LBMBS), a broad-based market index, and the Lipper U.S. Mortgage Fund Category (LUSMFC), an average of funds with similar objectives. The LBMBS is composed of all fixed rate, securitized mortgage pools issued by GNMA, FNMA and the FHLMC, including GNMA Graduated Payment Mortgages. Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling into the category indicated. Total returns for the indexes shown do not reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
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Calendar Period |
|
Fund |
|
<R>LBMBS</R> |
|
LUSMFC |
1 Year |
|
<R>2.23%</R> |
|
<R>1.86%</R> |
|
<R>0.43%</R> |
Start of Performance1 |
|
<R>6.74%</R> |
|
<R>5.95%</R> |
|
<R>5.06%</R> |
1 The Fund's Institutional Shares start of performance date was May 31, 1997.
Past performance does not necessarily predict future performance. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Shares.
Shareholder Fees |
|
|
Fees Paid Directly From Your Investment |
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) |
|
None |
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable) |
|
None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price) |
|
None |
Redemption Fee (as a percentage of amount redeemed, if applicable) |
|
None |
Exchange Fee |
|
None |
|
|
|
Annual Fund Operating Expenses (Before Waivers and Reimbursements)1 |
|
|
Expenses That are Deducted From Fund Assets (as a percentage of average net assets) |
|
|
Management Fee2 |
|
0.40% |
Distribution (12b-1) Fee |
|
None |
Shareholder Services Fee3 |
|
0.25% |
Other Expenses4 |
|
1.74% |
Total Annual Fund Operating Expenses |
|
2.39% |
1 Although not contractually obligated to do so, the Adviser and
shareholder services provider waived and reimbursed certain amounts. These
are shown below along with the net expenses the Fund actually paid for the
fiscal year ended September 30, 2000. | ||
Total Waivers and Reimbursements of Fund Expenses |
|
2.09% |
Total Actual Annual Fund Operating Expenses (after waivers and
reimbursements) |
|
0.30% |
2 The Adviser voluntarily waived the management fee. The Adviser can
terminate this voluntary waiver at any time. The management fee paid by
the Fund (after the voluntary waiver) was 0.00% for the fiscal year ended
September 30, 2000. | ||
3 The shareholder services fee has been voluntarily waived. This
voluntary waiver can be terminated at any time. The shareholder services
fee paid by the Fund's Institutional Shares (after the voluntary waiver)
was 0.00% for the fiscal year ended September 30, 2000. | ||
4 The Adviser voluntarily reimbursed certain operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement at any time. Total other expenses paid by the Fund (after voluntary reimbursement) were 0.30% for the fiscal year ended September 30, 2000. |
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This Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds.
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The Example assumes that you invest $10,000 in the Fund's Institutional Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Shares operating expenses are before waivers and reimbursements as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
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1 Year |
|
$ |
242 |
| |||
3 Years |
|
$ |
745 |
| |||
5 Years |
|
$ |
1,275 |
| |||
10 Years |
|
$ |
2,726 |
|
The Fund invests primarily in a portfolio of U.S. government and nongovernment investment grade, mortgage backed securities. A description of the various types of securities in which the Fund invests, and their risks, immediately follows this strategy section.
Mortgage backed securities generally offer higher relative yields versus comparable U.S. Treasury securities to compensate for prepayment risk. Prepayment risk is the unscheduled partial or complete payment of the principal outstanding on a mortgage loan (or asset backed loan) by the homeowner (or borrower). One important reason for prepayments is changes in market interest rates from the time of loan origination. The Adviser actively manages the Fund's portfolio, seeking the higher relative returns of mortgage and asset backed securities while attempting to limit the prepayment risk.
The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage backed securities with characteristics that make prepayments less likely. Characteristics that the Adviser may consider in selecting securities include the average interest rates of the underlying loans, the prior prepayment history of the loans and the federal agencies or private entities that back the loans. The Adviser attempts to assess the relative returns and risks of mortgage backed securities by analyzing how the timing, amount and division of cash flows from the pool of loans underlying the security might change in response to changing economic and market conditions.
The Adviser selects securities with longer or shorter duration based on its interest rate outlook. The Adviser generally shortens the portfolio's average duration when it expects interest rates to rise, and extends duration when it expects interest rates to fall. Duration measures the price sensitivity of a portfolio of fixed income securities to changes in interest rates. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions by analyzing a variety of factors such as:
The Adviser may use options and futures as a hedge to attempt to protect securities in its portfolio against decreases in value resulting from changes in interest rates. There is no assurance that the Adviser's efforts to forecast market interest rates, assess the impact of market interest rates on particular securities or hedge its portfolio through the use of options and futures will be successful.
The Adviser may use collateralized mortgage obligations (CMOs) to reduce prepayment risk. In addition, the Adviser may use combinations of CMOs and other mortgage backed securities to attempt to provide a higher yielding investment with lower sensitivity to fluctuations in interest rates. The Adviser may also attempt to take advantage of current and potential yield differentials existing from time to time between various mortgage and asset backed securities in order to increase the Fund's return, and may engage in dollar roll transactions for their potential to enhance income.
The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.
Prepayments of mortgage backed securities will cause the Fund to have an increased portfolio turnover rate. Portfolio turnover increases the Fund's trading costs and may have an adverse impact on the Fund's performance.
Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.
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Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
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A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
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The following describes the principal types of fixed income securities in which the Fund invests.
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Agency securities are issued or guaranteed by a federal agency or other government sponsored entity (GSE) acting under federal authority. The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as Treasury securities.
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The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risk depends upon the structure of the CMOs. However, the actual returns on any type of mortgage security depend upon the performance of the underlying pool of mortgages, which no one can predict and which will vary among pools. The Fund will invest only in CMOs that are rated A or better by a nationally recognized rating service.
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In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMOs. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
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More sophisticated CMOs include planned amortization classes (PACs) and targeted amortization classes (TACs). PACs and TACs are issued with companion classes. PACs and TACs receive principal payments and prepayments at a specified rate. The companion classes receive principal payments and prepayments in excess of the specified rate. In addition, PACs will receive the companion classes' share of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs and TACs to control prepayment risks by increasing the risks to their companion classes.
CMOs may allocate interest payments to one class (Interest Only or IOs) and principal payments to another class (Principal Only or POs). POs increase in value when prepayment rates increase. In contrast, IOs decrease in value when prepayments increase, because the underlying mortgages generate less interest payments. However, IOs tend to increase in value when interest rates rise (and prepayments decrease), making IOs a useful hedge against interest rate risks.
Another variant allocates interest payments between two classes of CMOs. One class (Floaters) receives a share of interest payments based upon a market index such as LIBOR. The other class (Inverse Floaters) receives any remaining interest payments from the underlying mortgages. Floater classes receive more interest (and Inverse Floater classes receive correspondingly less interest) as interest rates rise. This shifts prepayment and interest rate risks from the Floater to the Inverse Floater class, reducing the price volatility of the Floater class and increasing the price volatility of the Inverse Floater class.
Non-governmental mortgage backed securities (including non-governmental CMOs) are issued by private entities, rather than by U.S. government agencies. These securities involve credit risks and liquidity risks. The Fund may invest in non-governmental mortgage backed securities that are rated BBB or higher by a nationally recognized statistical rating agency.
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Asset backed securities are payable from pools of obligations other than first mortgages. Most asset backed securities involve consumer or commercial debts. The Fund will purchase only mortgage related asset backed securities such as home equity loans, secured mortgages and manufactured housing obligations. Asset backed securities may take the form of commercial paper, notes, or pass-through certificates. Asset backed securities have prepayment risks. Like CMOs, asset backed securities may be structured like Floaters, Inverse Floaters, IOs and POs. Also, asset backed securities may be issued by a private entity and, although these securities must be rated investment grade, they present credit risks.
</R>
Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
<R>
Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
</R>
Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
The Fund may trade in the following types of derivative contracts:
Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
<R>
The Fund may buy/sell the following types of futures contracts: financial futures contracts.
</R>
Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
Delayed delivery transactions, including when-issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default.
As with other delayed delivery transactions, a seller agrees to issue a TBA security at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms. For example, in a TBA mortgage backed transaction, the Fund and the seller would agree upon the issuer, interest rate and terms of the underlying mortgages. The seller would not identify the specific underlying mortgages until it issues the security. TBA mortgage backed securities increase interest rate risks because the underlying mortgages may be less favorable than anticipated by the Fund.
Dollar rolls are transactions where the Fund sells mortgage backed securities with a commitment to buy similar, but not identical, mortgage backed securities on a future date at a lower price. Normally, one or both securities involved are TBA mortgage backed securities. Dollar rolls are subject to interest rate and credit risks.
Repurchase agreements are transactions in which the Fund buys a security from a dealer or bank and agrees to sell the security back at a mutually agreed upon time and price. The repurchase price exceeds the sale price, reflecting the Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions, such as securities dealers, deemed creditworthy by the Adviser.
<R>
The Fund's custodian or subcustodian will take possession of the securities subject to repurchase agreements. The Adviser or subcustodian will monitor the value of the underlying security each day to ensure that the value of the security always equals or exceeds the repurchase price.
</R>
<R>
Repurchase agreements are subject to credit risks.
</R>
In order to secure its obligations in connection with special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on special transactions.
<R>
The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade.
</R>
If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
Prices of fixed income securities rise and fall in response to interest rate changes in the interest paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
<R>
Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
</R>
<R>
Many fixed income securities receive credit ratings from services such as Standard & Poor's and Moody's Investor Services, Inc. These services assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment.
</R>
<R>
Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline.
</R>
<R>
Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.
</R>
<R>
Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due), payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
</R>
<R>
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
</R>
<R>
Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
</R>
<R>
Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
</R>
Liquidity risk refers to the possibility that the Fund may not be able to sell a security when it wants to. If this happens, the Fund will be required to continue to hold the security, and the Fund could incur losses.
Trading opportunities are more limited for CMOs that have complex terms or that are not widely held. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
CMOs with complex or highly variable prepayment terms, such as companion classes, IOs, POs and Inverse Floaters, generally entail greater market, prepayment and liquidity risks than other mortgage backed securities. For example, their prices are more volatile and their trading market may be more limited.
<R>
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus) it is processed at the next calculated net asset value (NAV). The Fund does not charge a front-end sales charge. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values fixed income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost.
</R>
The required minimum initial investment for Fund Shares is $100,000. 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 is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
The Fund offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different sales charges and other expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.
<R>
The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to accounts for which financial institutions act in a fiduciary or agency capacity or to individuals, directly or through investment professionals.
</R>
The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
You may purchase Shares through an investment professional or directly from the Fund. The Fund reserves the right to reject any request to purchase Shares.
<R>
You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.
</R>
An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are restricted.
Make your check payable to The Federated Funds, note your account number on the check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will not accept third-party checks (checks originally payable to someone other than you or The Federated Funds).
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You should redeem Shares:
Submit your redemption request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.
<R>
You may redeem Shares by calling the Fund at 1-800-341-7400.
</R>
<R>
If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time), you will receive a redemption amount based on that day's NAV.
</R>
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
Call your investment professional or the Fund if you need special instructions.
Signatures must be guaranteed if:
<R>
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.
</R>
Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:
Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.
The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Fund does not issue share certificates.
You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.
The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the Fund declares a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.
Fund distributions are expected to be both dividends and capital gains. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.
The Board of Directors governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. The Adviser's address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
<R>
The Adviser and other subsidiaries of Federated advise approximately 176 mutual funds and separate accounts, which totaled approximately $125 billion in assets as of December 31, 1999. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,900 employees. More than 4,000 investment professionals make Federated Funds available to their customers.
</R>
<R>
</R>
<R>
Donald T. Ellenberger has been the Fund's Portfolio Manager since 1997. Mr. Ellenberger joined Federated in 1996 as a Portfolio Manager and a Vice President of a Federated advisory subsidiary. He has been a Vice President of the Fund's Adviser since 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.
</R>
<R>
Kathleen M. Foody-Malus has been the Fund's Portfolio Manager since inception. She is Vice President of the Corporation. Ms. Foody-Malus joined Federated in 1983 and has been a Senior Portfolio Manager since 1996 and a Vice President of the Fund's Adviser since 1993. She was a Portfolio Manager and a Vice President of the Fund's Adviser from 1993 to 1996. Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the University of Pittsburgh.
</R>
<R>
Edward J. Tiedge has been the Fund's Portfolio Manager since inception. He is Vice President of the Corporation. Mr. Tiedge joined Federated in 1993 as a Senior Analyst and has been a Portfolio Manager and a Vice President of the Fund's Adviser since 1996. He served as Portfolio Manager and an Assistant Vice President of the Fund's Adviser in 1995, and an Investment Analyst during 1993 and 1994. Mr. Tiedge is a Chartered Financial Analyst and received his M.S. in Industrial Administration from Carnegie Mellon University.
</R>
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.
<R>
</R>
The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years, or since inception, if the life of the Fund is shorter. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.
<R>
This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus.
</R>
(For a Share Outstanding Throughout Each Period)
Reference is made to the Independent Auditors' Report, on page 34.
Year Ended September 30 |
|
2000 |
|
|
1999 |
1 |
|
1998 |
|
|
1997 |
2 |
Net Asset Value, Beginning of Period |
|
$9.77 |
|
|
$10.11 |
|
|
$10.26 |
|
|
$10.00 |
|
Income From Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
0.68 |
|
|
0.67 |
|
|
0.95 |
|
|
0.25 |
|
Net realized and unrealized gain (loss) on investments |
|
0.08 |
|
|
(0.35 |
) |
|
(0.15 |
) |
|
0.26 |
|
| ||||||||||||
TOTAL FROM INVESTMENT OPERATIONS |
|
0.76 |
|
|
0.32 |
|
|
0.80 |
|
|
0.51 |
|
| ||||||||||||
Less Distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
(0.68 |
) |
|
(0.66 |
) |
|
(0.95 |
) |
|
(0.25 |
) |
Distributions from net realized gain on investments |
|
(0.01 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
| ||||||||||||
TOTAL DISTRIBUTIONS |
|
(0.69 |
) |
|
(0.66 |
) |
|
(0.95 |
) |
|
(0.25 |
) |
| ||||||||||||
Net Asset Value, End of Period |
|
$9.84 |
|
|
$ 9.77 |
|
|
$10.11 |
|
|
$10.26 |
|
| ||||||||||||
Total Return3 |
|
8.11 |
% |
|
3.20 |
% |
|
8.25 |
% |
|
5.12 |
% |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Expenses |
|
0.30 |
% |
|
0.30 |
% |
|
0.26 |
% |
|
0.00 |
%4 |
| ||||||||||||
Net investment income |
|
7.07 |
% |
|
6.63 |
% |
|
9.42 |
% |
|
7.37 |
%4 |
| ||||||||||||
Expense waiver/reimbursement5 |
|
2.09 |
% |
|
3.65 |
% |
|
7.22 |
% |
|
12.25 |
%4 |
| ||||||||||||
Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net assets, end of period (000 omitted) |
|
$36,722 |
|
|
$17,049 |
|
|
$5,224 |
|
|
$5,145 |
|
| ||||||||||||
Portfolio turnover |
|
66 |
% |
|
150 |
% |
|
147 |
% |
|
9 |
% |
|
1 For the year ended September 30, 1999, the fund was audited by Deloitte & Touche LLP. Each of the previous years was audited by other auditors.
2 Reflects operations for the period from May 31, 1997 (start of performance) to September 30, 1997.
3 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
4 Computed on an annualized basis.
5 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--4.7% |
|
|
|
|
|
|
Home Equity Loans--4.7% |
|
|
|
$ |
500,000 |
|
Conseco Finance 2000-D, Class A5, 8.410%, 12/15/2025 |
|
$ |
509,844 |
|
200,000 |
|
Mellon Bank Home Equity Installment Loan 98-1, 6.950%, 3/25/2015 |
|
|
188,454 |
|
12,498,115 |
|
New Century Home Equity Loan Trust 99, Class C3 (Interest Only), 1.935%, 6/25/2002 |
|
|
373,956 |
|
490,574 |
|
Residential Funding Mortgage Securities I 98-S31, Class A1, 6.500%, 12/25/2028 |
|
|
466,918 |
|
4,632,654 |
|
Salomon Brothers Mortgage Sec. VII 4 (Interest Only), 2.547%, 12/25/2027 |
|
|
220,051 |
| ||||||
|
|
|
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $1,813,053) |
|
|
1,759,223 |
| ||||||
|
|
|
LONG-TERM OBLIGATIONS--91.2% |
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation--42.0% |
|
|
|
|
2,700,110 |
|
6.000%, 1/1/2029 - 11/1/2029 |
|
|
2,526,277 |
|
3,495,294 |
|
6.500%, 9/1/2028 - 2/1/2029 |
|
|
3,362,120 |
|
5,818,173 |
|
7.000%, 6/1/2028 - 9/1/2030 |
|
|
5,707,648 |
|
3,991,080 |
1 |
7.500%, 2/1/2027 - 8/1/2030 |
|
|
3,990,458 |
| ||||||
|
|
|
TOTAL |
|
|
15,586,503 |
| ||||||
|
|
|
Federal Home Loan Mortgage Corporation-Debenture--4.3% |
|
|
|
|
1,700,000 |
|
5.750%, 3/15/2009 |
|
|
1,587,290 |
| ||||||
|
|
|
Federal Home Loan Mortgage Corporation REMIC--3.5% |
|
|
|
|
1,123,173 |
|
Series 197, (Principal Only), 4/1/2028 |
|
|
710,058 |
|
2,447,593 |
|
Series 2139, (Interest Only), 6.500%, 10/15/2026 |
|
|
579,774 |
| ||||||
|
|
|
TOTAL |
|
|
1,289,832 |
| ||||||
|
|
|
Federal National Mortgage Association--23.4% |
|
|
|
|
2,439,791 |
|
6.000%, 6/1/2014 -- 11/1/2030 |
|
|
2,283,283 |
|
2,540,458 |
|
6.500%, 11/1/2015 -- 11/1/2030 |
|
|
2,450,575 |
|
1,884,641 |
|
7.000%, 4/1/2029 - 10/1/2030 |
|
|
1,847,259 |
|
1,000,000 |
1 |
7.500%, 11/1/2030 |
|
|
998,120 |
|
1,100,237 |
|
8.000%, 12/1/2026 -- 11/1/2030 |
|
|
1,116,025 |
| ||||||
|
|
|
TOTAL |
|
|
8,695,262 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
LONG-TERM OBLIGATIONS--continued |
|
|
|
|
|
|
Federal National Mortgage Association REMIC--2.6% |
|
|
|
$ |
49,469,236 |
|
FNGT, Series GT 99-T2-X, 0.667%, (Interest Only), 1/19/2039 |
|
$ |
966,184 |
| ||||||
|
|
|
Government National Mortgage Association--15.4% |
|
|
|
|
1,703,836 |
|
6.500%, 5/15/2024 - 4/15/2029 |
|
|
1,648,606 |
|
2,075,701 |
|
7.000%, 9/15/2028 - 6/15/2029 |
|
|
2,044,812 |
|
1,030,150 |
1 |
7.500%, 9/15/2030 |
|
|
1,033,364 |
|
999,901 |
|
8.000%, 9/15/2030 |
|
|
1,018,019 |
| ||||||
|
|
|
TOTAL |
|
|
5,744,801 |
| ||||||
|
|
|
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $33,831,385) |
|
|
33,869,872 |
| ||||||
|
|
|
MUTUAL FUNDS--9.9% |
|
|
|
|
2,894,556 |
|
Government Obligations Fund |
|
|
2,894,556 |
|
77,000 |
|
Income Opportunities Fund 2000, Inc. |
|
|
765,188 |
| ||||||
|
|
|
TOTAL MUTUAL FUNDS (IDENTIFIED COST $3,650,119) |
|
|
3,659,744 |
| ||||||
|
|
|
REPURCHASE AGREEMENT--8.6%2 |
|
|
|
$ |
3,200,000 |
3 |
Goldman Sachs Group, Inc., 6.520%, dated 9/13/2000, due 10/16/2000 (at amortized cost) |
|
|
3,200,000 |
| ||||||
|
|
|
TOTAL INVESTMENTS (IDENTIFIED COST $42,494,557)4 |
|
$ |
42,488,839 |
|
1 All or a portion of this security is subject to a future dollar roll transaction.
2 The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of the purchase. The investment in the repurchase agreement is through participation in joint accounts with other Federated funds.
3 Although final maturity falls beyond seven days, a liquidity feature is included in each transaction to permit termination of the repurchase agreement within seven days.
4 The cost of investments for federal tax purposes amounts to $42,494,557. The net unrealized depreciation of investments on a federal tax basis amounts to $5,718 which is comprised of $268,625 appreciation and $274,343 depreciation at September 30, 2000.
Note: The categories of investments are shown as a percentage of net assets ($37,128,517) at September 30, 2000.
The following acronym is used throughout this portfolio.
REMIC |
--Real Estate Mortgage Investment Conduit |
See Notes which are an integral part of the Financial Statements
September 30, 2000
Assets: |
|
|
|
|
|
|
|
Total investments in securities, at value (identified and tax cost $42,494,557) |
|
|
|
|
$ |
42,488,839 |
|
Income receivable |
|
|
|
|
|
180,191 |
|
Receivable for investments sold |
|
|
|
|
|
867,939 |
|
Receivable for shares sold |
|
|
|
|
|
227,090 |
|
| |||||||
TOTAL ASSETS |
|
|
|
|
|
43,764,059 |
|
| |||||||
Liabilities: |
|
|
|
|
|
|
|
Payable for investments purchased |
|
$ |
3,244,534 |
|
|
|
|
Payable for shares redeemed |
|
|
6,475 |
|
|
|
|
Income distribution payable |
|
|
181,076 |
|
|
|
|
Payable for dollar roll transactions |
|
|
3,187,352 |
|
|
|
|
Accrued expenses |
|
|
16,105 |
|
|
|
|
| |||||||
TOTAL LIABILITIES |
|
|
|
|
|
6,635,542 |
|
| |||||||
Net assets for 3,774,138 shares outstanding |
|
|
|
|
$ |
37,128,517 |
|
| |||||||
Net Assets Consist of: |
|
|
|
|
|
|
|
Paid in capital |
|
|
|
|
$ |
37,212,025 |
|
Net unrealized depreciation of investments |
|
|
|
|
|
(5,718 |
) |
Accumulated net realized loss on investments |
|
|
|
|
|
(77,790 |
) |
| |||||||
TOTAL NET ASSETS |
|
|
|
|
$ |
37,128,517 |
|
| |||||||
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
|
|
|
|
|
|
|
Institutional Shares: |
|
|
|
|
|
|
|
$36,722,461 ÷ 3,732,866 shares outstanding |
|
|
|
|
|
$9.84 |
|
| |||||||
Institutional Service Shares: |
|
|
|
|
|
|
|
$406,056 ÷ 41,272 shares outstanding |
|
|
|
|
|
$9.84 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30, 2000
Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
$ |
37,076 |
|
Interest (net of dollar roll expense of $41,587) |
|
|
|
|
|
|
|
|
|
|
1,323,928 |
|
| ||||||||||||
TOTAL INCOME |
|
|
|
|
|
|
|
|
|
|
1,361,004 |
|
| ||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment adviser fee |
|
|
|
|
|
$ |
73,947 |
|
|
|
|
|
Administrative personnel and services fee |
|
|
|
|
|
|
155,000 |
|
|
|
|
|
Custodian fees |
|
|
|
|
|
|
4,808 |
|
|
|
|
|
Transfer and dividend disbursing agent fees and expenses |
|
|
|
|
|
|
36,278 |
|
|
|
|
|
Directors'/Trustees' fees |
|
|
|
|
|
|
2,770 |
|
|
|
|
|
Auditing fees |
|
|
|
|
|
|
10,164 |
|
|
|
|
|
Legal fees |
|
|
|
|
|
|
2,882 |
|
|
|
|
|
Portfolio accounting fees |
|
|
|
|
|
|
56,684 |
|
|
|
|
|
Distribution services fee--Institutional Service Shares |
|
|
|
|
|
|
1,295 |
|
|
|
|
|
Shareholder services fee--Institutional Shares |
|
|
|
|
|
|
44,922 |
|
|
|
|
|
Shareholder services fee--Institutional Service Shares |
|
|
|
|
|
|
1,295 |
|
|
|
|
|
Share registration costs |
|
|
|
|
|
|
30,582 |
|
|
|
|
|
Printing and postage |
|
|
|
|
|
|
18,662 |
|
|
|
|
|
Insurance premiums |
|
|
|
|
|
|
1,181 |
|
|
|
|
|
Taxes |
|
|
|
|
|
|
2,467 |
|
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
1,094 |
|
|
|
|
|
| ||||||||||||
TOTAL EXPENSES |
|
|
|
|
|
|
444,031 |
|
|
|
|
|
| ||||||||||||
Waivers and Reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
Waiver of investment adviser fee |
|
$ |
(73,947 |
) |
|
|
|
|
|
|
|
|
Waiver of distribution services fee--Institutional Service Shares |
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
Waiver of shareholder services fee--Institutional Shares |
|
|
(44,922 |
) |
|
|
|
|
|
|
|
|
Reimbursement of investment adviser fee |
|
|
(513 |
) |
|
|
|
|
|
|
|
|
Reimbursement of other operating expenses |
|
|
(267,103 |
) |
|
|
|
|
|
|
|
|
| ||||||||||||
TOTAL WAIVERS AND REIMBURSEMENTS |
|
|
|
|
|
|
(387,521 |
) |
|
|
|
|
| ||||||||||||
Net expenses |
|
|
|
|
|
|
|
|
|
|
56,510 |
|
| ||||||||||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
1,304,494 |
|
| ||||||||||||
Realized and Unrealized Gain (Loss) on Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments |
|
|
|
|
|
|
|
|
|
|
(39,521 |
) |
Net change in unrealized depreciation of investments |
|
|
|
|
|
|
|
|
|
|
233,780 |
|
| ||||||||||||
Net realized and unrealized gain on investments |
|
|
|
|
|
|
|
|
|
|
194,259 |
|
| ||||||||||||
Change in net assets resulting from operations |
|
|
|
|
|
|
|
|
|
$ |
1,498,753 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30 |
|
|
2000 |
|
|
|
1999 |
|
Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
1,304,494 |
|
|
$ |
685,841 |
|
Net realized gain (loss) on investments ($15,104 and $440, respectively, as computed for federal tax purposes) |
|
|
(39,521 |
) |
|
|
(9,453 |
) |
Net change in unrealized appreciation (depreciation) of investments |
|
|
233,780 |
|
|
|
(394,001 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS |
|
|
1,498,753 |
|
|
|
282,387 |
|
| ||||||||
Distributions to Shareholders: |
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(1,276,180 |
) |
|
|
(669,956 |
) |
Institutional Service Shares |
|
|
(34,437 |
) |
|
|
(10,121 |
) |
Distributions from net realized gain on investments |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(14,548 |
) |
|
|
-- |
|
Institutional Service Shares |
|
|
(556 |
) |
|
|
-- |
|
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS |
|
|
(1,325,721 |
) |
|
|
(680,077 |
) |
| ||||||||
Share Transactions: |
|
|
|
|
|
|
|
|
Proceeds from sale of shares |
|
|
26,019,845 |
|
|
|
11,435,668 |
|
Proceeds from shares issued in connection with the tax-free transfer of assets from a Common Trust Fund |
|
|
-- |
|
|
|
3,204,570 |
|
Net asset value of shares issued to shareholders in payment of distributions declared |
|
|
130,106 |
|
|
|
96,174 |
|
Cost of shares redeemed |
|
|
(6,772,544 |
) |
|
|
(1,999,893 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS |
|
|
19,377,407 |
|
|
|
12,736,519 |
|
| ||||||||
Change in net assets |
|
|
19,550,439 |
|
|
|
12,338,829 |
|
| ||||||||
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
17,578,078 |
|
|
|
5,239,249 |
|
| ||||||||
End of period |
|
$ |
37,128,517 |
|
|
$ |
17,578,078 |
|
|
See Notes which are an integral part of the Financial Statements
September 30, 2000
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 Mortgage 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.
On July 19, 1999, the Fund received a tax-free transfer of assets from a Common Trust Fund as follows:
Fund Shares Issued |
|
|
325,337 |
| |||
Common Trust Fund Net Assets Received |
|
$ |
3,204,570 |
| |||
Unrealized Appreciation1 |
|
$ |
84,429 |
|
1 Unrealized appreciation is included in the Common Trust Fund net assets acquired above.
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.
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 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. Investments in other open-end registered investment companies are valued at net asset value.
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.
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. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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"). Dividend income and distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares, which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
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 book and tax differences. The following reclassifications have been made to the financial statements.
Increase (Decrease) | ||
Paid in Capital |
|
Undistributed Net |
$(6,123) |
|
$6,123 |
|
Net investment income, net realized gains (losses), and net assets were not affected by this reclassification.
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 provision for federal tax is necessary.
Additionally, net capital losses of $88,777 attributable to security transactions incurred after October 31, 1999, are treated as arising on October 1, 2000, the first day of the Fund's next taxable year.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
The Fund enters into dollar roll transactions, with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in which the Fund sells mortgage securities to financial institutions and simultaneously agrees to accept substantially similar (same type, coupon and maturity) securities at a later date at an agreed upon price. Dollar roll transactions involve "to be announced" securities and are treated as short-term financing arrangements which will not exceed 12 months. The Fund will use the proceeds generated from the transactions to invest in short-term investments, which may enhance the Fund's current yield and total return.
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.
Investment transactions are accounted for on a trade date basis.
At September 30, 2000, par value shares ($0.001 per share) authorized were as follows:
Share Class Name |
|
Number of Par Value |
Institutional Shares |
|
1,000,000 |
Institutional Service Shares |
|
1,000,000 |
TOTAL |
|
2,000,000 |
Transactions in capital stock were as follows:
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
| ||
Shares sold |
|
2,624,346 |
|
|
$ |
25,675,954 |
|
|
1,087,338 |
|
|
$ |
10,854,139 |
|
Shares issued in connection with the tax-free transfer of assets from a Common Trust Fund |
|
-- |
|
|
|
-- |
|
|
325,337 |
|
|
|
3,204,570 |
|
Shares issued to shareholders in payment of distributions declared |
|
10,559 |
|
|
|
102,523 |
|
|
8,852 |
|
|
|
87,946 |
|
Shares redeemed |
|
(647,059 |
) |
|
|
(6,280,888 |
) |
|
(193,428 |
) |
|
|
(1,929,683 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS |
|
1,987,846 |
|
|
$ |
19,497,589 |
|
|
1,228,099 |
|
|
$ |
12,216,972 |
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Service Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
| ||
Shares sold |
|
35,447 |
|
|
$ |
343,891 |
|
|
58,881 |
|
|
$ |
581,529 |
|
Shares issued to shareholders in payment of distributions declared |
|
2,848 |
|
|
|
27,583 |
|
|
841 |
|
|
|
8,228 |
|
Shares redeemed |
|
(51,133 |
) |
|
|
(491,656 |
) |
|
(7,138 |
) |
|
|
(70,210 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE SHARE TRANSACTIONS |
|
(12,838 |
) |
|
$ |
(120,182 |
) |
|
52,584 |
|
|
$ |
519,547 |
|
| ||||||||||||||
NET CHANGE RESULTING FROM SHARE TRANSACTIONS |
|
1,975,008 |
|
|
$ |
19,377,407 |
|
|
1,280,683 |
|
|
$ |
12,736,519 |
|
|
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment adviser 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.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in Government Obligations Fund which is managed by the Adviser. The Adviser has agreed to reimburse certain investment adviser fees as a result of these transactions.
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 a scale that ranges from 0.15% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.
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 Fund 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 any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. FSSC may voluntarily choose to waive any portion of its fee. FSSC can modify or terminate this voluntary waiver at any time at its sole discretion.
FServ, through its subsidiary 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.
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.
During the year ended September 30, 2000, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sales transactions complied with Rule 17a-7 under the Act and amounted to $24,983,767 and $18,415,931 respectively.
Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding short-term securities (and in-kind contributions), for the year ended September 30, 2000, were as follows:
Purchases |
|
$ |
30,954,978 |
Sales |
|
$ |
12,755,499 |
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Mortgage Fund (the "Fund") as of September 30, 2000, and the related statement of operations for the year then ended, the statement of changes in net assets for the years ended September 30, 2000 and 1999, and the financial highlights for the years 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. The financial highlights for the years ended September 30, 1998 and 1997 were audited by other auditors whose report dated November 13, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to provide 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 the securities owned at September 30, 2000, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Mortgage Fund as of September 30, 2000, the results of its operations, and the changes in its net assets and its financial highlights for the years ended September 30, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 13, 2000
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A Statement of Additional Information (SAI) dated November 30, 2000, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.
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<R>
You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at [email protected] or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.
</R>
Federated
World-Class Investment Manager®
Federated Mortgage
Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
Investment Company Act File No. 811-7115
Cusip 31428Q887
<R>
G01922-01-IS (11/00)
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Federated is a registered mark of Federated Investors, Inc. 2000 ©Federated Investors, Inc.
Federated Mortgage Fund (Institutional Shares)
APPENDIX:
The graphic presentation displayed here consists of a bar chart representing the annual total returns of Federated Mortgage Fund's Institutional Shares as of the calendar year-end for each of two years.
The 'y' axis reflects the "% Total Return" beginning with "0" and increasing in increments of 2% up to 8%.
The 'x' axis represents calculation periods from the earliest first full calendar year-end of the Fund's start of business through the calendar year ended December 31, 1999. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Institutional Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1998 through 1999, The percentages noted are: 7.58% and 2.23%.
Federated
World-Class Investment Manager®
A Portfolio of Federated Total Return Series, Inc.
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</R>
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November 30, 2000
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A mutual fund seeking to provide total return by investing at least 65% of its assets in a diversified portfolio of mortgage backed securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 6
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What are the Specific Risks of Investing in the Fund? 13
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What Do Shares Cost? 15
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How is the Fund Sold? 15
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How to Purchase Shares 16
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How to Redeem Shares 17
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Account and Share Information 20
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Who Manages the Fund? 21
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Financial Information 22
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Independent Auditors' Report 34
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The Fund's investment objective is to provide total return. The Fund's total return will consist of two components: 1) changes in the market value of its portfolio of securities (both realized and unrealized appreciation); and 2) income received from its portfolio of securities. The Fund expects that income will comprise the largest component of its total return. The Fund seeks to provide the appreciation component of total return by selecting those securities whose prices will, in the opinion of the investment adviser (Adviser), benefit from anticipated changes in economic and market conditions. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.
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The Fund pursues its investment objective by investing at least 65% of its assets in governmental and non-governmental investment grade mortgage backed securities.
All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:
The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
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The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a calendar year-end basis.
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The Fund's Institutional Service Shares are sold without a sales charge (load). The total returns displayed above are based upon net asset value.
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The Fund's Institutional Service Shares total return for the nine-month period from January 1, 2000 to September 30, 2000 was 7.00%.
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Within the period shown in the chart, the Fund's Institutional Service Shares highest quarterly return was 2.15% (quarter ended September 30, 1998). Its lowest quarterly return was (0.57%) (quarter ended June 30, 1999).
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The following table represents the Fund's Institutional Service Shares Average Annual Total Returns for the calendar periods ended December 31, 1999. The table shows the Fund's Institutional Service Shares total returns averaged over a period of years relative to the Lehman Brothers Mortgage-Backed Securities Index (LBMBS), a broad-based market index, and the Lipper U.S. Mortgage Fund Category (LUSMFC), an average of funds with similar objectives. The LBMBS is composed of all fixed rate, securitized mortgage pools issued by GNMA, FNMA and the FHLMC, including GNMA Graduated Payment Mortgages. Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling into the category indicated. Total returns for the indexes shown do not reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
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Calendar Period |
|
Fund |
|
<R>LBMBS</R> |
|
LUSMFC |
1 Year |
|
<R>1.93%</R> |
|
<R>1.86%</R> |
|
<R>0.43%</R> |
Start of Performance1 |
|
<R>6.44%</R> |
|
<R>5.95%</R> |
|
<R>5.06%</R> |
1 The Fund's Institutional Service Shares start of performance date was May 31, 1997.
Past performance does not necessarily predict future performance. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Service Shares.
Shareholder Fees |
|
|
Fees Paid Directly From Your Investment |
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) |
|
None |
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable) |
|
None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other
Distributions) |
|
None |
Redemption Fee (as a percentage of amount redeemed, if applicable) |
|
None |
Exchange Fee |
|
None |
|
|
|
Annual Fund Operating Expenses (Before Waivers and Reimbursements)1 |
|
|
Expenses That are Deducted From Fund Assets (as a percentage of average net assets) |
|
|
Management Fee2 |
|
0.40% |
Distribution (12b-1) Fee3 |
|
0.25% |
Shareholder Services Fee |
|
0.25% |
Other Expenses4 |
|
1.74% |
Total Annual Fund Operating Expenses |
|
2.64% |
1 Although not contractually obligated to do so, the Adviser and
distributor waived and reimbursed certain amounts. These are shown below
along with the net expenses the Fund actually paid for the fiscal year
ended September 30, 2000. | ||
Total Waivers and Reimbursements of Fund Expenses |
|
2.04% |
Total Actual Annual Fund Operating Expenses (after waivers and
reimbursements) |
|
0.60% |
2 The Adviser voluntarily waived the management fee. The Adviser can
terminate this voluntary waiver at any time. The management fee paid by
the Fund (after the voluntary waiver) was 0.00% for the fiscal year ended
September 30, 2000. | ||
3 A portion of the distribution (12b-1) fee has been voluntarily
waived. This voluntary waiver can be terminated any time. The distribution
(12b-1) fee paid by the Fund's Institutional Service Shares (after the
voluntary waiver) was 0.05% for the fiscal year ended September 30,
2000. | ||
4 The Adviser voluntarily reimbursed certain operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement at any time. Total other expenses paid by the Fund (after voluntary reimbursement) were 0.30% for the fiscal year ended September 30, 2000. |
This Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Institutional Service Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Service Shares operating expenses are before waivers and reimbursements as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
1 Year |
|
$ |
267 |
| |||
3 Years |
|
$ |
820 |
| |||
5 Years |
|
$ |
1,400 |
| |||
10 Years |
|
$ |
2,973 |
|
The Fund invests primarily in a portfolio of U.S. government and non-government investment grade, mortgage backed securities. A description of the various types of securities in which the Fund invests, and their risks, immediately follows this strategy section.
Mortgage backed securities generally offer higher relative yields versus comparable U.S. Treasury securities to compensate for prepayment risk. Prepayment risk is the unscheduled partial or complete payment of the principal outstanding on a mortgage loan (or asset backed loan) by the homeowner (or borrower). One important reason for prepayments is changes in market interest rates from the time of loan origination. The Adviser actively manages the Fund's portfolio, seeking the higher relative returns of mortgage and asset backed securities while attempting to limit the prepayment risk.
The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage backed securities with characteristics that make prepayments less likely. Characteristics that the Adviser may consider in selecting securities include the average interest rates of the underlying loans, the prior prepayment history of the loans and the federal agencies or private entities that back the loans. The Adviser attempts to assess the relative returns and risks of mortgage backed securities by analyzing how the timing, amount and division of cash flows from the pool of loans underlying the security might change in response to changing economic and market conditions.
The Adviser selects securities with longer or shorter duration based on its interest rate outlook. The Adviser generally shortens the portfolio's average duration when it expects interest rates to rise, and extends duration when it expects interest rates to fall. Duration measures the price sensitivity of a portfolio of fixed income securities to changes in interest rates. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions by analyzing a variety of factors such as:
The Adviser may use options and futures as a hedge to attempt to protect securities in its portfolio against decreases in value resulting from changes in interest rates. There is no assurance that the Adviser's efforts to forecast market interest rates, assess the impact of market interest rates on particular securities or hedge its portfolio through the use of options and futures will be successful.
The Adviser may use collateralized mortgage obligations (CMOs) to reduce prepayment risk. In addition, the Adviser may use combinations of CMOs and other mortgage backed securities to attempt to provide a higher yielding investment with lower sensitivity to fluctuations in interest rates. The Adviser may also attempt to take advantage of current and potential yield differentials existing from time to time between various mortgage and asset backed securities in order to increase the Fund's return, and may engage in dollar roll transactions for their potential to enhance income.
The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.
Prepayments of mortgage backed securities will cause the Fund to have an increased portfolio turnover rate. Portfolio turnover increases the Fund's trading costs and may have an adverse impact on the Fund's performance.
Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.
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Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
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A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
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The following describes the principal types of fixed income securities in which the Fund invests.
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Agency securities are issued or guaranteed by a federal agency or other government sponsored entity (GSE) acting under federal authority. The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as Treasury securities.
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The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risk depends upon the structure of the CMOs. However, the actual returns on any type of mortgage security depend upon the performance of the underlying pool of mortgages, which no one can predict and which will vary among pools. The Fund will invest only in CMOs that are rated A or better by a nationally recognized rating service.
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMOs. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
More sophisticated CMOs include planned amortization classes (PACs) and targeted amortization classes (TACs). PACs and TACs are issued with companion classes. PACs and TACs receive principal payments and prepayments at a specified rate. The companion classes receive principal payments and prepayments in excess of the specified rate. In addition, PACs will receive the companion classes' share of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs and TACs to control prepayment risks by increasing the risks to their companion classes.
CMOs may allocate interest payments to one class (Interest Only or IOs) and principal payments to another class (Principal Only or POs). POs increase in value when prepayment rates increase. In contrast, IOs decrease in value when prepayments increase, because the underlying mortgages generate less interest payments. However, IOs tend to increase in value when interest rates rise (and prepayments decrease), making IOs a useful hedge against interest rate risks.
Another variant allocates interest payments between two classes of CMOs. One class (Floaters) receives a share of interest payments based upon a market index such as LIBOR. The other class (Inverse Floaters) receives any remaining interest payments from the underlying mortgages. Floater classes receive more interest (and Inverse Floater classes receive correspondingly less interest) as interest rates rise. This shifts prepayment and interest rate risks from the Floater to the Inverse Floater class, reducing the price volatility of the Floater class and increasing the price volatility of the Inverse Floater class.
Non-governmental mortgage backed securities (including non-governmental CMOs) are issued by private entities, rather than by U.S. government agencies. These securities involve credit risks and liquidity risks. The Fund may invest in non-governmental mortgage backed securities that are rated BBB or higher by a nationally recognized statistical rating agency.
Asset backed securities are payable from pools of obligations other than first mortgages. Most asset backed securities involve consumer or commercial debts. The Fund will purchase only mortgage related asset backed securities such as home equity loans, secured mortgages and manufactured housing obligations. Asset backed securities may take the form of commercial paper, notes, or pass-through certificates. Asset backed securities have prepayment risks. Like CMOs, asset backed securities may be structured like Floaters, Inverse Floaters, IOs and POs. Also, asset backed securities may be issued by a private entity and, although these securities must be rated investment grade, they present credit risks.
Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
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Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
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Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
The Fund may trade in the following types of derivative contracts:
Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
<R>
The Fund may buy/sell the following types of futures contracts: financial futures contracts.
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Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
Delayed delivery transactions, including when-issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default.
As with other delayed delivery transactions, a seller agrees to issue a TBA security at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms. For example, in a TBA mortgage backed transaction, the Fund and the seller would agree upon the issuer, interest rate and terms of the underlying mortgages. The seller would not identify the specific underlying mortgages until it issues the security. TBA mortgage backed securities increase interest rate risks because the underlying mortgages may be less favorable than anticipated by the Fund.
Dollar rolls are transactions where the Fund sells mortgage backed securities with a commitment to buy similar, but not identical, mortgage backed securities on a future date at a lower price. Normally, one or both securities involved are TBA mortgage backed securities. Dollar rolls are subject to interest rate and credit risks.
Repurchase agreements are transactions in which the Fund buys a security from a dealer or bank and agrees to sell the security back at a mutually agreed upon time and price. The repurchase price exceeds the sale price, reflecting the Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions, such as securities dealers, deemed creditworthy by the Adviser.
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The Fund's custodian or subcustodian will take possession of the securities subject to repurchase agreements. The Adviser or subcustodian will monitor the value of the underlying security each day to ensure that the value of the security always equals or exceeds the repurchase price.
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Repurchase agreements are subject to credit risks.
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In order to secure its obligations in connection with special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on special transactions.
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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade.
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If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
Prices of fixed income securities rise and fall in response to interest rate changes in the interest paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
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Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
</R>
<R>
Many fixed income securities receive credit ratings from services such as Standard & Poor's and Moody's Investor Services, Inc. These services assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment.
</R>
<R>
Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline.
</R>
<R>
Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.
</R>
<R>
Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due), payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
</R>
<R>
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
</R>
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Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
</R>
<R>
Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
</R>
Liquidity risk refers to the possibility that the Fund may not be able to sell a security when it wants to. If this happens, the Fund will be required to continue to hold the security, and the Fund could incur losses.
Trading opportunities are more limited for CMOs that have complex terms or that are not widely held. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
CMOs with complex or highly variable prepayment terms, such as companion classes, IOs, POs and Inverse Floaters, generally entail greater market, prepayment and liquidity risks than other mortgage backed securities. For example, their prices are more volatile and their trading market may be more limited.
<R>
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus) it is processed at the next calculated net asset value (NAV). The Fund does not charge a front-end sales charge. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values fixed income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost.
</R>
The required minimum initial investment for Fund Shares is $25,000. 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 is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
The Fund offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different sales charges and other expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.
<R>
The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to retail and private banking customers of financial institutions or to individuals, directly or through investment professionals.
</R>
<R>
When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
</R>
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Institutional Service Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.
You may purchase Shares through an investment professional or directly from the Fund. The Fund reserves the right to reject any request to purchase Shares.
<R>
</R>
<R>
You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.
</R>
An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are restricted.
Make your check payable to The Federated Funds, note your account number on the check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will not accept third-party checks (checks originally payable to someone other than you or The Federated Funds).
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You should redeem Shares:
Submit your redemption request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.
You may redeem Shares by calling the Fund at 1-800-341-7400.
<R>
If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time), you will receive a redemption amount based on that day's NAV.
</R>
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
Call your investment professional or the Fund if you need special instructions.
Signatures must be guaranteed if:
<R>
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.
</R>
Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:
Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.
The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Fund does not issue share certificates.
You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.
The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the Fund declares a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.
<R>
Fund distributions are expected to be both dividends and capital gains. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.
</R>
The Board of Directors governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. The Adviser's address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
<R>
The Adviser and other subsidiaries of Federated advise approximately 176 mutual funds and separate accounts, which totaled approximately $125 billion in assets as of December 31, 1999. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,900 employees. More than 4,000 investment professionals make Federated Funds available to their customers.
</R>
<R>
</R>
<R>
Donald T. Ellenberger has been the Fund's Portfolio Manager since 1997. Mr. Ellenberger joined Federated in 1996 as a Portfolio Manager and a Vice President of a Federated advisory subsidiary. He has been a Vice President of the Fund's Adviser since 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.
</R>
<R>
Kathleen M. Foody-Malus has been the Fund's Portfolio Manager since inception. She is Vice President of the Corporation. Ms. Foody-Malus joined Federated in 1983 and has been a Senior Portfolio Manager since 1996 and a Vice President of the Fund's Adviser since 1993. She was a Portfolio Manager and a Vice President of the Fund's Adviser from 1993 to 1996. Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the University of Pittsburgh.
</R>
<R>
Edward J. Tiedge has been the Fund's Portfolio Manager since inception. He is Vice President of the Corporation. Mr. Tiedge joined Federated in 1993 as a Senior Analyst and has been a Portfolio Manager and a Vice President of the Fund's Adviser since 1996. He served as Portfolio Manager and an Assistant Vice President of the Fund's Adviser in 1995, and an Investment Analyst during 1993 and 1994. Mr. Tiedge is a Chartered Financial Analyst and received his M.S. in Industrial Administration from Carnegie Mellon University.
</R>
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.
<R>
</R>
The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years, or since inception, if the life of the Fund is shorter. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.
<R>
This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus.
</R>
(For a Share Outstanding Throughout Each Period)
Reference is made to the Independent Auditors' Report on page 34.
Year Ended September 30 |
|
2000 |
|
|
1999 |
1 |
|
1998 |
|
|
1997 |
2 |
Net Asset Value, Beginning of Period |
|
$9.77 |
|
|
$10.11 |
|
|
$10.26 |
|
|
$10.00 |
|
Income From Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
0.66 |
|
|
0.66 |
|
|
0.92 |
|
|
0.24 |
|
Net realized and unrealized gain (loss) on investments |
|
0.07 |
|
|
(0.37 |
) |
|
(0.15 |
) |
|
0.26 |
|
| ||||||||||||
TOTAL FROM INVESTMENT OPERATIONS |
|
0.73 |
|
|
0.29 |
|
|
0.77 |
|
|
0.50 |
|
| ||||||||||||
Less Distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
(0.65 |
) |
|
(0.63 |
) |
|
(0.92 |
) |
|
(0.24 |
) |
Distributions from net realized gain on investments |
|
(0.01 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
| ||||||||||||
TOTAL DISTRIBUTIONS |
|
(0.66 |
) |
|
(0.63 |
) |
|
(0.92 |
) |
|
(0.24 |
) |
| ||||||||||||
Net Asset Value, End of Period |
|
$9.84 |
|
|
$ 9.77 |
|
|
$10.11 |
|
|
$10.26 |
|
| ||||||||||||
Total Return3 |
|
7.79 |
% |
|
2.89 |
% |
|
7.93 |
% |
|
5.07 |
% |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Expenses |
|
0.60 |
% |
|
0.60 |
% |
|
0.48 |
% |
|
0.00 |
%4 |
| ||||||||||||
Net investment income |
|
6.72 |
% |
|
6.38 |
% |
|
6.62 |
% |
|
7.76 |
%4 |
| ||||||||||||
Expense waiver/reimbursement5 |
|
2.04 |
% |
|
3.60 |
% |
|
8.52 |
% |
|
14.14 |
%4 |
| ||||||||||||
Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net assets, end of period (000 omitted) |
|
$406 |
|
|
$529 |
|
|
$15 |
|
|
$5 |
|
| ||||||||||||
Portfolio turnover |
|
66 |
% |
|
150 |
% |
|
147 |
% |
|
9 |
% |
|
1 For the year ended September 30, 1999, the fund was audited by Deloitte & Touche LLP. Each of the previous years was audited by other auditors.
2 Reflects operations for the period from May 31, 1997 (start of performance) to September 30, 1997.
3 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
4 Computed on an annualized basis.
5 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--4.7% |
|
|
|
|
|
|
Home Equity Loans--4.7% |
|
|
|
$ |
500,000 |
|
Conseco Finance 2000-D, Class A5, 8.410%, 12/15/2025 |
|
$ |
509,844 |
|
200,000 |
|
Mellon Bank Home Equity Installment Loan 98-1, 6.950%, 3/25/2015 |
|
|
188,454 |
|
12,498,115 |
|
New Century Home Equity Loan Trust 99, Class C3 (Interest Only), 1.935%, 6/25/2002 |
|
|
373,956 |
|
490,574 |
|
Residential Funding Mortgage Securities I 98-S31, Class A1, 6.500%, 12/25/2028 |
|
|
466,918 |
|
4,632,654 |
|
Salomon Brothers Mortgage Sec. VII 4 (Interest Only), 2.547%, 12/25/2027 |
|
|
220,051 |
| ||||||
|
|
|
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $1,813,053) |
|
|
1,759,223 |
| ||||||
|
|
|
LONG-TERM OBLIGATIONS--91.2% |
|
|
|
|
|
|
Federal Home Loan Mortgage Corporation--42.0% |
|
|
|
|
2,700,110 |
|
6.000%, 1/1/2029 - 11/1/2029 |
|
|
2,526,277 |
|
3,495,294 |
|
6.500%, 9/1/2028 - 2/1/2029 |
|
|
3,362,120 |
|
5,818,173 |
|
7.000%, 6/1/2028 - 9/1/2030 |
|
|
5,707,648 |
|
3,991,080 |
1 |
7.500%, 2/1/2027 - 8/1/2030 |
|
|
3,990,458 |
| ||||||
|
|
|
TOTAL |
|
|
15,586,503 |
| ||||||
|
|
|
Federal Home Loan Mortgage Corporation-Debenture--4.3% |
|
|
|
|
1,700,000 |
|
5.750%, 3/15/2009 |
|
|
1,587,290 |
| ||||||
|
|
|
Federal Home Loan Mortgage Corporation REMIC--3.5% |
|
|
|
|
1,123,173 |
|
Series 197, (Principal Only), 4/1/2028 |
|
|
710,058 |
|
2,447,593 |
|
Series 2139, (Interest Only), 6.500%, 10/15/2026 |
|
|
579,774 |
| ||||||
|
|
|
TOTAL |
|
|
1,289,832 |
| ||||||
|
|
|
Federal National Mortgage Association--23.4% |
|
|
|
|
2,439,791 |
|
6.000%, 6/1/2014 -- 11/1/2030 |
|
|
2,283,283 |
|
2,540,458 |
|
6.500%, 11/1/2015 -- 11/1/2030 |
|
|
2,450,575 |
|
1,884,641 |
|
7.000%, 4/1/2029 - 10/1/2030 |
|
|
1,847,259 |
|
1,000,000 |
1 |
7.500%, 11/1/2030 |
|
|
998,120 |
|
1,100,237 |
|
8.000%, 12/1/2026 -- 11/1/2030 |
|
|
1,116,025 |
| ||||||
|
|
|
TOTAL |
|
|
8,695,262 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
LONG-TERM OBLIGATIONS--continued |
|
|
|
|
|
|
Federal National Mortgage Association REMIC--2.6% |
|
|
|
$ |
49,469,236 |
|
FNGT, Series GT 99-T2-X, 0.667%, (Interest Only), 1/19/2039 |
|
$ |
966,184 |
| ||||||
|
|
|
Government National Mortgage Association--15.4% |
|
|
|
|
1,703,836 |
|
6.500%, 5/15/2024 - 4/15/2029 |
|
|
1,648,606 |
|
2,075,701 |
|
7.000%, 9/15/2028 - 6/15/2029 |
|
|
2,044,812 |
|
1,030,150 |
1 |
7.500%, 9/15/2030 |
|
|
1,033,364 |
|
999,901 |
|
8.000%, 9/15/2030 |
|
|
1,018,019 |
| ||||||
|
|
|
TOTAL |
|
|
5,744,801 |
| ||||||
|
|
|
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $33,831,385) |
|
|
33,869,872 |
| ||||||
|
|
|
MUTUAL FUNDS--9.9% |
|
|
|
|
2,894,556 |
|
Government Obligations Fund |
|
|
2,894,556 |
|
77,000 |
|
Income Opportunities Fund 2000, Inc. |
|
|
765,188 |
| ||||||
|
|
|
TOTAL MUTUAL FUNDS (IDENTIFIED COST $3,650,119) |
|
|
3,659,744 |
| ||||||
|
|
|
REPURCHASE AGREEMENT--8.6%2 |
|
|
|
$ |
3,200,000 |
3 |
Goldman Sachs Group, Inc., 6.520%, dated 9/13/2000, due 10/16/2000 (at amortized cost) |
|
|
3,200,000 |
| ||||||
|
|
|
TOTAL INVESTMENTS (IDENTIFIED COST $42,494,557)4 |
|
$ |
42,488,839 |
|
1 All or a portion of this security is subject to a future dollar roll transaction.
2 The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of the purchase. The investment in the repurchase agreement is through participation in joint accounts with other Federated funds.
3 Although final maturity falls beyond seven days, a liquidity feature is included in each transaction to permit termination of the repurchase agreement within seven days.
4 The cost of investments for federal tax purposes amounts to $42,494,557. The net unrealized depreciation of investments on a federal tax basis amounts to $5,718 which is comprised of $268,625 appreciation and $274,343 depreciation at September 30, 2000.
Note: The categories of investments are shown as a percentage of net assets ($37,128,517) at September 30, 2000.
The following acronym is used throughout this portfolio.
REMIC |
--Real Estate Mortgage Investment Conduit |
See Notes which are an integral part of the Financial Statements
September 30, 2000
Assets: |
|
|
|
|
|
|
|
Total investments in securities, at value (identified and tax cost $42,494,557) |
|
|
|
|
$ |
42,488,839 |
|
Income receivable |
|
|
|
|
|
180,191 |
|
Receivable for investments sold |
|
|
|
|
|
867,939 |
|
Receivable for shares sold |
|
|
|
|
|
227,090 |
|
| |||||||
TOTAL ASSETS |
|
|
|
|
|
43,764,059 |
|
| |||||||
Liabilities: |
|
|
|
|
|
|
|
Payable for investments purchased |
|
$ |
3,244,534 |
|
|
|
|
Payable for shares redeemed |
|
|
6,475 |
|
|
|
|
Income distribution payable |
|
|
181,076 |
|
|
|
|
Payable for dollar roll transactions |
|
|
3,187,352 |
|
|
|
|
Accrued expenses |
|
|
16,105 |
|
|
|
|
| |||||||
TOTAL LIABILITIES |
|
|
|
|
|
6,635,542 |
|
| |||||||
Net assets for 3,774,138 shares outstanding |
|
|
|
|
$ |
37,128,517 |
|
| |||||||
Net Assets Consist of: |
|
|
|
|
|
|
|
Paid in capital |
|
|
|
|
$ |
37,212,025 |
|
Net unrealized depreciation of investments |
|
|
|
|
|
(5,718 |
) |
Accumulated net realized loss on investments |
|
|
|
|
|
(77,790 |
) |
| |||||||
TOTAL NET ASSETS |
|
|
|
|
$ |
37,128,517 |
|
| |||||||
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
|
|
|
|
|
|
|
Institutional Shares: |
|
|
|
|
|
|
|
$36,722,461 ÷ 3,732,866 shares outstanding |
|
|
|
|
|
$9.84 |
|
| |||||||
Institutional Service Shares: |
|
|
|
|
|
|
|
$406,056 ÷ 41,272 shares outstanding |
|
|
|
|
|
$9.84 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30, 2000
Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
$ |
37,076 |
|
Interest (net of dollar roll expense of $41,587) |
|
|
|
|
|
|
|
|
|
|
1,323,928 |
|
| ||||||||||||
TOTAL INCOME |
|
|
|
|
|
|
|
|
|
|
1,361,004 |
|
| ||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment adviser fee |
|
|
|
|
|
$ |
73,947 |
|
|
|
|
|
Administrative personnel and services fee |
|
|
|
|
|
|
155,000 |
|
|
|
|
|
Custodian fees |
|
|
|
|
|
|
4,808 |
|
|
|
|
|
Transfer and dividend disbursing agent fees and expenses |
|
|
|
|
|
|
36,278 |
|
|
|
|
|
Directors'/Trustees' fees |
|
|
|
|
|
|
2,770 |
|
|
|
|
|
Auditing fees |
|
|
|
|
|
|
10,164 |
|
|
|
|
|
Legal fees |
|
|
|
|
|
|
2,882 |
|
|
|
|
|
Portfolio accounting fees |
|
|
|
|
|
|
56,684 |
|
|
|
|
|
Distribution services fee--Institutional Service Shares |
|
|
|
|
|
|
1,295 |
|
|
|
|
|
Shareholder services fee--Institutional Shares |
|
|
|
|
|
|
44,922 |
|
|
|
|
|
Shareholder services fee--Institutional Service Shares |
|
|
|
|
|
|
1,295 |
|
|
|
|
|
Share registration costs |
|
|
|
|
|
|
30,582 |
|
|
|
|
|
Printing and postage |
|
|
|
|
|
|
18,662 |
|
|
|
|
|
Insurance premiums |
|
|
|
|
|
|
1,181 |
|
|
|
|
|
Taxes |
|
|
|
|
|
|
2,467 |
|
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
1,094 |
|
|
|
|
|
| ||||||||||||
TOTAL EXPENSES |
|
|
|
|
|
|
444,031 |
|
|
|
|
|
| ||||||||||||
Waivers and Reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
Waiver of investment adviser fee |
|
$ |
(73,947 |
) |
|
|
|
|
|
|
|
|
Waiver of distribution services fee--Institutional Service Shares |
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
Waiver of shareholder services fee--Institutional Shares |
|
|
(44,922 |
) |
|
|
|
|
|
|
|
|
Reimbursement of investment adviser fee |
|
|
(513 |
) |
|
|
|
|
|
|
|
|
Reimbursement of other operating expenses |
|
|
(267,103 |
) |
|
|
|
|
|
|
|
|
| ||||||||||||
TOTAL WAIVERS AND REIMBURSEMENTS |
|
|
|
|
|
|
(387,521 |
) |
|
|
|
|
| ||||||||||||
Net expenses |
|
|
|
|
|
|
|
|
|
|
56,510 |
|
| ||||||||||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
1,304,494 |
|
| ||||||||||||
Realized and Unrealized Gain (Loss) on Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments |
|
|
|
|
|
|
|
|
|
|
(39,521 |
) |
Net change in unrealized depreciation of investments |
|
|
|
|
|
|
|
|
|
|
233,780 |
|
| ||||||||||||
Net realized and unrealized gain on investments |
|
|
|
|
|
|
|
|
|
|
194,259 |
|
| ||||||||||||
Change in net assets resulting from operations |
|
|
|
|
|
|
|
|
|
$ |
1,498,753 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30 |
|
|
2000 |
|
|
|
1999 |
|
Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
1,304,494 |
|
|
$ |
685,841 |
|
Net realized gain (loss) on investments ($15,104 and $440, respectively, as computed for federal tax purposes) |
|
|
(39,521 |
) |
|
|
(9,453 |
) |
Net change in unrealized appreciation (depreciation) of investments |
|
|
233,780 |
|
|
|
(394,001 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS |
|
|
1,498,753 |
|
|
|
282,387 |
|
| ||||||||
Distributions to Shareholders: |
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(1,276,180 |
) |
|
|
(669,956 |
) |
Institutional Service Shares |
|
|
(34,437 |
) |
|
|
(10,121 |
) |
Distributions from net realized gain on investments |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(14,548 |
) |
|
|
-- |
|
Institutional Service Shares |
|
|
(556 |
) |
|
|
-- |
|
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS |
|
|
(1,325,721 |
) |
|
|
(680,077 |
) |
| ||||||||
Share Transactions: |
|
|
|
|
|
|
|
|
Proceeds from sale of shares |
|
|
26,019,845 |
|
|
|
11,435,668 |
|
Proceeds from shares issued in connection with the tax-free transfer of assets from a Common Trust Fund |
|
|
-- |
|
|
|
3,204,570 |
|
Net asset value of shares issued to shareholders in payment of distributions declared |
|
|
130,106 |
|
|
|
96,174 |
|
Cost of shares redeemed |
|
|
(6,772,544 |
) |
|
|
(1,999,893 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS |
|
|
19,377,407 |
|
|
|
12,736,519 |
|
| ||||||||
Change in net assets |
|
|
19,550,439 |
|
|
|
12,338,829 |
|
| ||||||||
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
17,578,078 |
|
|
|
5,239,249 |
|
| ||||||||
End of period |
|
$ |
37,128,517 |
|
|
$ |
17,578,078 |
|
|
See Notes which are an integral part of the Financial Statements
September 30, 2000
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 Mortgage 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.
On July 19, 1999, the Fund received a tax-free transfer of assets from a Common Trust Fund as follows:
Fund Shares Issued |
|
|
325,337 |
| |||
Common Trust Fund Net Assets Received |
|
$ |
3,204,570 |
| |||
Unrealized Appreciation1 |
|
$ |
84,429 |
|
1 Unrealized appreciation is included in the Common Trust Fund net assets acquired above.
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.
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 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. Investments in other open-end registered investment companies are valued at net asset value.
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.
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. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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"). Dividend income and distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares, which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
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 book and tax differences. The following reclassifications have been made to the financial statements.
Increase (Decrease) | ||
Paid in Capital |
|
Undistributed Net |
$(6,123) |
|
$6,123 |
|
Net investment income, net realized gains (losses), and net assets were not affected by this reclassification.
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 provision for federal tax is necessary.
Additionally, net capital losses of $88,777 attributable to security transactions incurred after October 31, 1999, are treated as arising on October 1, 2000, the first day of the Fund's next taxable year.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
The Fund enters into dollar roll transactions, with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in which the Fund sells mortgage securities to financial institutions and simultaneously agrees to accept substantially similar (same type, coupon and maturity) securities at a later date at an agreed upon price. Dollar roll transactions involve "to be announced" securities and are treated as short-term financing arrangements which will not exceed 12 months. The Fund will use the proceeds generated from the transactions to invest in short-term investments, which may enhance the Fund's current yield and total return.
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.
Investment transactions are accounted for on a trade date basis.
At September 30, 2000, par value shares ($0.001 per share) authorized were as follows:
Share Class Name |
|
Number of Par Value |
Institutional Shares |
|
1,000,000 |
Institutional Service Shares |
|
1,000,000 |
TOTAL |
|
2,000,000 |
Transactions in capital stock were as follows:
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
| ||
Shares sold |
|
2,624,346 |
|
|
$ |
25,675,954 |
|
|
1,087,338 |
|
|
$ |
10,854,139 |
|
Shares issued in connection with the tax-free transfer of assets from a Common Trust Fund |
|
-- |
|
|
|
-- |
|
|
325,337 |
|
|
|
3,204,570 |
|
Shares issued to shareholders in payment of distributions declared |
|
10,559 |
|
|
|
102,523 |
|
|
8,852 |
|
|
|
87,946 |
|
Shares redeemed |
|
(647,059 |
) |
|
|
(6,280,888 |
) |
|
(193,428 |
) |
|
|
(1,929,683 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS |
|
1,987,846 |
|
|
$ |
19,497,589 |
|
|
1,228,099 |
|
|
$ |
12,216,972 |
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Service Shares: |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
| ||
Shares sold |
|
35,447 |
|
|
$ |
343,891 |
|
|
58,881 |
|
|
$ |
581,529 |
|
Shares issued to shareholders in payment of distributions declared |
|
2,848 |
|
|
|
27,583 |
|
|
841 |
|
|
|
8,228 |
|
Shares redeemed |
|
(51,133 |
) |
|
|
(491,656 |
) |
|
(7,138 |
) |
|
|
(70,210 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE SHARE TRANSACTIONS |
|
(12,838 |
) |
|
$ |
(120,182 |
) |
|
52,584 |
|
|
$ |
519,547 |
|
| ||||||||||||||
NET CHANGE RESULTING FROM SHARE TRANSACTIONS |
|
1,975,008 |
|
|
$ |
19,377,407 |
|
|
1,280,683 |
|
|
$ |
12,736,519 |
|
|
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment adviser 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.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in Government Obligations Fund which is managed by the Adviser. The Adviser has agreed to reimburse certain investment adviser fees as a result of these transactions.
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 a scale that ranges from 0.15% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.
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 Fund 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 any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. FSSC may voluntarily choose to waive any portion of its fee. FSSC can modify or terminate this voluntary waiver at any time at its sole discretion.
FServ, through its subsidiary 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.
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.
During the year ended September 30, 2000, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sales transactions complied with Rule 17a-7 under the Act and amounted to $24,983,767 and 18,415,931 respectively.
Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding short-term securities (and in-kind contributions), for the year ended September 30, 2000, were as follows:
Purchases |
|
$ |
30,954,978 |
Sales |
|
$ |
12,755,499 |
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Mortgage Fund (the "Fund") as of September 30, 2000, and the related statement of operations for the year then ended, the statement of changes in net assets for the years ended September 30, 2000 and 1999, and the financial highlights for the years 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. The financial highlights for the years ended September 30, 1998 and 1997 were audited by other auditors whose report dated November 13, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to provide 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 the securities owned at September 30, 2000, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Mortgage Fund as of September 30, 2000, the results of its operations, and the changes in its net assets and its financial highlights for the years ended September 30, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 13, 2000
<R>
A Statement of Additional Information (SAI) dated November 30, 2000, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.
</R>
<R>
You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at [email protected] or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.
</R>
Federated
World-Class Investment Manager®
Federated Mortgage
Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
Investment Company Act File No. 811-7115
Cusip 31428Q804
<R>
G01922-02-SS (11/00)
</R>
Federated is a registered mark of Federated Investors, Inc. 2000 ©Federated Investors, Inc.
Federated Mortgage Fund (Institutional Service Shares)
APPENDIX: RISK/RETURN BAR CHART
The graphic presentation displayed here consists of a bar chart representing the annual total returns of Federated Mortgage Funds Institutional Service Shares as of the calendar year-end for each of two years.
The 'y' axis reflects the "% Total Return" beginning with "0" and increasing in increments of 2% up to 8%.
The 'x' axis represents calculation periods from the earliest first full calendar year-end of the Fund's start of business through the calendar year ended December 31, 1999. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1998 through 1999, The percentages noted are: 7.26% and 1.93%.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Federated Mortgage Fund (Institutional Shares)
Growth of $100,000 Invested Line Graph
The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed underneath. The Institutional Shares of Federated Mortgage Fund (the "Fund") are represented by a solid line. The Lehman Brothers Mortgage-Backed Securities Index (LBMBS) is represented by a dotted line. The Lipper U.S. Mortgage Fund Category (LUSMFC) is represented by a broken line. The line graph is a visual representation of a comparison of change in value of a $100,000 hypothetical investment in the Institutional Shares of the Fund, the LBMBS and the LUSMFC. The "x" axis reflects computation periods from 5/31/97 to 9/30/00. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Institutional Shares as compared to the LBMBS and the LUSMFC. The ending values were $126,957, $124,257, and $120,933, respectively.
Federated Mortgage Fund (Institutional Service Shares)
Growth of $25,000 Invested Line Graph
The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed underneath. The Institutional Service Shares of Federated Mortgage Fund (the "Fund") are represented by a solid line. The Lehman Brothers Mortgage-Backed Securities Index (LBMBS) is represented by a dotted line. The Lipper U.S. Mortgage Fund Category (LUSMFC) is represented by a broken line. The line graph is a visual representation of a comparison of change in value of a $25,000 hypothetical investment in the Institutional Service Shares of the Fund, the LBMBS and the LUSMFC. The "x" axis reflects computation periods from 5/31/97 to 9/30/00. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Institutional Service Shares as compared to the LBMBS and the LUSMFC. The ending values were $32,442, $31,064, and $30,341, respectively.
Federated Limited Duration Fund (Institutional Shares)
Growth of $100,000 Invested Line Graph
The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed underneath. The Institutional Shares of Federated Limited Duration Fund (the "Fund") are represented by a solid line. The Merrill Lynch 1-3 Year Treasury Index (ML1-3T) is represented by a dotted line. The Merrill Lynch 1-3 Year Corporate Index (ML1-3C) is represented by a dashed line. The Lipper Short Investment Grade Debt Funds Average (LSIGDFA) is represented by a line using a combination of dots and dashes. The line graph is a visual representation of a comparison of change in value of a $100,000 hypothetical investment in the Institutional Service Shares of the Fund, the ML1-3T, the ML1-3C, and the LSIGDFA. The "x" axis reflects computation periods from 10/1/96 to 9/30/00. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Institutional Service Shares as compared to the ML1-3T, the ML1-3C, and the LSIGDFA. The ending values were $127,547, $126,027, $128,486, and $123,726, respectively.
Federated Limited Duration Fund (Institutional Service Shares)
Growth of $25,000 Invested Line Graph
The graphic presentation here displayed consists of a line graph. The corresponding components of the line graph are listed underneath. The Institutional Service Shares of Federated Limited Duration Fund (the "Fund") are represented by a solid line. The Merrill Lynch 1-3 Year Treasury Index (ML1-3T) is represented by a dotted line. The Merrill Lynch 1-3 Year Corporate Index (ML1-3C) is represented by a dashed line. The Lipper Short Investment Grade Debt Funds Average (LSIGDFA) is represented by a line using a combination of dots and dashes. The line graph is a visual representation of a comparison of change in value of a $25,000 hypothetical investment in the Institutional Service Shares of the Fund, the ML1-3T, the ML1-3C, and the LSIGDFA. The "x" axis reflects computation periods from 10/1/96 to 9/30/00. The "y" axis reflects the cost of the investment. The right margin reflects the ending value of the hypothetical investment in the Fund's Institutional Service Shares as compared to the ML1-3T, the ML1-3C, and the LSIGDFA. The ending values were $31,551, $31,507, $32,122, and $30,932, respectively.
A Portfolio of Federated Total Return Series, Inc.
<R>
</R>
<R>
November 30, 2000
</R>
<R>
This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Federated Mortgage Fund--Institutional Shares and Institutional Service Shares (Fund), dated November 30, 2000. Obtain the prospectuses and the Annual Report's Management Discussion of Fund Performance without charge by calling 1-800-341-7400.
</R>
<R>
Federated
World-Class Investment Manager®
Federated Mortgage
Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
G01922-03 (11/00)
</R>
Federated is a registered mark of Federated Investors, Inc. 2000© Federated Investors, Inc.
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
<R>
What Do Shares Cost? 8
</R>
<R>
How is the Fund Sold? 8
</R>
<R>
Subaccounting Services 8
</R>
Redemption in Kind 8
<R>
Account and Share Information 9
</R>
<R>
Tax Information 9
</R>
Who Manages and Provides Services to the Fund? 9
How Does the Fund Measure Performance? 12
Who is Federated Investors, Inc.? 13
<R>
Investment Ratings 14
</R>
<R>
Addresses 17
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The Fund is a diversified portfolio of Federated Total Return Series, Inc. (Corporation). The Corporation is an open-end, management investment company that was established under the laws of the State of Maryland on October 11, 1993. The Corporation may offer separate series of shares representing interests in separate portfolios of securities. The Corporation changed its name from Insight Institutional Series, Inc. to Federated Total Return Series, Inc. on March 21, 1995. The Fund changed its name from Federated Government Fund to Federated Mortgage Fund on June 30, 1998.
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The Board of Directors (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to both classes of Shares. The Fund's investment adviser is Federated Investment Management Company (Adviser).
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In pursuing its investment strategy, the Fund may invest in the following securities for any purpose that is consistent with its investment objective.
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the types of fixed income securities in which the Fund invests.
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
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Agency securities are issued or guaranteed by a federal agency or other government sponsored entity (GSE) acting under federal authority. The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
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The Fund treats mortgage-backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the market and prepayment risks of these mortgage-backed securities.
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Mortgage-backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
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Mortgage-backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage-backed securities is pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages. The Fund may invest in mortgage-backed securities primarily by investing in another investment company (which is not available for general investment by the public) that owns those securities and that is advised by an affiliate of the Adviser. This other investment company is managed independently of the Fund and may incur additional administrative expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional expenses. The Fund may also invest in such securities directly.
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CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage-backed securities. This creates different prepayment and market risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
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In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
More sophisticated CMOs include planned amortization classes (PACs) and targeted amortization classes (TACs). PACs and TACs are issued with companion classes. PACs and TACs receive principal payments and prepayments at a specified rate. The companion classes receive principal payments and prepayments in excess of the specified rate. In addition, PACs will receive the companion classes' share of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs and TACs to control prepayment risks by increasing the risks to their companion classes.
CMOs may allocate interest payments to one class (Interest Only or IOs) and principal payments to another class (Principal Only or POs). POs increase in value when prepayment rates increase. In contrast, IOs decrease in value when prepayments increase, because the underlying mortgages generate less interest payments. However, IOs tend to increase in value when interest rates rise (and prepayments decrease), making IOs a useful hedge against market risks.
Another variant allocates interest payments between two classes of CMOs. One class (Floaters) receives a share of interest payments based upon a market index such as LIBOR. The other class (Inverse Floaters) receives any remaining interest payments from the underlying mortgages. Floater classes receive more interest (and Inverse Floater classes receive correspondingly less interest) as interest rates rise. This shifts prepayment and interest rate risks from the Floater to the Inverse Floater class, reducing the price volatility of the Floater class and increasing the price volatility of the Inverse Floater class.
CMOs must allocate all payments received from the underlying mortgages to some class. To capture any unallocated payments, CMOs generally have an accrual (Z) class. Z classes do not receive any payments from the underlying mortgages until all other CMO classes have been paid off. Once this happens, holders of Z class CMOs receive all payments and prepayments.
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Non-governmental mortgage-backed securities (including non- governmental CMOs) are issued by private entities, rather than by U. S. government agencies. The Fund may invest in non-governmental mortgage-backed securities that are rated BBB or higher by a nationally recognized statistical rating agency. These securities involve credit risks and liquidity risks.
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Zero coupon securities do not pay interest or principal until final maturity unlike debt securities that provide periodic payments of interest (referred to as a coupon payment). Investors buy zero coupon securities at a price below the amount payable at maturity. The difference between the purchase price and the amount paid at maturity represents interest on the zero coupon security. Investors must wait until maturity to receive interest and principal, which increases the interest rate and credit risks of a zero coupon security. A zero coupon step-up security converts to a coupon security before final maturity.
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There are many forms of zero coupon securities. Some are issued at a discount and are referred to as zero coupon or capital appreciation bonds. Others are created from interest bearing bonds by separating the right to receive the bond's coupon payments from the right to receive the bond's principal due at maturity, a process known as coupon stripping. Treasury STRIPs, IOs and POs are the most common forms of stripped zero coupon securities. In addition, some securities give the issuer the option to deliver additional securities in place of cash interest payments, thereby increasing the amount payable at maturity. These are referred to as pay-in-kind or PIK securities.
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Asset backed securities are payable from pools of obligations other than first mortgages. Most asset backed securities involve consumer or commercial debts. The Fund will purchase only mortgage related asset backed securities such as home equity loans, secured mortgages and manufactured housing obligations. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of commercial paper, notes, or pass-through certificates. Asset backed securities have prepayment risks. Like CMOs, asset backed securities may be structured like Floaters, Inverse Floaters, IOs and POs. Also, asset backed securities may be issued by a private entity and, although these securities must be rated investment grade, they present credit risks.
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Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
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Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
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Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate and currency risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
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The Fund may trade in the following types of derivative contracts:
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Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
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The Fund may buy/sell the following types of financial futures contracts.
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Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
The Fund may not buy or sell futures or related options if the margin deposits and premiums paid for these securities would exceed 5% of the Fund's total assets.
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Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
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Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
Caps and Floors are contracts in which one party agrees to make payments only if an interest rate or index goes above (Cap) or below (Floor) a certain level in return for a fee from the other party.
Repurchase agreements are transactions in which the Fund buys a security from a dealer or bank and agrees to sell the security back at a mutually agreed upon time and price. The repurchase price exceeds the sale price, reflecting the Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions, such as securities dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities subject to repurchase agreements. The Adviser or subcustodian will monitor the value of the underlying security each day to ensure that the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
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Reverse repurchase agreements are repurchase agreements in which the Fund is the seller (rather than the buyer) of the securities, and agrees to repurchase them at an agreed upon time and price. A reverse repurchase agreement may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In addition, reverse repurchase agreements create leverage risks because the Fund must repurchase the underlying security at a higher price, regardless of the market value of the security at the time of repurchase. The Fund may borrow an amount up to one third of the Fund's net assets (exclusive of such borrowings) for leverage purposes.
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Delayed delivery transactions, including when issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default.
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As with other delayed delivery transactions, a seller agrees to issue a TBA security at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms. For example, in a TBA mortgage backed transaction, the Fund and the seller would agree upon the issuer, interest rate and terms of the underlying mortgages. The seller would not identify the specific underlying mortgages until it issues the security. TBA mortgage-backed securities increase interest rate risks because the underlying mortgages may be less favorable than anticipated by the Fund.
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Dollar rolls are transactions where the Fund sells mortgage-backed securities with a commitment to buy similar, but not identical, mortgage-backed securities on a future date at a lower price. Normally, one or both securities involved are TBA mortgage-backed securities. Dollar rolls are subject to interest rate and credit risks.
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The Fund may lend portfolio securities to borrowers that the Adviser deems creditworthy. In return, the Fund receives cash or liquid securities from the borrower as collateral. The borrower must furnish additional collateral if the market value of the loaned securities increases. Also, the borrower must pay the Fund the equivalent of any dividends or interest received on the loaned securities.
The Fund will reinvest cash collateral in securities that qualify as an acceptable investment for the Fund. However, the Fund must pay interest to the borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower. The Fund will not have the right to vote on securities while they are on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash collateral to a securities lending agent or broker.
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Securities lending activities are subject to interest rate risks and credit risks.
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In order to secure its obligations in connection with derivatives contracts or special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on derivative contracts or special transactions.
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The SEC has granted an exemption that permits the Fund and all other funds advised by subsidiaries of Federated Investors, Inc. ("Federated funds") to lend and borrow money for certain temporary purposes directly to and from other Federated funds. Participation in this inter-fund lending program is voluntary for both borrowing and lending funds, and an inter-fund loan is only made if it benefits each participating fund. Federated administers the program according to procedures approved by the Fund's Board, and the Board monitors the operation of the program. Any inter-fund loan must comply with certain conditions set out in the exemption, which are designed to assure fairness and protect all participating funds.
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For example, inter-fund lending is permitted only: (a) to meet shareholder redemption requests; and (b) to meet commitments arising from "failed" trades. All inter-fund loans must be repaid in seven days or less. The Fund's participation in this program must be consistent with its investment policies and limitations, and must meet certain percentage tests. Inter-fund loans may be made only when the rate of interest to be charged is more attractive to the lending fund than market-competitive rates on overnight repurchase agreements (the "Repo Rate") and more attractive to the borrowing fund than the rate of interest that would be charged by an unaffiliated bank for short-term borrowings (the "Bank Loan Rate"), as determined by the Board. The interest rate imposed on inter-fund loans is the average of the Repo Rate and the Bank Loan Rate.
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The Fund may invest its assets in securities of other investment companies, including the securities of affiliated money market funds, as an efficient means of carrying out its investment policies and managing its uninvested cash.
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The Fund may invest in mortgage-backed securities primarily by investing in another investment company (which is not available for general investment by the public) that owns those securities and that is advised by an affiliate of the Adviser. This other investment company is managed independently of the Fund and may incur additional administrative expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional expenses. The Fund may also invest in such securities directly.
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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
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There are many factors which may affect an investment in the Fund. The Fund's principal risks are outlined below.
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Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due) payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage-backed securities.
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For example, when interest rates decline, the values of mortgage-backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage-backed securities.
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Conversely, when interest rates rise, the values of mortgage-backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage-backed securities, and cause their value to decline more than traditional fixed income securities.
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Generally, mortgage-backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage-backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage-backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
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The Fund's investment objective is to provide total return. The investment objective may not be changed by the Fund's Directors without shareholder approval.
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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 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.
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.
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.
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.
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).
The Fund will not issue senior securities, except as permitted by its investment objective and policies.
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The above limitations cannot be changed unless authorized by the Board of Directors (Board) and by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act. The following limitations, however, may be changed by the Board without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective.
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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.
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For purposes of the above 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." Except with respect to borrowing money, if a percentage limitations 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 limitation.
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Prices provided by independent pricing services may be determined without relying exclusively on quoted prices and may consider institutional trading in similar groups of securities, yield, quality, stability, risk, coupon rate, maturity, type of issue, trading characteristics, and other market data or factors. From time to time, when prices cannot be obtained from an independent pricing service, securities may be valued based on quotes from broker-dealers or other financial institutions that trade the securities.
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The Fund's net asset value (NAV) per Share fluctuates and is based on the market value of all securities and other assets of the Fund. The NAV for each class of Shares may differ 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.
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Under the Distributor's Contract with the Fund, the Distributor (Federated Securities Corp.) offers Shares on a continuous, best-efforts basis.
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As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per share expenses, and provide cash for orderly portfolio management and Share redemptions. In addition, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee.
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For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing-related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses.
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The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees.
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Investment professionals (such as broker-dealers or banks) may be paid fees, in significant amounts, out of the assets of the Distributor and/or Federated Shareholder Services Company (these fees do not come out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates.
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Investment professionals receive such fees for providing distribution-related and/or shareholder services, such as advertising, providing incentives to their sales personnel, sponsoring other activities intended to promote sales, and maintaining shareholder accounts These payments may be based upon such factors as the number or value of Shares the investment professional sells or may sell; the value of client assets invested; and/or the type and nature of sales or marketing support furnished by the investment professional.
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Certain investment professionals may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent may charge a fee based on the level of subaccounting services rendered. Investment professionals holding Shares in a fiduciary, agency, custodial or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services that may be related to the ownership of Shares. This information should, therefore, be read together with any agreement between the customer and the investment professional about the services provided, the fees charged for those services, and any restrictions and limitations imposed.
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Although the Fund intends to pay Share redemptions in cash, it reserves the right, as described below, to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
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Because the Fund has elected to be governed by Rule 18f-1 under the 1940 Act, the Fund is obligated to pay Share redemptions to any one shareholder in cash only up to the lesser of $250,000 or 1% of the net assets represented by such Share class during any 90-day period.
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Any Share redemption payment greater than this amount will also be in cash unless the Fund's Board determines that payment should be in kind. In such a case, the Fund will pay all or a portion of the remainder of the redemption in portfolio securities, valued in the same way as the Fund determines its NAV. The portfolio securities will be selected in a manner that the Fund's Board deems fair and equitable and, to the extent available, such securities will be readily marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving the portfolio securities and selling them before their maturity could receive less than the redemption value of the securities and could incur certain transaction costs.
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Each share of the Fund gives the shareholder one vote in Director elections and other matters submitted to shareholders for vote. All Shares of the Corporation have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote.
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Directors may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Corporation's outstanding shares of all series entitled to vote.
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As of November 7, 2000, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Institutional Shares: Charles Schwab & Co. Inc., Attn: Mutual Funds Dept., 101 Montgomery Street, San Francisco, CA 94104-4122, 5.65%; Wabank & Co. Wakesha State Bank, PO Box 648, Waukesha, WI 53187-0648, 11.88%; LaCross & Co., North Central Trust Co., Attn. Betty Smith, 311 Main Street, La Crosse, WI 54601-3251, 15.60%; Frojack Co., #2006513, First National Bank North Dakota, Attn Investment Dept., PO Box 1796, Walla Walla, WA 99362-0353, 26.37%; STC & Co., Springfield Trust Company, Attn Sandy Davis, 1906 East Battlefield Road, Springfield, MO 65804-3878, 8.18%; Boyer & Co #2039495, Baker-Boyer National Bank Attn Investment Dept., PO Box 1796, Walla Walla, WA 99362-0353, 26.37%.
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As of November 7, 2000, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Institutional Service Shares: Fairy Turner, 334 Asbill Road, McKee, KY 40447-9656, 15.20%; American Bank & Trust Co. 401(k), Attn John Benoit, 1600 4th Avenue, Suite 405, Rock Island, IL 61201-8632, 13.19%; Moce & Co., First Mid-Illinois Bank and Trust, NA, PO Box 499, Mattoon, IL 61938-0499, 17.63%; National Investor Services Corp. Spec. Custody Acct. for the Exclusive Benefit of Customers, Attn Mutual Fund Dept., 55 Water Street, 32nd Floor, New York, NY 10041-3299, 7.48%; NFSC FEBO #139-133140, FMT Co. Cust. IRA, FBO Terrance L. Conner, 605 Wild Pine Way, Venice, FL 34292-4618, 8.96%.
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Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders.
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Corporation's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carryforward, which may reduce the taxable income or gain that the Fund would realize, and to which the shareholder would be subject, in the future.
The Board is responsible for managing the Corporation's business affairs and for exercising all the Corporation's powers except those reserved for the shareholders. Information about each Board member is provided below and includes each person's: name, address, birth date, present position(s) held with the Corporation, principal occupations for the past five years and positions held prior to the past five years, total compensation received as a Director from the Corporation for its most recent fiscal year, if applicable, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Corporation is comprised of four funds and the Federated Fund Complex is comprised of 43 investment companies, whose investment advisers are affiliated with the Fund's Adviser.
As of November 7, 2000, the Fund's Board and Officers as a group owned approximately less than 1% of the Fund's outstanding Shares.
Name |
|
Principal Occupations |
|
Aggregate |
|
Total |
John F. Donahue*# |
|
Chief Executive Officer and Director or Trustee of the Federated Fund Complex; Chairman and Director, Federated Investors, Inc.; Chairman, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. ; formerly: Trustee, Federated Investment Management Company and Chairman and Director, Federated Investment Counseling. |
|
$0 |
|
$0 for the Corporation |
Thomas G. Bigley |
|
Director or Trustee of the Federated Fund Complex; Director, Member of Executive Committee, Children's Hospital of Pittsburgh; Director and Chairman of Audit Committee, Robroy Industries, Inc. (coated steel conduits/computer storage equipment); formerly: Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc. (physician practice management); Director, Member of Executive Committee, University of Pittsburgh. |
|
$1,413.94 |
|
$116,760.63 for the |
|
|
|
|
|
|
|
John T. Conroy, Jr. |
|
Director or Trustee of the Federated Fund Complex; Chairman of the Board, Investment Properties Corporation; Partner or Trustee in private real estate ventures in Southwest Florida; formerly: President, Investment Properties Corporation; Senior Vice President, John R. Wood and Associates, Inc., Realtors; President, Naples Property Management, Inc. and Northgate Village Development Corporation. |
|
$1,445.29 |
|
$128,455.37 for the |
Nicholas P. Constantakis |
|
Director or Trustee of the Federated Fund Complex; Director and Chairman of the Audit Committee, Michael Baker Corporation (engineering, construction, operations and technical services); formerly: Partner, Andersen Worldwide SC. |
|
$1,413.94 |
|
$73,191.21 for the |
John F. Cunningham |
|
Director or Trustee of some of the Federated Fund Complex; Chairman,
President and Chief Executive Officer, Cunningham & Co., Inc.
(strategic business consulting); Trustee Associate, Boston College;
Director, Iperia Corp. (communications/software); formerly: Director,
Redgate Communications and EMC Corporation (computer storage
systems). |
|
$1,313.72 |
|
$93,190.48 for the |
Lawrence D. Ellis, M.D.* |
|
Director or Trustee of the Federated Fund Complex; Professor of Medicine, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center -- Downtown; Hematologist, Oncologist and Internist, University of Pittsburgh Medical Center; Member, National Board of Trustees, Leukemia Society of America. |
|
$1,313.72 |
|
$116,760.63 for the |
Peter E. Madden |
|
Director or Trustee of the Federated Fund Complex; formerly:
Representative, Commonwealth of Massachusetts General Court; President,
State Street Bank and Trust Company and State Street Corporation.
|
|
$1,345.94 |
|
$109,153.60 for the |
Charles F. Mansfield, Jr. |
|
Director or Trustee of some of the Federated Fund Complex; Management
Consultant; formerly: Executive Vice President, Legal and External
Affairs, DVC Group, Inc. (formerly, Dugan Valva Contess, Inc.) (marketing,
communications, technology and consulting). |
|
$1,445.29 |
|
$102,573.91 for the |
John E. Murray, Jr., J.D., S.J.D.# |
|
Director or Trustee of the Federated Fund Complex; President, Law
Professor, Duquesne University; Consulting Partner, Mollica & Murray;
Director, Michael Baker Corp. (engineering, construction, operations and
technical services). |
|
$1,345.08 |
|
$128,455.37 for the |
Marjorie P. Smuts |
|
Director or Trustee of the Federated Fund Complex; Public
Relations/Marketing/Conference Planning. |
|
$1,313.72 |
|
$116,760.63 for the |
John S. Walsh |
|
Director or Trustee of some of the Federated Fund Complex; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc.; Director, Walsh & Kelly, Inc. (heavy highway contractor); formerly: Vice President, Walsh & Kelly, Inc. |
|
$1,313.72 |
|
$94,536.85 for the |
J. Christopher Donahue* |
|
President or Executive Vice President of the Federated Fund Complex; Director or Trustee of some of the Funds in the Federated Fund Complex; President, Chief Executive Officer and Director, Federated Investors, Inc.; President, Chief Executive Officer and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; President, Chief Executive Officer and Director, Federated Global Investment Management Corp.; President and Chief Executive Officer, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company; formerly: President, Federated Investment Counseling. |
|
$0 |
|
$0 for the Corporation |
|
|
|
|
|
|
|
Edward C. Gonzales |
|
President, Executive Vice President and Treasurer of some of the Funds in the Federated Fund Complex; Vice Chairman, Federated Investors, Inc.; Trustee, Federated Administrative Services; formerly: Trustee or Director of some of the Funds in the Federated Fund Complex; CEO and Chairman, Federated Administrative Services; Vice President, Federated Investment Management Company, Federated Investment Counseling, Federated Global Investment Management Corp. and Passport Research, Ltd.; Director and Executive Vice President, Federated Securities Corp.; Director, Federated Services Company; Trustee, Federated Shareholder Services Company. |
|
$0 |
|
$0 for the Corporation |
John W. McGonigle |
|
Executive Vice President and Secretary of the Federated Fund Complex; Executive Vice President, Secretary and Director, Federated Investors, Inc.; formerly: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
|
$0 |
|
$0 for the Corporation |
Richard J. Thomas |
|
Treasurer of the Federated Fund Complex; Senior Vice President, Federated Administrative Services; formerly: Vice President, Federated Administrative Services; held various management positions within Funds Financial Services Division of Federated Investors, Inc. |
|
$0 |
|
$0 for the Corporation |
William D. Dawson III |
|
Chief Investment Officer of this Fund and various other Funds in the Federated Fund Complex; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp., Federated Investment Management Company and Passport Research, Ltd.; Director, Federated Global Investment Management Corp. and Federated Investment Management Company; Registered Representative, Federated Securities Corp.; Portfolio Manager, Federated Administrative Services; Vice President, Federated Investors, Inc.; formerly: Executive Vice President and Senior Vice President, Federated Investment Counseling Institutional Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd. |
|
$0 |
|
$0 for the Corporation |
Joseph M. Balestrino |
|
Joseph M. Balestrino is Vice President of the Corporation. Mr. Balestrino joined Federated in 1986 and has been a Senior Portfolio Manager and Senior Vice President of the Fund's Adviser since 1998. He was a Portfolio Manager and a Vice President of the Fund's Adviser from 1995 to 1998. Mr. Balestrino served as a Portfolio Manager and an Assistant Vice President of the Adviser from 1993 to 1995. Mr. Balestrino is a Chartered Financial Analyst and received his Master's Degree in Urban and Regional Planning from the University of Pittsburgh. |
|
$0 |
|
$0 for the Corporation |
|
|
|
|
|
|
|
<R>
* An asterisk denotes a Director who is deemed to be an interested person as defined in the 1940 Act.
</R>
# A pound sign denotes a Member of the Board's Executive Committee, which handles the Board's responsibilities between its meetings.
<R>
Mr. Donahue is the father of J. Christopher Donahue, President of the Corporation.
</R>
<R>
Messrs. Cunningham, Mansfield and Walsh became members of the Board of Directors on April 1, 1999.
</R>
The Adviser conducts investment research and makes investment decisions for the Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Corporation or any Fund shareholder for any losses that may be sustained in the purchase, holding, or sale of any security or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Corporation.
Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of Fund Shares offered by the Distributor.
<R>
</R>
<R>
As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted codes of ethics. These codes govern securities trading activities of investment personnel, Fund Directors, and certain other employees. Although they do permit these people to trade in securities, including those that the Fund could buy, they also contain significant safeguards designed to protect the Fund and its shareholders from abuses in this area, such as requirements to obtain prior approval for, and to report, particular transactions.
</R>
When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. The Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. In selecting among firms believed to meet these criteria, the Adviser may give consideration to those firms which have sold or are selling Shares of the Fund and other funds distributed by the Distributor and its affiliates. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other accounts managed by the Adviser. When the Fund and one or more of those accounts invests in, or disposes of, the same security, available investments or opportunities for sales will be allocated among the Fund and the account(s) in a manner believed by the Adviser to be equitable. While the coordination and ability to participate in volume transactions may benefit the Fund, it is possible that this procedure could adversely impact the price paid or received and/or the position obtained or disposed of by the Fund.
Federated Services Company, a subsidiary of Federated, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Services Company provides these at the following annual rate of the average aggregate daily net assets of all Federated Funds as specified below:
Maximum Administrative Fee |
|
Average Aggregate Daily |
0.150 of 1% |
|
on the first $250 million |
0.125 of 1% |
|
on the next $250 million |
0.100 of 1% |
|
on the next $250 million |
0.075 of 1% |
|
on assets in excess of $750 million |
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses.
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank.
Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type and number of accounts and transactions made by shareholders.
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs its audit so that it may provide an opinion as to whether the Fund's financial statements and financial highlights are free of material misstatement in accordance with accounting principles generally accepted in the United States of America.
For the Year Ended September 30 |
|
<R>2000</R> |
|
1999 |
|
1998 |
Advisory Fee Earned |
|
<R>$73,947</R> |
|
$41,413 |
|
$20,745 |
| ||||||
Advisory Fee Reduction |
|
<R>73,947</R> |
|
41,413 |
|
20,745 |
| ||||||
Brokerage Commissions |
|
<R>0</R> |
|
0 |
|
0 |
| ||||||
Administrative Fee |
|
<R>155,000</R> |
|
155,000 |
|
155,001 |
| ||||||
12b-1 Fee |
|
|
|
|
|
|
| ||||||
Institutional Service Shares |
|
<R>259</R> |
|
<R>--</R> |
|
-- |
| ||||||
Shareholder Services Fee |
|
|
|
|
|
|
| ||||||
Institutional Shares |
|
<R>0</R> |
|
<R>--</R> |
|
-- |
| ||||||
Institutional Service Shares |
|
<R>1,295</R> |
|
<R>--</R> |
|
-- |
|
Fees are allocated among classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable class of Shares.
The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information.
The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings fluctuate daily. Both net earnings and offering price per Share are factors in the computation of yield and total return.
<R>
Total returns are given for the one-year and Start of Performance periods ended September 30, 2000.
</R>
<R>
Yield is given for the 30-day period ended September 30, 2000
</R>
Share Class |
|
30-Day Period |
|
1 Year |
|
Start of |
Institutional Shares: |
|
|
|
|
|
|
Total Return |
|
<R>--</R> |
|
<R>8.11%</R> |
|
<R>7.42%</R> |
Yield |
|
<R>7.12%</R> |
|
<R>--</R> |
|
<R>--</R> |
<R>Institutional Service Shares:</R> |
|
|
|
|
|
|
Total Return |
|
<R>--</R> |
|
<R>7.79%</R> |
|
<R>7.11%</R> |
Yield |
|
<R>6.81%</R> |
|
<R>--</R> |
|
<R>--</R> |
Total return represents the change (expressed as a percentage) in the value of Shares over a specific period of time, and includes the investment of income and capital gains distributions.
The average annual total return for Shares is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of Shares owned at the end of the period by the NAV per Share at the end of the period. The number of Shares owned at the end of the period is based on the number of Shares purchased at the beginning of the period with $1,000, less any applicable sales charge, adjusted over the period by any additional Shares, assuming the annual reinvestment of all dividends and distributions.
The yield of Shares is calculated by dividing: (i) the net investment income per Share earned by the Shares over a 30-day period; by (ii) the maximum offering price per Share on the last day of the period. This number is then annualized using semi-annual compounding. This means that the amount of income generated during the 30-day period is assumed to be generated each month over a 12-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by Shares because of certain adjustments required by the SEC and, therefore, may not correlate to the dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in connection with services provided in conjunction with an investment in Shares, the Share performance is lower for shareholders paying those fees.
Advertising and sales literature may include:
The Fund may compare its performance, or performance for the types of securities in which it invests, to a variety of other investments, including federally insured bank products such as bank savings accounts, certificates of deposit, and Treasury bills.
The Fund may quote information from reliable sources regarding individual countries and regions, world stock exchanges, and economic and demographic statistics.
You may use financial publications and/or indices to obtain a more complete view of Share performance. When comparing performance, you should consider all relevant factors such as the composition of the index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include:
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.
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.
Federated is dedicated to meeting investor needs by making structured, straightforward and consistent investment decisions. Federated investment products have a history of competitive performance and have gained the confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound methodologies backed by fundamental and technical research. At Federated, success in investment management does not depend solely on the skill of a single portfolio manager. It is a fusion of individual talents and state-of-the-art industry tools and resources. Federated's investment process involves teams of portfolio managers and analysts, and investment decisions are executed by traders who are dedicated to specific market sectors and who handle trillions of dollars in annual trading volume.
<R>
In the municipal sector, as of December 31, 1999, Federated managed 12 bond funds with approximately $2.0 billion in assets and 24 money market funds with approximately $13.1 billion in total assets. In 1976, Federated introduced one of the first municipal bond mutual funds in the industry and is now one of the largest institutional buyers of municipal securities. The Funds may quote statistics from organizations including The Tax Foundation and the National Taxpayers Union regarding the tax obligations of Americans.
</R>
<R>
In the equity sector, Federated has more than 29 years' experience. As of December 31, 1999, Federated managed 53 equity funds totaling approximately $18.3 billion in assets across growth, value, equity income, international, index and sector (i.e. utility) styles. Federated's value-oriented management style combines quantitative and qualitative analysis and features a structured, computer-assisted composite modeling system that was developed in the 1970s.
</R>
<R>
In the corporate bond sector, as of December 31, 1999, Federated managed 13 money market funds and 29 bond funds with assets approximating $35.7 billion and $7.7 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 27 years of experience in the corporate bond sector. In 1972, Federated introduced one of the first high-yield bond funds in the industry. In 1983, Federated was one of the first fund managers to participate in the asset backed securities market, a market totaling more than $209 billion.
</R>
<R>
In the government sector, as of December 31, 1999, Federated managed 9 mortgage backed, 11 government/agency and 16 government money market mutual funds, with assets approximating $4.7 billion, $1.6 billion and $34.1 billion, respectively. Federated trades approximately $450 million in U.S. government and mortgage-backed securities daily and places approximately $25 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $43.8 billion in government funds within these maturity ranges.
</R>
<R>
In the money market sector, Federated gained prominence in the mutual fund industry in 1974 with the creation of the first institutional money market fund. Simultaneously, the company pioneered the use of the amortized cost method of accounting for valuing shares of money market funds, a principal means used by money managers today to value money market fund shares. Other innovations include the first institutional tax-free money market fund. As of December 31, 1999, Federated managed more than $83.0 billion in assets across 54 money market funds, including 16 government, 13 prime, 24 municipal and 1 euro-denominated with assets approximating $34.1 billion, $35.7 billion, $13.1 billion and $115 million, respectively.
</R>
The Chief Investment Officers responsible for oversight of the various investment sectors within Federated are: U.S. equity and high yield-- J. Thomas Madden; U.S. fixed income--William D. Dawson III; and global equities and fixed income--Henry A. Frantzen. The Chief Investment Officers are Executive Vice Presidents of the Federated advisory companies.
Thirty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $5 trillion to the more than 7,300 funds available, according to the Investment Company Institute.
Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include:
<R>
Federated meets the needs of approximately 1,160 institutional clients nationwide by managing and servicing separate accounts and mutual funds for a variety of purposes, including defined benefit and defined contribution programs, cash management, and asset/liability management. Institutional clients include corporations, pension funds, tax exempt entities, foundations/endowments, insurance companies, and investment and financial advisers. The marketing effort to these institutional clients is headed by John B. Fisher, President, Institutional Sales Division, Federated Securities Corp.
</R>
Other institutional clients include more than 1,600 banks and trust organizations. Virtually all of the trust divisions of the top 100 bank holding companies use Federated Funds in their clients' portfolios. The marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank Marketing & Sales.
Federated Funds are available to consumers through major brokerage firms nationwide--we have over 2,200 broker/dealer and bank broker/dealer relationships across the country--supported by more wholesalers than any other mutual fund distributor. Federated's service to financial professionals and institutions has earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for service quality measurement. The marketing effort to these firms is headed by James F. Getz, President, Broker/Dealer Sales Division, Federated Securities Corp.
<R>
</R>
<R>
</R>
<R>
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
B--Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
</R>
<R>
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
</R>
<R>
CC--The rating CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC debt rating.
</R>
<R>
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.
</R>
<R>
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
</R>
<R>
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.
</R>
<R>
AA--Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
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.
</R>
<R>
CC--Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time.
</R>
<R>
C--Bonds are imminent default in payment of interest or principal.
</R>
<R>
</R>
<R>
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:
</R>
<R>
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.
</R>
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</R>
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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.
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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.
</R>
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</R>
<R>
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as having the strongest degree of assurance for timely payment.
</R>
<R>
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than the strongest issues.
</R>
Institutional Shares
Institutional Service Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
Federated Securities Corp.
Federated Investors Tower
1001 Liberty
Avenue
Pittsburgh, PA 15222-3779
Federated Investment Management Company
Federated Investors Tower
1001
Liberty Avenue
Pittsburgh, PA 15222-3779
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA
02266-8600
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA
02266-8600
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
Federated
World-Class Investment Manager®
A Portfolio of Federated Total Return Series, Inc.
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</R>
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November 30, 2000
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A mutual fund seeking to provide total return by investing primarily in a diversified portfolio of domestic fixed income securities with an average portfolio duration of three years or less.
</R>
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE
Risk/Return Summary 1
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What are the Fund's Fees and Expenses? 4
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What are the Fund's Investment Strategies? 5
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What are the Principal Securities in Which the Fund Invests? 7
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What are the Specific Risks of Investing in the Fund? 10
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What Do Shares Cost? 13
</R>
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How is the Fund Sold? 13
</R>
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How to Purchase Shares 14
</R>
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How to Redeem Shares 15
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Account and Share Information 17
</R>
<R>
Who Manages the Fund? 18
</R>
<R>
Financial Information 19
</R>
<R>
Independent Auditors' Report 36
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The Fund's investment objective is to provide total return. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus. The Fund's total return will consist of two components: (1) changes in the market value of its portfolio securities (both realized and unrealized appreciation); and (2) income received from its portfolio securities. The Fund expects that income will comprise the largest component of its total return.
The Fund invests primarily in a diversified portfolio of domestic fixed income securities, including corporate debt securities, U.S. government obligations and mortgage backed and asset backed securities. Under normal market conditions, the Fund invests at least 65% of its assets in domestic investment grade debt securities. The investment adviser (Adviser) seeks to enhance the Fund's performance by allocating relatively more of its portfolio to the security type that the Adviser expects to offer the best balance between total return and risk.
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Although the value of the Fund's shares will fluctuate, the Adviser will seek to manage the magnitude of fluctuation by limiting the Fund's dollar-weighted average duration to three years or less. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
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All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:
The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency.
The bar chart shows the variability of the Fund's Institutional Shares total returns on a calendar year-end basis.
The Fund's Institutional Shares are sold without a sales charge (load). The total returns displayed above are based upon net asset value.
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The Fund's Institutional Shares total return for the nine-month period from January 1, 2000 to September 30, 2000 was 5.31%.
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Within the period shown in the chart, the Fund's Institutional Shares highest quarterly return was 2.60% (quarter ended June 30, 1997). Its lowest quarterly return was 0.38% (quarter ended December 31, 1998).
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<R>
The following table represents the Fund's Institutional Shares Average Annual Total Returns for the calendar periods ended December 31, 1999. The table shows the Fund's Institutional Shares total returns averaged over a period of years relative to the Merrill Lynch 1-3 Year Treasury Index (ML1-3T), a broad-based unmanaged index tracking short-term U.S. government securities with maturities between 1 and 2.99 years, the Merrill Lynch 1-3 Corporate Index (ML1-3C), a broad-based market capitalization weighted index including fixed-coupon domestic investment grade corporate bonds with at least $100 million par amount outstanding, and Lipper Short Investment Grade Debt Funds Average (LSIGDFA), an average of funds with similar investment objectives. Total returns for the indexes shown do not reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
</R>
<R>
Calendar Period |
|
Fund |
|
ML1-3T |
|
ML1-3C |
|
LSIGDFA |
1 Year |
|
3.32% |
|
3.06% |
|
3.90% |
|
2.92% |
Start of Performance1 |
|
6.06% |
|
5.69% |
|
6.23% |
|
5.18% |
1 The Fund's Institutional Shares start of performance date was October 1, 1996.
Past performance does not necessarily predict future performance. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Shares.
Shareholder Fees |
|
|
Fees Paid Directly From Your Investment |
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) |
|
None |
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable) |
|
None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price) |
|
None |
Redemption Fee (as a percentage of amount redeemed, if applicable) |
|
None |
Exchange Fee |
|
None |
|
|
|
Annual Fund Operating Expenses (Before Waivers and Reimbursements)1 |
|
|
Expenses That are Deducted From Fund Assets (as a percentage of average net assets) |
|
|
Management Fee2 |
|
0.40% |
Distribution (12b-1) Fee |
|
None |
Shareholder Services Fee3 |
|
0.25% |
Other Expenses4 |
|
0.43% |
Total Annual Fund Operating Expenses |
|
1.08% |
1 Although not contractually obligated to do so, the Adviser and shareholder services provider waived and reimbursed certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended September 30, 2000. | ||
Total Waivers and Reimbursements of Fund Expenses |
|
0.73% |
Total Actual Annual Fund Operating Expenses (after waivers and reimbursements) |
|
0.35% |
2 The Adviser voluntarily waived the management fee. The Adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.00% for the fiscal year ended September 30, 2000. | ||
3 The shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The shareholder services fee paid by the Fund's Institutional Shares (after the voluntary waiver) was 0.00% for the fiscal year ended September 30, 2000. | ||
4 The Adviser voluntarily reimbursed certain operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement at any time. Total other operating expenses paid by the Fund (after the voluntary reimbursement) were 0.35% for the fiscal year ended September 30, 2000. |
This Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds.
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The Example assumes that you invest $10,000 in the Fund's Institutional Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Shares operating expenses are before waivers and reimbursements as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
</R>
1 Year |
$ |
110 |
| ||
3 Years |
$ |
343 |
| ||
5 Years |
$ |
595 |
| ||
10 Years |
$ |
1,317 |
|
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Under normal market conditions, the Fund invests at least 65% of the value of its total assets in a diversified portfolio of domestic, high-quality fixed income securities, combining various asset classes including U.S. Treasury, asset backed, mortgage backed and corporate debt securities. The Fund's Adviser actively manages the Fund's portfolio within a portfolio duration limitation to attempt to construct a portfolio of securities offering attractive risk-adjusted yields over a portfolio of comparable Treasury securities. As a matter of investment policy, the Adviser manages the Fund's share price volatility attributable to interest rate risk by limiting the dollar-weighted average modified duration of its portfolio securities to three years or less. A description of the various types of securities in which the Fund principally invests, and their risks, immediately follows this strategy section.
</R>
<R>
The Adviser attempts to select securities offering attractive risk-adjusted yields over comparable Treasury securities. Corporate and asset backed securities offer higher yields compared to Treasury securities to compensate for their additional risks, such as credit risk. Mortgage backed securities, which usually have nominal credit risk, have higher yields due to their risk that the principal will be repaid faster than expected if the underlying mortgages are prepaid. In selecting securities, the Adviser seeks the higher relative returns of corporate and asset backed (including mortgage backed) securities, while attempting to limit or manage their additional credit or prepayment risks.
</R>
The Adviser's investment process first allocates the Fund's portfolio among different types of fixed income securities. The Adviser makes a greater allocation of the Fund's portfolio to those types of securities that the Adviser expects to offer the best balance between total return and risk and thus offer the greatest potential for return. The allocation process is based on the Adviser's continuing analysis of a variety of economic and market indicators to arrive at what the adviser believes the yield "spread" should be of each security type. (The spread is the difference between the yield of a security versus the yield of a comparable U.S. Treasury security.)
Securities are selected by weighing projected spreads against the spreads at which securities can currently be purchased. The Adviser also analyzes the credit risks and prepayment risks of individual securities in order to complete the analysis.
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The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage backed securities with characteristics that make prepayment fluctuations less likely. Characteristics that the Adviser may consider in selecting securities include the average interest rates of the underlying mortgages and the federal agencies (if any) that support the mortgages. The Adviser attempts to assess the relative returns and risks for mortgage backed securities by analyzing how the timing, amount and division of cash flows might change in response to changing economic and market conditions.
</R>
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The Adviser attempts to manage the Fund's credit risk by selecting securities that make default in the payment of principal and interest less likely. The Adviser looks at a variety of factors, including macroeconomic analysis and corporate earnings analysis, among others, to determine which business sectors and credit ratings are most advantageous for investment by the Fund. In selecting individual corporate fixed income securities, the Adviser analyzes a company's business, competitive position, and general financial condition to assess whether the security's credit risk is commensurate with its potential return. The Fund may invest a portion of its portfolio in non-investment grade fixed income securities, which are rated BB or lower by a nationally recognized securities rating organization (NRSRO). The non-investment grade securities in which the Fund invests generally pay higher interest rates as compensation for the greater default risk attached to the securities.
</R>
Within the Fund's three-year portfolio duration constraint, the Adviser may further manage interest rate risk by lengthening or shortening duration from time-to-time based on its interest rate outlook. If the Adviser expects interest rates to decline, it will generally lengthen the Fund's duration, and if the Adviser expects interest rates to increase, it will generally shorten the Fund's duration. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions by analyzing a variety of factors, such as:
There is no assurance that the Adviser's efforts to forecast market interest rates, and assess relative risks and the impact of market interest rates on particular securities, will be successful.
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The Fund may also invest a portion of its portfolio in foreign securities.
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Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the types of fixed income securities in which the Fund principally invests.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
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Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
</R>
CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of pass through instruments or asset-backed bonds. Asset backed securities have prepayment risks.
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a Government Sponsored Entity, or GSE). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
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</R>
<R>
Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer based outside the United States if:
</R>
<R>
Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.
</R>
<R>
</R>
<R>
In order to convert U.S. dollars into the currency needed to buy a foreign security, or to convert foreign currency received from the sale of a foreign security into U.S. dollars, the Fund may enter into spot currency trades. In a spot currency trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.
</R>
<R>
The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
</R>
Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
<R>
Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due), payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
</R>
<R>
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
</R>
<R>
Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
</R>
<R>
Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
</R>
Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
Many fixed income securities receive credit ratings from services such as Standard & Poor's and Moody's Investor Services, Inc. These services assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment.
Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline.
Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.
Trading opportunities are more limited for fixed income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held.
These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses.
<R>
</R>
<R>
Exchange rates for currencies fluctuate daily. The combination of currency risk and market risks tends to make securities traded in foreign markets more volatile than securities traded in the United States. The Adviser attempts to manage currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.
</R>
<R>
</R>
Securities rated below investment grade, also known as junk bonds, generally entail greater market, credit and liquidity risks than investment grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.
<R>
</R>
<R>
Foreign securities pose additional risks because foreign economic or political conditions may be less favorable than those of the United States. Securities in foreign markets may also be subject to taxation policies that reduce returns for U.S. investors.
</R>
<R>
Foreign companies may not provide information (including financial statements) as frequently or to as great an extent as companies in the United States. Foreign companies may also receive less coverage than United States companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.
</R>
<R>
Foreign countries may have restriction on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund's investments.
</R>
<R>
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus) it is processed at the next calculated net asset value (NAV).
</R>
<R>
From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund's assets may change on days you cannot purchase or redeem Shares. The Fund does not charge a front-end sales charge. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values fixed income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost.
</R>
The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated" and Institutional Shares.
The required minimum initial investment for Fund Shares is $100,000. There is no required minimum subsequent investment amount. 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 is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
<R>
The Fund offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect its performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.
</R>
The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to accounts for which financial institutions act in a fiduciary or agency capacity and to individuals, directly or through investment professionals.
<R>
The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
</R>
You may purchase Shares through an investment professional or directly from the Fund. The Fund reserves the right to reject any request to purchase Shares.
Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."
You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are restricted.
Make your check payable to The Federated Funds, note your account number on the check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will not accept third-party checks (checks originally payable to someone other than you or The Federated Funds).
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You should redeem Shares:
Submit your redemption request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.
You may redeem Shares by calling the Fund at 1-800-341-7400. If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day's NAV.
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
Call your investment professional or the Fund if you need special instructions.
Signatures must be guaranteed if:
<R>
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer or securities exchange member. A notary public cannot provide a signature guarantee.
</R>
Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:
Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.
The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Fund no longer issues share certificates. If you are redeeming Shares represented by certificates previously issued by the Fund, you must return the certificates with your written redemption request. For your protection, send your certificates by registered or certified mail, but do not endorse them.
You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.
The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the Fund declares a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.
Fund distributions are expected to be primarily dividends. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.
The Board of Directors governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. The Adviser's address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
<R>
The Adviser and other subsidiaries of Federated advise approximately 176 mutual funds and separate accounts, which totaled approximately $125 billion in assets as of December 31, 1999. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,900 employees. More than 4,000 investment professionals make Federated Funds available to their customers.
</R>
<R>
Randall S. Bauer has been the Fund's portfolio manager since inception. He is Vice President of the Fund. Mr. Bauer joined Federated in 1989 and has been a Portfolio Manager and a Vice President of the Fund's Adviser since 1994. Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance from Pennsylvania State University.
</R>
Robert E. Cauley has been the Fund's portfolio manager since March 1999. Mr. Cauley joined Federated in 1996 as a Senior Investment Analyst and an Assistant Vice President of the Fund's Adviser and has been a Portfolio Manager since 1997. Mr. Cauley has been a Vice President of the Adviser since 1999. Mr. Cauley was a member of the Asset-Backed Structuring Group at Lehman Brothers Holding, Inc. from 1994 to 1996. Mr. Cauley earned his M.S.I.A., concentrating in Finance and Economics, from Carnegie Mellon University.
<R>
Mark E. Durbiano has been the Fund's portfolio manager for the high-yield corporate bonds asset category of the Fund since inception. He is Vice President of the Fund. Mr. Durbiano joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice President of the Fund's Adviser since 1996. From 1988 through 1995, Mr. Durbiano was a Portfolio Manager and a Vice President of the Fund's Adviser. Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in Finance from the University of Pittsburgh.
</R>
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.
<R>
</R>
<R>
The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years, or since inception, if the life of the Fund is shorter. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.
</R>
This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus.
(For a Share Outstanding Throughout Each Period)
Reference is made to the Independent Auditors' Report on page 36.
Year Ended September 30 |
|
2000 |
|
|
1999 |
1 |
|
1998 |
|
|
1997 |
2 |
Net Asset Value, Beginning of Period |
|
$ 9.88 |
|
|
$10.23 |
|
|
$10.13 |
|
|
$10.00 |
|
Income From Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
0.69 |
|
|
0.63 |
|
|
0.70 |
|
|
0.66 |
|
Net realized and unrealized gain (loss) on investments and foreign currency transactions |
|
(0.10 |
) |
|
(0.35 |
) |
|
0.12 |
|
|
0.14 |
|
| ||||||||||||
TOTAL FROM INVESTMENT OPERATIONS |
|
0.59 |
|
|
0.28 |
|
|
0.82 |
|
|
0.80 |
|
| ||||||||||||
Less Distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
(0.68 |
) |
|
(0.63 |
) |
|
(0.70 |
) |
|
(0.65 |
) |
Distributions from net realized gain on investments and foreign currency transactions |
|
-- |
|
|
-- |
|
|
(0.02 |
) |
|
(0.02 |
) |
| ||||||||||||
TOTAL DISTRIBUTIONS |
|
(0.68 |
) |
|
(0.63 |
) |
|
(0.72 |
) |
|
(0.67 |
) |
| ||||||||||||
Net Asset Value, End of Period |
|
$ 9.79 |
|
|
$ 9.88 |
|
|
$10.23 |
|
|
$10.13 |
|
| ||||||||||||
Total Return3 |
|
6.17 |
% |
|
2.88 |
% |
|
7.85 |
% |
|
8.27 |
% |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Expenses |
|
0.35 |
% |
|
0.35 |
% |
|
0.32 |
% |
|
0.00 |
% |
| ||||||||||||
Net investment income |
|
7.12 |
% |
|
6.45 |
% |
|
6.31 |
% |
|
6.47 |
% |
| ||||||||||||
Expense waiver/reimbursement4 |
|
0.73 |
% |
|
0.91 |
% |
|
1.95 |
% |
|
8.74 |
% |
| ||||||||||||
Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net assets, end of period (000 omitted) |
|
$87,780 |
|
$66,820 |
|
$30,219 |
|
$7,589 |
| |||
| ||||||||||||
Portfolio turnover |
|
34 |
% |
|
53 |
% |
|
64 |
% |
|
109 |
% |
|
1 For the year ended September 30, 1999, the fund was audited by Deloitte & Touche LLP. Each of the previous years was audited by other auditors.
2 Reflects operations for the period from October 1, 1996 (start of performance) to September 30, 1997.
3 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
4 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--53.1%1 |
|
|
|
|
|
|
Automobile--17.1% |
|
|
|
$ |
33,465 |
|
AFG Receivables Trust 1997-A, Class C, 7.20%, 10/15/2002 |
|
$ |
33,510 |
|
29,846 |
|
AFG Receivables Trust 1997-B, Class C, 7.00%, 2/15/2003 |
|
|
29,844 |
|
2,000,000 |
|
Arcadia Automobile Receivables Trust 1997-B, Class A5, 6.70%, 2/15/2005 |
|
|
1,997,500 |
|
1,500,000 |
|
BMW Vehicle Owner Trust 1999-A, Class A3, 6.41%, 4/25/2003 |
|
|
1,493,940 |
|
1,500,000 |
|
Bay View Auto Trust 1999-LG1, Class A3, 6.91%, 3/15/2004 |
|
|
1,501,935 |
|
255,000 |
|
CIT RV Trust 1994-A, Class A, 4.90%, 7/15/2009 |
|
|
252,553 |
|
3,000,000 |
|
Capital Auto Receivables Asset Trust 2000-1, Class A4, 7.00%, 1/17/2005 |
|
|
3,015,495 |
|
50,000 |
|
Chase Manhattan Auto Owner Trust 1997-A, Class A5, 6.50%, 12/17/2001 |
|
|
49,987 |
|
117,867 |
|
Fleetwood Credit Corp. Grantor Trust 1996-B, Class A, 6.90%, 3/15/2012 |
|
|
117,652 |
|
644,437 |
|
Key Auto Finance Trust 1999-1, Class C, 7.08%, 1/15/2007 |
|
|
636,179 |
|
1,690,314 |
|
Mellon Auto Grantor Trust 2000-1, Class B, 7.43%, 10/15/2006 |
|
|
1,706,110 |
|
2,000,000 |
|
Nissan Auto Receivables Owner Trust 1999-A, Class A3, 6.47%, 9/15/2003 |
|
|
1,995,440 |
|
166,435 |
2 |
Paragon Auto Receivables Owner Trust 1998-A, Class B, 7.47%, 11/15/2004 |
|
|
163,406 |
|
417,065 |
2 |
Paragon Auto Receivables Owner Trust 1998-B, Class B, 7.03%, 3/15/2005 |
|
|
407,098 |
|
644,716 |
|
Paragon Auto Receivables Owner Trust 1999-A, Class A, 5.95%, 11/15/2005 |
|
|
639,065 |
|
1,500,000 |
|
Toyota Auto Receivables Owner Trust 1999-A, Class C, 6.70%, 8/16/2004 |
|
|
1,496,085 |
|
1,000,000 |
|
Toyota Auto Receivables Owner Trust 2000-B, Class A3, 6.76%, 8/15/2004 |
|
|
1,001,560 |
|
150,000 |
|
Yamaha Motor Master Trust 1995-1, Class A, 6.20%, 5/15/2003 |
|
|
149,997 |
| ||||||
|
|
|
TOTAL |
|
|
16,687,356 |
| ||||||
|
|
|
Credit Card--9.0% |
|
|
|
|
102,726 |
2 |
Banco Nacional de Mexico SA, Credit Card Merchant Voucher Receivables Master Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 |
|
|
99,784 |
|
500,000 |
2 |
Circuit City Credit Card Master Trust 2000-1, Class CTF, 7.82%, 2/15/2006 |
|
|
500,962 |
|
250,000 |
|
Citibank Credit Card Master Trust 1998-1, Class A, 5.75%, 1/15/2003 |
|
|
249,355 |
|
801,000 |
|
Citibank Credit Card Master Trust I 1998-6, Class A, 5.85%, 4/10/2003 |
|
|
796,867 |
|
1,550,000 |
|
Fingerhut Master Trust 1998-2, Class A, 6.23%, 2/15/2007 |
|
|
1,528,316 |
|
260,000 |
|
First USA Credit Card Master Trust 1997-6, Class A, 6.42%, 3/17/2005 |
|
|
258,625 |
|
2,000,000 |
|
MBNA Master Credit Card Trust 1997-F, Class A, 6.60%, 11/15/2004 |
|
|
1,995,760 |
|
1,000,000 |
|
MBNA Master Credit Card Trust 1999-I, Class A, 6.40%, 1/18/2005 |
|
|
993,910 |
|
1,000,000 |
|
MBNA Master Credit Card Trust 2000-A, Class A, 7.35%, 7/16/2007 |
|
|
1,027,950 |
|
285,000 |
|
Prime Credit Card Master Trust 1996-1, Class A, 6.70%, 7/15/2004 |
|
|
285,034 |
|
1,000,000 |
|
Proffitt's Credit Card Master Trust 1998-2, Class B, 6.15%, 9/15/2004 |
|
|
994,920 |
| ||||||
|
|
|
TOTAL |
|
|
8,731,483 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--continued1 |
|
|
|
|
|
|
Home Equity Loan--14.2% |
|
|
|
$ |
500,000 |
2 |
125 Home Loan Owner Trust 1998-1, Class B2, 12.16%, 2/15/2029 |
|
$ |
455,000 |
|
603 |
|
Advanta Mortgage Loan Trust 1997-1, Class A2, 7.10%, 4/25/2020 |
|
|
601 |
|
500,000 |
|
Amresco Residential Securities Mortgage Loan Trust 1996-1, Class A5, 7.05%, 4/25/2027 |
|
|
497,646 |
|
1,000,000 |
|
Cityscape Home Equity Loan Trust 1997-1, Class M1, 7.58%, 3/25/2018 |
|
|
972,455 |
|
1,266,352 |
2 |
Contimortgage Home Equity Loan Trust 1993-3, Class A2, 5.54%, 7/15/2020 |
|
|
1,203,430 |
|
270,000 |
|
Countrywide Asset-Backed Certificates 1999-1, Class AF2, 6.16%, 9/25/2025 |
|
|
265,216 |
|
1,140,000 |
|
EQCC Home Equity Loan Trust 1996-3, Class A6, 7.40%, 12/15/2019 |
|
|
1,142,405 |
|
457,000 |
|
EQCC Home Equity Loan Trust 1997-2, Class A7, 6.89%, 2/15/2020 |
|
|
454,989 |
|
942,642 |
|
Green Tree Home Improvement Loan Trust 1995-C, Class B1, 7.20%, 7/15/2020 |
|
|
928,522 |
|
481,015 |
|
Green Tree Home Improvement Loan Trust 1997-C, Class B2, 7.59%, 8/15/2028 |
|
|
312,660 |
|
390,496 |
|
Headlands Home Equity Loan Trust 1998-2, Class A3, 6.67%, 12/15/2024 |
|
|
382,503 |
|
412,614 |
|
Independent National Mortgage Corp. Home Equity 1997-A, Class BF, 7.39%, 10/25/2028 |
|
|
397,915 |
|
1,500,000 |
|
Long Beach Home Equity Loan Trust 2000-LB1, Class M2V, 7.72%, 6/21/2030 |
|
|
1,500,000 |
|
1,000,000 |
|
Mellon Bank Home Equity Installment Loan 1999-1, Class B, 6.95%, 3/25/2015 |
|
|
942,270 |
|
267,444 |
|
NC Finance Trust 1999-1, Class B, 8.75%, 1/25/2029 |
|
|
250,060 |
|
946,487 |
2 |
Option One Mortgage Securities Corp. 2000-5, Class CTF, 10.65%, 10/26/2030 |
|
|
946,782 |
|
1,500,000 |
|
Saxon Asset Securities Trust 1997-1, Class AF4, 7.76%, 2/25/2027 |
|
|
1,505,772 |
|
303,557 |
|
Saxon Asset Securities Trust 1997-1, Class BV, 7.52%, 4/25/2027 |
|
|
301,043 |
|
250,000 |
2 |
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
|
230,665 |
|
500,000 |
|
Saxon Asset Securities Trust 1999-1, Class BV1, 9.37%, 2/25/2029 |
|
|
499,545 |
|
478,246 |
|
Saxon Asset Securities Trust 2000-2, Class AV1, 6.88%, 7/25/2030 |
|
|
476,507 |
|
61,064 |
|
TMS Home Equity Trust 1996-B, Class A7, 7.55%, 2/15/2020 |
|
|
61,056 |
|
64,591 |
|
UCFC Home Equity Loan 1995-A1, Class A5, 8.55%, 1/10/2020 |
|
|
64,523 |
| ||||||
|
|
|
TOTAL |
|
|
13,791,565 |
| ||||||
|
|
|
Machinery & Equipment--0.5% |
|
|
|
|
541,315 |
|
Case Equipment Loan Trust 1999-A, Class B, 5.96%, 8/15/2005 |
|
|
537,226 |
| ||||||
|
|
|
Manufactured Housing--6.7% |
|
|
|
|
407,335 |
|
Bankamerica Manufactured Housing Contract Trust 1996-1, Class A3, 6.95%, 10/10/2026 |
|
|
407,783 |
|
2,000,000 |
|
Conseco Finance Securitization Corp. 2000-5, Class A2, 7.06%, 2/1/2032 |
|
|
1,999,374 |
|
250,000 |
|
Green Tree Financial Corp. 1996-2, Class B1, 7.55%, 4/15/2027 |
|
|
237,525 |
|
22,663 |
|
Green Tree Financial Corp. 1996-4, Class A4, 6.80%, 6/15/2027 |
|
|
22,666 |
|
1,250,000 |
|
Green Tree Financial Corp. 1997-3, Class B1, 7.51%, 7/15/2028 |
|
|
1,151,888 |
|
1,275,000 |
2 |
Merit Securities Corp. 12, Class 1, 7.98%, 7/28/2033 |
|
|
1,160,250 |
|
1,000,000 |
|
Merit Securities Corp. 13, Class A4, 7.88%, 12/28/2033 |
|
|
1,001,093 |
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--continued1 |
|
|
|
|
|
|
Manufactured Housing--continued |
|
|
|
$ |
70,649 |
|
Oakwood Mortgage Investors, Inc. 1997-C, Class A2, 6.45%, 11/15/2027 |
|
$ |
70,389 |
|
500,000 |
|
Vanderbilt Mortgage Finance 1999-A, Class 2B2, 9.22%, 6/7/2016 |
|
|
492,700 |
| ||||||
|
|
|
TOTAL |
|
|
6,543,668 |
| ||||||
|
|
|
Other--5.6% |
|
|
|
|
200,000 |
|
Centerior Energy Receivables Master Trust 1996-1, Class A, 7.20%, 4/15/2002 |
|
|
200,538 |
|
1,000,000 |
|
Copelco Capital Funding LLC 1999-B, Class A3, 6.61%, 12/18/2002 |
|
|
999,665 |
|
178,074 |
|
Copelco Capital Funding Corp. X 1997-A, Class A4, 6.47%, 4/20/2005 |
|
|
178,035 |
|
2,000,000 |
2 |
Embarcadero Aircraft Securitization Trust 2000-A, Class A1, 7.10%, 8/15/2025 |
|
|
2,000,000 |
|
613,000 |
|
Green Tree Home Improvement Loan Trust 1996-F, Class HIB2, 7.70%, 11/15/2027 |
|
|
585,850 |
|
60,951 |
|
NationsCredit Grantor Trust 1997-1, Class A, 6.75%, 8/15/2013 |
|
|
60,937 |
|
1,500,000 |
|
Peco Energy Transition Trust 1999-A, Class A4, 5.80%, 3/1/2007 |
|
|
1,448,715 |
| ||||||
|
|
|
TOTAL |
|
|
5,473,740 |
| ||||||
|
|
|
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $52,276,897) |
|
|
51,765,038 |
| ||||||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--15.5%1 |
|
|
|
|
|
|
Commercial Mortgage--0.8% |
|
|
|
|
100,000 |
2 |
K Mart CMBS Financing, Inc. Series 1997-1, Class D, 7.73%, 3/1/2007 |
|
|
99,661 |
|
250,000 |
2 |
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST I, Class A3, 7.20%, 1/15/2003 |
|
|
247,266 |
|
500,000 |
2 |
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST I, Class A5, 7.87%, 1/15/2003 |
|
|
477,813 |
| ||||||
|
|
|
TOTAL |
|
|
824,740 |
| ||||||
|
|
|
Government Agency--0.4% |
|
|
|
|
405,000 |
|
Federal National Mortgage Association, Series 1993-32, Class H, 6.00%, 3/25/2023 |
|
|
367,371 |
| ||||||
|
|
|
Whole Loan--14.3% |
|
|
|
|
389,627 |
2 |
Bayview Financial Acquisition Trust 1998-1, Class MII3, 8.07%, 5/25/2029 |
|
|
356,752 |
|
453,934 |
2 |
Bayview Financial Acquisition Trust 1998-1, Class MII4, 8.37%, 5/25/2029 |
|
|
400,881 |
|
691,394 |
|
Bear Stearns Mortgage Securities, Inc. 1996-8, Class B3, 8.00%, 11/25/2027 |
|
|
673,784 |
|
145,617 |
2 |
C-BASS ABS, LLC Series 1997-1, Class A1, 7.52%, 2/1/2017 |
|
|
144,161 |
|
103,987 |
|
C-BASS ABS, LLC Series 1998-3, Class AF, 6.50%, 1/25/2033 |
|
|
99,828 |
|
1,230,070 |
2 |
C-BASS ABS, LLC Series 1999-3, Class B1, 8.23%, 2/3/2029 |
|
|
970,217 |
|
476,814 |
|
GE Capital Mortgage Services, Inc. 1994-27, Class A3, 6.50%, 7/25/2024 |
|
|
473,098 |
|
90,499 |
2 |
GE Capital Mortgage Services, Inc. 1994-3, Class B4, 6.50%, 1/25/2024 |
|
|
58,032 |
|
181,224 |
|
GE Capital Mortgage Services, Inc. 1996-3, Class A1, 7.00%, 3/25/2026 |
|
|
180,195 |
|
1,500,000 |
|
GE Capital Mortgage Services, Inc. 1998-3, Class A4, 6.25%, 1/25/2028 |
|
|
1,460,070 |
|
315,743 |
|
GE Capital Mortgage Services, Inc. 1998-11, Class 1A1, 6.75%, 6/25/2028 |
|
|
313,566 |
|
957,566 |
|
Headlands Mortgage Securities Inc. 1997-1, Class B3, 7.75%, 3/25/2027 |
|
|
937,816 |
Principal |
|
|
|
Value | ||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--continued1 |
|
|
|
|
|
|
Whole Loan--continued |
|
|
|
$ |
519,000 |
|
Homeside Mortgage Securities, Inc. 1998-1, Class A2, 6.75%, 2/25/2028 |
|
$ |
486,409 |
|
900,000 |
2 |
Mellon Residential Funding Corp. 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
|
687,796 |
|
1,258,000 |
2 |
Mellon Residential Funding Corp. 1999-TBC1, Class B4, 6.43%, 1/25/2029 |
|
|
943,302 |
|
1,254,187 |
2 |
Merrill Lynch Mortgage Investors, Inc., Class BB, 8.00%, 3/1/2031 |
|
|
1,224,987 |
|
481,940 |
2 |
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
|
383,142 |
|
1,000,000 |
|
Residential Accredit Loans, Inc. 1997-QS12, Class A6, 7.25%, 11/25/2027 |
|
|
990,000 |
|
110,495 |
|
Residential Asset Securitization Trust 1997-A2, Class A3, 9.00%, 4/25/2027 |
|
|
110,190 |
|
1,000,000 |
|
Residential Asset Securitization Trust 1997-A7, Class A5, 7.50%, 9/25/2027 |
|
|
998,620 |
|
293,407 |
|
Residential Asset Securitization Trust 1998-A12, Class A1, 6.75%, 11/25/2028 |
|
|
290,154 |
|
829,919 |
|
Residential Funding Mortgage Securities I 1994-S13, Class M1, 7.00%, 5/25/2024 |
|
|
797,079 |
|
180,667 |
2, 3 |
SMFC Trust Asset-Backed Certificates, Series 1997-A, Class 4, 7.27%, 1/28/2025 |
|
|
144,082 |
|
812,871 |
|
Structured Asset Securities Corp. 1999-ALS2, Class A2, 6.75%, 7/25/2029 |
|
|
781,133 |
| ||||||
|
|
|
TOTAL |
|
|
13,905,294 |
| ||||||
|
|
|
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $15,580,300) |
|
|
15,097,405 |
| ||||||
|
|
|
CORPORATE BONDS--7.0% |
|
|
|
|
|
|
Banking--1.0% |
|
|
|
|
1,000,000 |
|
Wells Fargo Co., Note, 6.50%, 9/3/2002 |
|
|
996,770 |
| ||||||
|
|
|
Finance - Automotive--1.0% |
|
|
|
|
945,000 |
|
Ford Motor Credit Co., 8.55%, 4/8/2002 |
|
|
965,100 |
| ||||||
|
|
|
Financial Intermediaries--1.0% |
|
|
|
|
250,000 |
|
Lehman Brothers Holdings, Inc., Bond, 6.20%, 1/15/2002 |
|
|
247,200 |
|
200,000 |
|
Lehman Brothers Holdings, Inc., Medium Term Note, 6.00%, 2/26/2001 |
|
|
199,158 |
|
500,000 |
|
Lehman Brothers Holdings, Inc., Medium Term Note, 6.38%, 3/15/2001 |
|
|
498,435 |
| ||||||
|
|
|
TOTAL |
|
|
944,793 |
| ||||||
|
|
|
Food & Drug Retailers--0.5% |
|
|
|
|
500,000 |
|
Great Atlantic & Pacific Tea Co., Inc., Sr. Note, 7.70%, 1/15/2004 |
|
|
432,500 |
| ||||||
|
|
|
Forest Products--0.6% |
|
|
|
|
400,000 |
|
Fort James Corp., Sr. Note, 6.23%, 3/15/2001 |
|
|
398,552 |
|
200,000 |
|
Quno Corp., Sr. Note, 9.13%, 5/15/2005 |
|
|
210,478 |
| ||||||
|
|
|
TOTAL |
|
|
609,030 |
| ||||||
|
|
|
Insurance--0.2% |
|
|
|
|
250,000 |
|
HSB Group, Inc., Company Guarantee, 7.64%, 7/15/2027 |
|
|
235,003 |
| ||||||
|
|
|
Retailers--0.1% |
|
|
|
|
50,000 |
|
Shopko Stores, Inc., 8.50%, 3/15/2002 |
|
|
49,478 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
CORPORATE BONDS--continued |
|
|
|
|
|
|
Technology Services--1.6% |
|
|
|
$ |
1,500,000 |
|
Unisys Corp., Sr. Note, 11.75%, 10/15/2004 |
|
$ |
1,590,000 |
| ||||||
|
|
|
Telecommunications & Cellular--1.0% |
|
|
|
|
1,000,000 |
|
AT&T Corp., Global Bond, 5.63%, 3/15/2004 |
|
|
955,980 |
| ||||||
|
|
|
TOTAL CORPORATE BONDS (IDENTIFIED COST $6,946,682) |
|
|
6,778,654 |
| ||||||
|
|
|
U.S. GOVERNMENT AGENCIES--1.2%1 |
|
|
|
|
500,000 |
|
Federal Home Loan Bank System, Sr. Note, 5.80%, 9/2/2008 |
|
|
470,830 |
|
252,797 |
|
Government National Mortgage Association ARM, 8902, 30 Year, 7.38%, 1/20/2022 |
|
|
254,250 |
|
133,042 |
|
Government National Mortgage Association, Pool 423843, 8.50%, 8/15/2026 |
|
|
136,826 |
|
242,019 |
|
Government National Mortgage Association, Pool 780360, 11.00%, 9/15/2015 |
|
|
262,363 |
| ||||||
|
|
|
TOTAL U.S. GOVERNMENT AGENCIES (IDENTIFIED COST $1,175,471) |
|
|
1,124,269 |
| ||||||
|
|
|
FOREIGN GOVERNMENTS/AGENCIES--0.5% |
|
|
|
|
|
|
Government Agency--0.3% |
|
|
|
|
276,750 |
|
Brazil, Government of, IDU, 7.88%, 1/1/2001 |
|
|
276,504 |
| ||||||
|
|
|
Sovereign--0.2% |
|
|
|
|
200,000 |
|
Korea Development Bank, Bond, 7.13%, 9/17/2001 |
|
|
199,766 |
| ||||||
|
|
|
TOTAL FOREIGN GOVERNMENT/AGENCIES (IDENTIFIED COST $440,461) |
|
|
476,270 |
| ||||||
|
|
|
PREFERRED STOCKS--0.2% |
|
|
|
|
|
|
Steel--0.2% |
|
|
|
|
10,000 |
|
USX Capital LLC, Preferred, Series A (identified cost $254,375) |
|
|
240,625 |
| ||||||
|
|
|
U.S. TREASURY OBLIGATIONS--12.8% |
|
|
|
$ |
1,122,000 |
|
4.750%, 2/15/2004 |
|
|
1,082,584 |
|
250,000 |
|
5.375%, 6/30/2003 |
|
|
246,542 |
|
500,000 |
|
5.625%, 5/15/2001 |
|
|
498,040 |
|
1,000,000 |
|
5.750%, 11/15/2000 |
|
|
999,650 |
|
2,000,000 |
|
6.125%, 8/31/2002 |
|
|
2,003,140 |
|
2,000,000 |
|
6.500%, 2/15/2010 |
|
|
2,085,260 |
|
4,000,000 |
|
6.750%, 5/15/2005 |
|
|
4,143,760 |
|
1,400,000 |
|
7.500%, 11/15/2001 |
|
|
1,418,620 |
| ||||||
|
|
|
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $12,478,779) |
|
|
12,477,596 |
| ||||||
Shares |
|
|
|
Value | ||
|
|
|
MUTUAL FUNDS--13.4% |
|
|
|
|
10,659,689 |
|
Prime Value Obligations Fund, Class IS |
|
$ |
10,659,689 |
|
307,375 |
|
High Yield Bond Portfolio |
|
|
2,425,186 |
| ||||||
|
|
|
TOTAL MUTUAL FUNDS (IDENTIFIED COST $13,271,464) |
|
|
13,084,875 |
| ||||||
|
|
|
TOTAL INVESTMENTS (IDENTIFIED COST $102,424,429)4 |
|
$ |
101,044,732 |
|
1 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.
2 Denotes a restricted security which is subject to restrictions on resale under federal securities laws. At September 30, 2000, these securities amounted to $13,305,469 which represents 13.7% of net assets. Included in these amounts, securities which have been deemed liquid amounted to $144,082 which represents 0.1% of net assets.
3 Denotes a restricted security that has been deemed liquid by the Fund's Adviser according to criteria approved by the Fund's Board of Directors.
4 The cost of investments for federal tax purposes amounts to $102,429,878. The net unrealized depreciation of investments on a federal tax basis amounts to $1,385,146 which is comprised of $203,732 appreciation and $1,588,878 depreciation at September 30, 2000.
Note: The categories of investments are shown as a percentage of net assets ($97,404,984) at September 30, 2000.
The following acronym is used throughout the portfolio:
ARM |
--Adjustable Rate Mortgage |
See Notes which are an integral part of the Financial Statements
September 30, 2000
Assets: |
|
|
|
|
|
|
|
Total investments in securities, at value (identified cost $102,424,429 and tax cost $102,429,878) |
|
|
|
|
$ |
101,044,732 |
|
Cash |
|
|
|
|
|
55,797 |
|
Income receivable |
|
|
|
|
|
674,358 |
|
Receivable for shares sold |
|
|
|
|
|
1,135,981 |
|
| |||||||
TOTAL ASSETS |
|
|
|
|
|
102,910,868 |
|
| |||||||
Liabilities: |
|
|
|
|
|
|
|
Payable for investments purchased |
|
$ |
5,004,482 |
|
|
|
|
Payable for shares redeemed |
|
|
56,790 |
|
|
|
|
Income distribution payable |
|
|
423,453 |
|
|
|
|
Accrued expenses |
|
|
21,159 |
|
|
|
|
| |||||||
TOTAL LIABILITIES |
|
|
|
|
|
5,505,884 |
|
| |||||||
Net assets for 9,950,412 shares outstanding |
|
|
|
|
$ |
97,404,984 |
|
| |||||||
Net Assets Consist of: |
|
|
|
|
|
|
|
Paid in capital |
|
|
|
|
$ |
99,586,209 |
|
Net unrealized depreciation of investments |
|
|
|
|
|
(1,379,697 |
) |
Accumulated net realized loss on investments |
|
|
|
|
|
(987,342 |
) |
Undistributed net investment income |
|
|
|
|
|
185,814 |
|
| |||||||
TOTAL NET ASSETS |
|
|
|
|
$ |
97,404,984 |
|
| |||||||
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
|
|
|
|
|
|
|
Institutional Shares: |
|
|
|
|
|
|
|
$87,779,809 ÷ 8,967,130 shares outstanding |
|
|
|
|
|
$9.79 |
|
| |||||||
Institutional Service Shares: |
|
|
|
|
|
|
|
$9,625,175 ÷ 983,282 shares outstanding |
|
|
|
|
|
$9.79 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30, 2000
Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
$ |
252,650 |
|
Interest |
|
|
|
|
|
|
|
|
|
|
5,763,966 |
|
| ||||||||||||
TOTAL INCOME |
|
|
|
|
|
|
|
|
|
|
6,016,616 |
|
| ||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment adviser fee |
|
|
|
|
|
$ |
322,300 |
|
|
|
|
|
Administrative personnel and services fee |
|
|
|
|
|
|
155,000 |
|
|
|
|
|
Custodian fees |
|
|
|
|
|
|
10,001 |
|
|
|
|
|
Transfer and dividend disbursing agent fees and expenses |
|
|
|
|
|
|
49,297 |
|
|
|
|
|
Directors'/Trustees' fees |
|
|
|
|
|
|
3,141 |
|
|
|
|
|
Auditing fees |
|
|
|
|
|
|
10,289 |
|
|
|
|
|
Legal fees |
|
|
|
|
|
|
2,448 |
|
|
|
|
|
Portfolio accounting fees |
|
|
|
|
|
|
61,321 |
|
|
|
|
|
Distribution services fee--Institutional Service Shares |
|
|
|
|
|
|
21,891 |
|
|
|
|
|
Shareholder services fee--Institutional Shares |
|
|
|
|
|
|
179,547 |
|
|
|
|
|
Shareholder services fee--Institutional Service Shares |
|
|
|
|
|
|
21,891 |
|
|
|
|
|
Share registration costs |
|
|
|
|
|
|
28,203 |
|
|
|
|
|
Printing and postage |
|
|
|
|
|
|
23,423 |
|
|
|
|
|
Insurance premiums |
|
|
|
|
|
|
1,300 |
|
|
|
|
|
Taxes |
|
|
|
|
|
|
2,271 |
|
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
1,882 |
|
|
|
|
|
| ||||||||||||
TOTAL EXPENSES |
|
|
|
|
|
|
894,205 |
|
|
|
|
|
| ||||||||||||
Waivers and Reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
Waiver of investment adviser fee |
|
$ |
(322,300 |
) |
|
|
|
|
|
|
|
|
Waiver of distribution services fee--Institutional Service Shares |
|
|
(17,512 |
) |
|
|
|
|
|
|
|
|
Waiver of shareholder services fee--Institutional Shares |
|
|
(179,547 |
) |
|
|
|
|
|
|
|
|
Reimbursement of investment adviser fee |
|
|
(381 |
) |
|
|
|
|
|
|
|
|
Reimbursement of other operating expenses |
|
|
(68,556 |
) |
|
|
|
|
|
|
|
|
| ||||||||||||
TOTAL WAIVERS AND REIMBURSEMENTS |
|
|
|
|
|
|
(588,296 |
) |
|
|
|
|
| ||||||||||||
Net expenses |
|
|
|
|
|
|
|
|
|
|
305,909 |
|
| ||||||||||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
5,710,707 |
|
| ||||||||||||
Realized and Unrealized Loss on Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments |
|
|
|
|
|
|
|
|
|
|
(418,667 |
) |
Net realized gain on capital gain distributions from other investment companies |
|
|
|
|
|
|
|
|
|
|
5,048 |
|
Net change in unrealized depreciation of investments |
|
|
|
|
|
|
|
|
|
|
(444,578 |
) |
| ||||||||||||
Net realized and unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
(858,197 |
) |
| ||||||||||||
Change in net assets resulting from operations |
|
|
|
|
|
|
|
|
|
$ |
4,852,510 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30 |
|
|
2000 |
|
|
|
1999 |
|
Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
5,710,707 |
|
|
$ |
3,573,627 |
|
Net realized gain (loss) on investments ($(575,771) and $2,474, respectively, as computed for federal tax purposes) |
|
|
(418,667 |
) |
|
|
(558,411 |
) |
Net realized gain on capital gain distributions from other investment companies |
|
|
5,048 |
|
|
|
-- |
|
Net change in unrealized depreciation of investments |
|
|
(444,578 |
) |
|
|
(1,379,505 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS |
|
|
4,852,510 |
|
|
|
1,635,711 |
|
| ||||||||
Distributions to Shareholders: |
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(4,977,835 |
) |
|
|
(2,875,443 |
) |
Institutional Service Shares |
|
|
(580,133 |
) |
|
|
(659,954 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS |
|
|
(5,557,968 |
) |
|
|
(3,535,397 |
) |
| ||||||||
Share Transactions: |
|
|
|
|
|
|
|
|
Proceeds from sale of shares |
|
|
51,525,810 |
|
|
|
62,007,341 |
|
Net asset value of shares issued to shareholders in payment of distributions declared |
|
|
1,171,996 |
|
|
|
674,646 |
|
Cost of shares redeemed |
|
|
(30,155,862 |
) |
|
|
(27,337,842 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS |
|
|
22,541,944 |
|
|
|
35,344,145 |
|
| ||||||||
Change in net assets |
|
|
21,836,486 |
|
|
|
33,444,459 |
|
| ||||||||
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
75,568,498 |
|
|
|
42,124,039 |
|
| ||||||||
End of period (including undistributed net investment income of $185,814 and $33,075, respectively) |
|
$ |
97,404,984 |
|
|
$ |
75,568,498 |
|
|
See Notes which are an integral part of the Financial Statements
September 30, 2000
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.
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.
U.S. government securities, listed corporate bonds, other fixed income and 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. Investments in other open-end regulated investment companies are valued at net asset 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.
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.
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. The Fund, along with other affiliated companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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"). Dividend income and distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares, which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
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 provision for federal tax is necessary. Withholding taxes on foreign interest and dividends have been provided for in accordance with the applicable country's tax rules and rates.
At September 30, 2000, the Fund, for federal tax purposes, had a capital loss carryforward of $579,262, 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 as follows:
Expiration Year |
|
Expiration Amount |
2006 |
|
$ 3,491 |
| ||
2008 |
|
$575,771 |
|
Additionally, net capital losses of $404,603 attributable to security transactions incurred after October 31, 1999 were treated as arising on October 1, 2000, the first day of the Fund's next taxable year.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under contract.
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, 2000 is as follows:
Security |
|
Acquisition |
|
Acquisition |
125 Home Loan Owner Trust 1998-1, Class B2, 12.16%, 2/15/2029 |
|
07/30/1998 |
|
$ 499,844 |
| ||||
Banco Nacional de Mexico SA, Credit Card Merchant Voucher Receivables Master Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 |
|
01/09/1997 |
|
95,851 |
| ||||
Bayview Financial Acquisition Trust 1998-1, Class MII3, 8.07%, 5/25/2029 |
|
05/14/1998 |
|
388,835 |
| ||||
Bayview Financial Acquisition Trust 1998-1, Class MII4, 8.37%, 5/25/2029 |
|
06/02/1998 |
|
453,012 |
| ||||
C-BASS ABS, LLC Series 1997-1, Class A1, 7.52%, 2/1/2017 |
|
02/25/1997 |
|
144,770 |
| ||||
C-BASS ABS, LLC Series 1999-3, Class B1, 8.23%, 2/3/2029 |
|
12/10/1998 |
|
101,282 |
| ||||
Circuit City Credit Card Master Trust 2000-1, Class CTF, 7.82%, 2/15/2006 |
|
02/23/2000 |
|
500,000 |
| ||||
Contimortgage Home Equity Loan Trust 1993-3, Class A2, 5.54%, 7/15/2020 |
|
02/07/2000 |
|
1,149,441 |
| ||||
Embarcadero Aircraft Securitization Trust 2000-A, Class A1, 7.10%, 8/15/2025 |
|
08/17/2000 |
|
2,000,000 |
| ||||
GE Capital Mortgage Services, Inc. 1994-3, Class B4, 6.50%, 1/25/2024 |
|
07/10/1997 |
|
61,792 |
| ||||
K Mart CMBS Financing, Inc. Series 1997-1, Class D, 7.73%, 3/1/2007 |
|
02/27/1997 |
|
100,000 |
| ||||
Mellon Residential Funding Corp. 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
12/16/1998 |
|
717,526 |
| ||||
Mellon Residential Funding Corp. 1999-TBC1, Class B4, 6.43%, 1/25/2029 |
|
03/12/1999 |
|
966,029 |
| ||||
Merrill Lynch Mortgage Investors, Inc., Class BB, 8.00%, 3/1/2031 |
|
04/13/2000 |
|
1,177,188 |
| ||||
Merit Securities Corp. 12, Class 1, 7.98%, 7/28/2033 |
|
09/02/1999 |
|
1,211,719 |
| ||||
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST 1, Class A3, 7.20%, 1/15/2003 |
|
09/23/1998 |
|
243,750 |
| ||||
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST 1, Class A5, 7.87%, 1/15/2003 |
|
02/03/1998 |
|
500,000 |
| ||||
Option One Mortgage Securities Corp. 2000-5, Class CTF, 10.65%, 10/26/2030 |
|
08/11/2000 |
|
901,686 |
| ||||
Paragon Auto Receivables Owner Trust 1998-A, Class B, 7.47%, 11/15/2004 |
|
05/14/1998 |
|
159,203 |
| ||||
Paragon Auto Receivables Owner Trust 1998-B, Class B, 7.03%, 3/15/2005 |
|
09/09/1998 |
|
399,262 |
| ||||
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
02/12/1999 |
|
410,718 |
| ||||
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
03/05/1998 |
|
233,196 |
|
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.
Investment transactions are accounted for on a trade date basis.
At September 30, 2000, par value shares ($0.001 per share) authorized were as follows:
Share Class Name |
|
Number of Par Value |
Institutional Shares |
|
1,000,000,000 |
Institutional Service Shares |
|
1,000,000,000 |
TOTAL |
|
2,000,000,000 |
Transactions in capital stock were as follows:
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Shares: |
|
Shares |
|
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
|
Shares sold |
|
4,868,532 |
|
|
$ |
47,619,117 |
|
|
5,262,382 |
|
|
$ |
52,646,943 |
|
Shares issued to shareholders in payment of distributions declared |
|
91,968 |
|
|
|
898,837 |
|
|
40,839 |
|
|
|
408,205 |
|
Shares redeemed |
|
(2,756,648 |
) |
|
|
(26,928,213 |
) |
|
(1,494,996 |
) |
|
|
(14,918,969 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS |
|
2,203,852 |
|
|
$ |
21,589,741 |
|
|
3,808,225 |
|
|
$ |
38,136,179 |
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Service Shares: |
|
Shares |
|
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
|
Shares sold |
|
399,891 |
|
|
$ |
3,906,693 |
|
|
933,821 |
|
|
$ |
9,360,398 |
|
Shares issued to shareholders in payment of distributions declared |
|
27,949 |
|
|
|
273,159 |
|
|
26,571 |
|
|
|
266,441 |
|
Shares redeemed |
|
(330,146 |
) |
|
|
(3,227,649 |
) |
|
(1,238,993 |
) |
|
|
(12,418,873 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE |
|
97,694 |
|
|
$ |
952,203 |
|
|
(278,601 |
) |
|
$ |
(2,792,034 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM |
|
2,301,546 |
|
|
$ |
22,541,944 |
|
|
3,529,624 |
|
|
$ |
35,344,145 |
|
|
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment adviser 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.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in Prime Value Obligations Fund which is managed by the Adviser. The Adviser has agreed to reimburse certain investment adviser fees as a result of these transactions.
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 a scale that ranges from 0.15% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.
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.
Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. FSSC may voluntarily choose to waive any portion of its fee. FSSC can modify or terminate this voluntary waiver at any time at its sole discretion.
FServ, through its subsidiary 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.
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.
Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding short-term securities (and in-kind contributions), for the year ended September 30, 2000, were as follows:
Purchases |
|
$ |
43,919,250 |
| |||
Sales |
|
$ |
25,795,873 |
|
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Limited Duration Fund (the "Fund") as of September 30, 2000, and the related statement of operations for the year then ended, the statement of changes in net assets for the years ended September 30, 2000 and 1999, and the financial highlights for the periods 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. The financial highlights for the years ended September 30, 1998 and 1997 were audited by other auditors whose report dated November 13, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to provide 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 the securities owned at September 30, 2000, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Limited Duration Fund as of September 30, 2000, the results of its operations, and the changes in its net assets and its financial highlights for the years ended September 30, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 13, 2000
<R>
A Statement of Additional Information (SAI) dated November 30, 2000, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.
</R>
<R>
You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at [email protected] or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.
</R>
Federated
World-Class Investment Manager
Federated Limited
Duration Fund
Federated Investors Funds
5800 Corporate
Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
Investment Company Act File No. 811-7115
<R>
Cusip 31428Q408
</R>
<R>
G01744-01-IS (11/00)
</R>
Federated is a registered mark of Federated Investors, Inc. 2000 ©Federated Investors, Inc.
Federated Limited Duration Fund (Institutional Shares)
APPENDIX: RISK/RETURN BAR CHART
The graphic presentation displayed here consists of a bar chart representing the annual total returns of Federated Limited Duration Fund's Institutional Shares as of the calendar year-end for each of three years.
The 'y' axis reflects the "% Total Return" beginning with "0" and increasing in increments of 2% up to 8%.
The 'x' axis represents calculation periods from the earliest first full calendar year-end of the Fund's start of business through the calendar year ended December 31, 1999. The light gray shaded chart features three distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Institutional Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1997 through 1999, The percentages noted are: 7.64%, 6.37% and 3.32%.
Federated
World-Class Investment Manager®
A Portfolio of Federated Total Return Series, Inc.
November 30, 2000
<R>
A mutual fund seeking to provide total return by investing primarily in a diversified portfolio of domestic fixed income securities with an average portfolio duration of three years or less.
</R>
As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 4
<R>
What are the Fund's Investment Strategies? 5
</R>
<R>
What are the Principal Securities in Which the Fund Invests? 7
</R>
<R>
What are the Specific Risks of Investing in the Fund? 10
</R>
<R>
What Do Shares Cost? 13
</R>
<R>
How is the Fund Sold? 14
</R>
<R>
How to Purchase Shares 14
</R>
<R>
How to Redeem Shares 16
</R>
<R>
Account and Share Information 18
</R>
<R>
Who Manages the Fund? 19
</R>
<R>
Financial Information 20
</R>
<R>
Independent Auditors' Report 37
</R>
The Fund's investment objective is to provide total return. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus. The Fund's total return will consist of two components: (1) changes in the market value of its portfolio securities (both realized and unrealized appreciation); and (2) income received from its portfolio securities. The Fund expects that income will comprise the largest component of its total return.
The Fund invests primarily in a diversified portfolio of domestic fixed income securities, including corporate debt securities, U.S. government obligations and mortgage backed and asset backed securities. Under normal market conditions, the Fund invests at least 65% of its assets in domestic investment grade debt securities. The investment adviser (Adviser) seeks to enhance the Fund's performance by allocating relatively more of its portfolio to the security type that the Adviser expects to offer the best balance between total return and risk.
<R>
Although the value of the Fund's shares will fluctuate, the Adviser will seek to manage the magnitude of fluctuation by limiting the Fund's dollar-weighted average duration to three years or less. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
</R>
All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:
The Shares offered by this prospectus are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency.
<R>
The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a calendar year-end basis.
</R>
The Fund's Institutional Service Shares are sold without a sales charge (load). The total returns displayed above are based upon net asset value.
<R>
The Fund's Institutional Service Shares total return for the nine-month period from January 1, 2000 to September 30, 2000 was 5.07%.
</R>
<R>
Within the period shown in the chart, the Fund's Institutional Service Shares highest quarterly return was 2.52% (quarter ended June 30, 1997). Its lowest quarterly return was 0.31% (quarter ended December 31, 1998).
</R>
<R>
The following table represents the Fund's Institutional Service Shares Average Annual Total Returns for the calendar periods ended December 31, 1999. The table shows the Fund's Institutional Service Shares total returns averaged over a period of years relative to Merrill Lynch 1-3 Year Treasury Index (ML1-3T), a broad-based unmanaged index tracking short-term U.S. government securities with maturities between 1 and 2.99 years, the Merrill Lynch 1-3 Year Corporate Index (ML1-3C), a broad-based market capitalization weighted index including fixed-coupon domestic investment grade corporate bonds with at least $100 million par amount outstanding, and Lipper Short Investment Grade Debt Funds Average (LSIGDFA), an average of funds with similar investment objectives. Total returns for the indexes shown do not reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.
</R>
Calendar Period |
|
Fund |
|
<R>ML1-3T</R> |
|
<R>ML1-3C</R> |
|
<R>LSIGDFA</R> |
1 Year |
|
<R>3.02%</R> |
|
<R>3.06%</R> |
|
<R>3.90%</R> |
|
<R>2.92%</R> |
Start of Performance1 |
|
<R>5.79% </R> |
|
<R>5.69% </R> |
|
<R>6.23%</R> |
|
<R>5.18%</R> |
1 The Fund's Institutional Service Shares start of performance date was October 1, 1996.
Past performance does not necessarily predict future performance. This information provides you with historical performance information so that you can analyze whether the Fund's investment risks are balanced by its potential returns.
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Service Shares.
Shareholder Fees |
|
|
Fees Paid Directly From Your Investment |
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) |
|
None |
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable) |
|
None |
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price) |
|
None |
Redemption Fee (as a percentage of amount redeemed, if applicable) |
|
None |
Exchange Fee |
|
None |
|
|
|
Annual Fund Operating Expenses (Before Waivers and Reimbursements)1 |
|
|
Expenses That are Deducted From Fund Assets (as a percentage of average net assets) |
|
|
Management Fee2 |
|
0.40% |
Distribution (12b-1) Fee3 |
|
0.25% |
Shareholder Services Fee |
|
0.25% |
Other Expenses4 |
|
0.43% |
Total Annual Fund Operating Expenses |
|
1.33% |
1 Although not contractually obligated to do so, the Adviser and distributor waived and reimbursed certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended September 30, 2000. | ||
Total Waivers and Reimbursements of Fund Expenses |
|
0.68% |
Total Actual Annual Fund Operating Expenses (after waivers and reimbursements) |
|
0.65% |
2 The Adviser voluntarily waived the management fee. The Adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.00% for the fiscal year ended September 30, 2000. | ||
3 A portion of the distribution (12b-1) fee was voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund's Institutional Service Shares (after the voluntary waiver) was 0.05% for the fiscal year ended September 30, 2000. | ||
4 The Adviser voluntarily reimbursed certain operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement at any time. Total other operating expenses paid by the Fund (after the voluntary reimbursement) were 0.35% for the fiscal year ended September 30, 2000. |
This Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds.
<R>
The Example assumes that you invest $10,000 in the Fund's Institutional Service Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Service Shares operating expenses are before waivers and reimbursements as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
</R>
1 Year |
$ |
135 |
| ||
3 Years |
$ |
421 |
| ||
5 Years |
$ |
729 |
| ||
10 Years |
$ |
1,601 |
|
<R>
Under normal market conditions, the Fund invests at least 65% of the value of its total assets in a diversified portfolio of domestic, high quality fixed income securities, combining various asset classes including U.S. Treasury, asset backed, mortgage backed and corporate debt securities. The Fund's Adviser actively manages the Fund's portfolio within a portfolio duration limitation to attempt to construct a portfolio of securities offering attractive risk-adjusted yields over a portfolio of comparable Treasury securities. As a matter of investment policy, the Adviser manages the Fund's share price volatility attributable to interest rate risk by limiting the dollar-weighted average modified duration of its portfolio securities to three years or less. A description of the various types of securities in which the Fund principally invests, and their risks, immediately follows this strategy section.
</R>
<R>
The Adviser attempts to select securities offering attractive risk-adjusted yields over comparable Treasury securities. Corporate and asset backed securities offer higher yields compared to Treasury securities to compensate for their additional risks, such as credit risk. Mortgage backed securities, which usually have nominal credit risk, have higher yields due to their risk that the principal will be repaid faster than expected if the underlying mortgages are prepaid. In selecting securities, the Adviser seeks the higher relative returns of corporate and asset backed (including mortgage backed) securities, while attempting to limit or manage their additional credit or prepayment risks.
</R>
The Adviser's investment process first allocates the Fund's portfolio among different types of fixed income securities. The Adviser makes a greater allocation of the Fund's portfolio to those types of securities that the Adviser expects to offer the best balance between total return and risk and thus offer the greatest potential for return. The allocation process is based on the Adviser's continuing analysis of a variety of economic and market indicators to arrive at what the adviser believes the yield "spread" should be of each security type. (The spread is the difference between the yield of a security versus the yield of a comparable U.S. Treasury security.)
Securities are selected by weighing projected spreads against the spreads at which securities can currently be purchased. The Adviser also analyzes the credit risks and prepayment risks of individual securities in order to complete the analysis.
<R>
The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage backed securities with characteristics that make prepayment fluctuations less likely. Characteristics that the Adviser may consider in selecting securities include the average interest rates of the underlying mortgages and the federal agencies (if any) that support the mortgages. The Adviser attempts to assess the relative returns and risks for mortgage backed securities by analyzing how the timing, amount and division of cash flows might change in response to changing economic and market conditions.
</R>
<R>
The Adviser attempts to manage the Fund's credit risk by selecting securities that make default in the payment of principal and interest less likely. The Adviser looks at a variety of factors, including macroeconomic analysis and corporate earnings analysis, among others, to determine which business sectors and credit ratings are most advantageous for investment by the Fund. In selecting individual corporate fixed income securities, the Adviser analyzes a company's business, competitive position, and general financial condition to assess whether the security's credit risk is commensurate with its potential return. The Fund may invest a portion of its portfolio in non-investment grade fixed income securities, which are rated BB or lower by a nationally recognized securities rating organization (NRSRO). The non-investment grade securities in which the Fund invests generally pay higher interest rates as compensation for the greater default risk attached to the securities.
</R>
Within the Fund's three-year portfolio duration constraint, the Adviser may further manage interest rate risk by lengthening or shortening duration from time-to-time based on its interest rate outlook. If the Adviser expects interest rates to decline, it will generally lengthen the Fund's duration, and if the Adviser expects interest rates to increase, it will generally shorten the Fund's duration. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions by analyzing a variety of factors, such as:
There is no assurance that the Adviser's efforts to forecast market interest rates, and assess relative risks and the impact of market interest rates on particular securities, will be successful.
<R>
The Fund may also invest a portion of its portfolio in foreign securities.
</R>
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
The following describes the types of fixed income securities in which the Fund principally invests.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities are pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and pre-payments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages.
CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
<R>
Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of pass through instruments or asset-backed bonds. Asset backed securities have prepayment risks.
</R>
Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a Government Sponsored Entity, or GSE). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
<R>
</R>
<R>
Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:
</R>
<R>
Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks.
</R>
<R>
</R>
<R>
In order to convert U.S. dollars into the currency needed to buy a foreign security, or to convert foreign currency received from the sale of a foreign security into U.S. dollars, the Fund may enter into spot currency trades. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is in underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.
</R>
<R>
The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
</R>
Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
<R>
Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due), payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
</R>
<R>
For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
</R>
<R>
Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
</R>
<R>
Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
</R>
<R>
</R>
Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.
Many fixed income securities receive credit ratings from services such as Standard & Poor's and Moody's Investor Services, Inc. These services assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment.
Fixed income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline.
Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy.
Trading opportunities are more limited for fixed income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held.
These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.
Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses.
<R>
</R>
<R>
Exchange rates for currencies fluctuate daily. The combination of currency risk and market risks tends to make securities traded in foreign markets more volatile than securities traded exclusively in the United States. The Adviser attempts to manage currency risk by limiting the amount the Fund invests in securities denominated in a particular currency. However, diversification will not protect the Fund against a general increase in the value of the U.S. dollar relative to other currencies.
</R>
<R>
</R>
<R>
Securities rated below investment grade, also known as junk bonds, generally entail greater market, credit and liquidity risks than investment grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.
</R>
<R>
</R>
<R>
Foreign securities pose additional risks because foreign economic or political conditions may be less favorable than those of the United States. Securities in foreign markets may also be subject to taxation policies that reduce returns for U.S. investors.
</R>
<R>
Foreign companies may not provide information (including financial statements) as frequently or to as great an extent as companies in the United States. Foreign companies may also receive less coverage than U.S. companies by market analysts and the financial press. In addition, foreign countries may lack uniform accounting, auditing and financial reporting standards or regulatory requirements comparable to those applicable to U.S. companies. These factors may prevent the Fund and its Adviser from obtaining information concerning foreign companies that is as frequent, extensive and reliable as the information available concerning companies in the United States.
</R>
<R>
Foreign countries may have restrictions on foreign ownership of securities or may impose exchange controls, capital flow restrictions or repatriation restrictions which could adversely affect the liquidity of the Fund's investments.
</R>
<R>
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus) it is processed at the next calculated net asset value (NAV).
</R>
<R>
From time to time the Fund may purchase foreign securities that trade in foreign markets on days the NYSE is closed. The value of the Fund's assets may change on days you cannot purchase or redeem Shares. The Fund does not charge a front-end sales charge. NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund generally values fixed income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost.
</R>
The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated" and Institutional Service Shares.
The required minimum initial investment for Fund Shares is $25,000. There is no required minimum subsequent investment amount. 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 is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.
The Fund offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.
The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to retail and private banking customers of financial institutions or to individuals, directly or through investment professionals.
When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Institutional Service Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.
You may purchase Shares through an investment professional or directly from the Fund. The Fund reserves the right to reject any request to purchase Shares.
Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."
You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are restricted.
Make your check payable to The Federated Funds, note your account number on the check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will not accept third-party checks (checks originally payable to someone other than you or The Federated Funds).
Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.
You should redeem Shares:
Submit your redemption request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.
You may redeem Shares by calling the Fund at 1-800-341-7400. If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day's NAV.
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
Call your investment professional or the Fund if you need special instructions.
Signatures must be guaranteed if:
A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A notary public cannot provide a signature guarantee.
Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:
Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:
You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.
The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.
The Fund no longer issues share certificates. If you are redeeming Shares represented by certificates previously issued by the Fund, you must return the certificates with your written redemption request. For your protection, send your certificates by registered or certified mail, but do not endorse them.
You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.
The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the Fund declares a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.
Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.
The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.
Fund distributions are expected to be primarily dividends. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.
The Board of Directors governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. The Adviser's address is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
<R>
The Adviser and other subsidiaries of Federated advise approximately 176 mutual funds and separate accounts, which totaled approximately $125 billion in assets as of December 31, 1999. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,900 employees. More than 4,000 investment professionals make Federated Funds available to their customers.
</R>
<R>
Randall S. Bauer has been the Fund's portfolio manager since inception. He is Vice President of the Fund. Mr. Bauer joined Federated in 1989 and has been a Portfolio Manager and a Vice President of the Fund's Adviser since 1994. Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance from Pennsylvania State University.
</R>
Robert E. Cauley has been the Fund's portfolio manager since March 1999. Mr. Cauley joined Federated in 1996 as a Senior Investment Analyst and an Assistant Vice President of the Fund's Adviser and has been a Portfolio Manager since 1997. Mr. Cauley has been a Vice President of the Adviser since 1999. Mr. Cauley was a member of the Asset-Backed Structuring Group at Lehman Brothers Holding, Inc. from 1994 to 1996. Mr. Cauley earned his M.S.I.A., concentrating in Finance and Economics, from Carnegie Mellon University.
<R>
Mark E. Durbiano has been the Fund's portfolio manager for the high yield corporate bonds asset category of the Fund since inception. He is Vice President of the Fund. Mr. Durbiano joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice President of the Fund's Adviser since 1996. From 1988 through 1995, Mr. Durbiano was a Portfolio Manager and a Vice President of the Fund's Adviser. Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in Finance from the University of Pittsburgh.
</R>
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.
<R>
</R>
<R>
The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years, or since inception, if the life of the Fund is shorter. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.
</R>
This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus.
(For a Share Outstanding Throughout Each Period)
Reference is made to the Independent Auditors' Report on page 37.
Year Ended September 30 |
|
2000 |
|
|
1999 |
1 |
|
1998 |
|
|
1997 |
2 |
Net Asset Value, Beginning of Period |
|
$ 9.88 |
|
|
$10.23 |
|
|
$10.13 |
|
|
$10.00 |
|
Income from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
0.67 |
|
|
0.60 |
|
|
0.67 |
|
|
0.63 |
|
Net realized and unrealized gain (loss) on investments and foreign currency transactions |
|
(0.11 |
) |
|
(0.35 |
) |
|
0.12 |
|
|
0.15 |
|
| ||||||||||||
TOTAL FROM INVESTMENT OPERATIONS |
|
0.56 |
|
|
0.25 |
|
|
0.79 |
|
|
0.78 |
|
| ||||||||||||
Less Distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
(0.65 |
) |
|
(0.60 |
) |
|
(0.67 |
) |
|
(0.63 |
) |
Distributions from net realized gain on investments and foreign currency transactions |
|
-- |
|
|
-- |
|
|
(0.02 |
) |
|
(0.02 |
) |
| ||||||||||||
TOTAL DISTRIBUTIONS |
|
(0.65 |
) |
|
(0.60 |
) |
|
(0.69 |
) |
|
(0.65 |
) |
| ||||||||||||
Net Asset Value, End of Period |
|
$ 9.79 |
|
|
$ 9.88 |
|
|
$10.23 |
|
|
$10.13 |
|
| ||||||||||||
Total Return3 |
|
5.86 |
% |
|
2.57 |
% |
|
7.53 |
% |
|
8.10 |
% |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Expenses |
|
0.65 |
% |
|
0.65 |
% |
|
0.62 |
% |
|
0.29 |
% |
| ||||||||||||
Net investment income |
|
6.82 |
% |
|
6.09 |
% |
|
6.03 |
% |
|
6.31 |
% |
| ||||||||||||
Expense waiver/reimbursement4 |
|
0.68 |
% |
|
0.86 |
% |
|
1.94 |
% |
|
14.52 |
% |
| ||||||||||||
Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net assets, end of period (000 omitted) |
|
$9,625 |
|
$8,749 |
|
$11,905 |
|
$2,724 |
| |||
| ||||||||||||
Portfolio turnover |
|
34 |
% |
|
53 |
% |
|
64 |
% |
|
109 |
% |
|
1 For the year ended September 30, 1999, the fund was audited by Deloitte & Touche LLP. Each of the previous years was audited by other auditors.
2 Reflects operations for the period from October 1, 1996 (start of performance) to September 30, 1997.
3 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
4 This voluntary expense decrease is reflected in both the expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
September 30, 2000
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--53.1%1 |
|
|
|
|
|
|
Automobile--17.1% |
|
|
|
$ |
33,465 |
|
AFG Receivables Trust 1997-A, Class C, 7.20%, 10/15/2002 |
|
$ |
33,510 |
|
29,846 |
|
AFG Receivables Trust 1997-B, Class C, 7.00%, 2/15/2003 |
|
|
29,844 |
|
2,000,000 |
|
Arcadia Automobile Receivables Trust 1997-B, Class A5, 6.70%, 2/15/2005 |
|
|
1,997,500 |
|
1,500,000 |
|
BMW Vehicle Owner Trust 1999-A, Class A3, 6.41%, 4/25/2003 |
|
|
1,493,940 |
|
1,500,000 |
|
Bay View Auto Trust 1999-LG1, Class A3, 6.91%, 3/15/2004 |
|
|
1,501,935 |
|
255,000 |
|
CIT RV Trust 1994-A, Class A, 4.90%, 7/15/2009 |
|
|
252,553 |
|
3,000,000 |
|
Capital Auto Receivables Asset Trust 2000-1, Class A4, 7.00%, 1/17/2005 |
|
|
3,015,495 |
|
50,000 |
|
Chase Manhattan Auto Owner Trust 1997-A, Class A5, 6.50%, 12/17/2001 |
|
|
49,987 |
|
117,867 |
|
Fleetwood Credit Corp. Grantor Trust 1996-B, Class A, 6.90%, 3/15/2012 |
|
|
117,652 |
|
644,437 |
|
Key Auto Finance Trust 1999-1, Class C, 7.08%, 1/15/2007 |
|
|
636,179 |
|
1,690,314 |
|
Mellon Auto Grantor Trust 2000-1, Class B, 7.43%, 10/15/2006 |
|
|
1,706,110 |
|
2,000,000 |
|
Nissan Auto Receivables Owner Trust 1999-A, Class A3, 6.47%, 9/15/2003 |
|
|
1,995,440 |
|
166,435 |
2 |
Paragon Auto Receivables Owner Trust 1998-A, Class B, 7.47%, 11/15/2004 |
|
|
163,406 |
|
417,065 |
2 |
Paragon Auto Receivables Owner Trust 1998-B, Class B, 7.03%, 3/15/2005 |
|
|
407,098 |
|
644,716 |
|
Paragon Auto Receivables Owner Trust 1999-A, Class A, 5.95%, 11/15/2005 |
|
|
639,065 |
|
1,500,000 |
|
Toyota Auto Receivables Owner Trust 1999-A, Class C, 6.70%, 8/16/2004 |
|
|
1,496,085 |
|
1,000,000 |
|
Toyota Auto Receivables Owner Trust 2000-B, Class A3, 6.76%, 8/15/2004 |
|
|
1,001,560 |
|
150,000 |
|
Yamaha Motor Master Trust 1995-1, Class A, 6.20%, 5/15/2003 |
|
|
149,997 |
| ||||||
|
|
|
TOTAL |
|
|
16,687,356 |
| ||||||
|
|
|
Credit Card--9.0% |
|
|
|
|
102,726 |
2 |
Banco Nacional de Mexico SA, Credit Card Merchant Voucher Receivables Master Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 |
|
|
99,784 |
|
500,000 |
2 |
Circuit City Credit Card Master Trust 2000-1, Class CTF, 7.82%, 2/15/2006 |
|
|
500,962 |
|
250,000 |
|
Citibank Credit Card Master Trust 1998-1, Class A, 5.75%, 1/15/2003 |
|
|
249,355 |
|
801,000 |
|
Citibank Credit Card Master Trust I 1998-6, Class A, 5.85%, 4/10/2003 |
|
|
796,867 |
|
1,550,000 |
|
Fingerhut Master Trust 1998-2, Class A, 6.23%, 2/15/2007 |
|
|
1,528,316 |
|
260,000 |
|
First USA Credit Card Master Trust 1997-6, Class A, 6.42%, 3/17/2005 |
|
|
258,625 |
|
2,000,000 |
|
MBNA Master Credit Card Trust 1997-F, Class A, 6.60%, 11/15/2004 |
|
|
1,995,760 |
|
1,000,000 |
|
MBNA Master Credit Card Trust 1999-I, Class A, 6.40%, 1/18/2005 |
|
|
993,910 |
|
1,000,000 |
|
MBNA Master Credit Card Trust 2000-A, Class A, 7.35%, 7/16/2007 |
|
|
1,027,950 |
|
285,000 |
|
Prime Credit Card Master Trust 1996-1, Class A, 6.70%, 7/15/2004 |
|
|
285,034 |
|
1,000,000 |
|
Proffitt's Credit Card Master Trust 1998-2, Class B, 6.15%, 9/15/2004 |
|
|
994,920 |
| ||||||
|
|
|
TOTAL |
|
|
8,731,483 |
| ||||||
|
|
|
Home Equity Loan--14.2% |
|
|
|
|
500,000 |
2 |
125 Home Loan Owner Trust 1998-1, Class B2, 12.16%, 2/15/2029 |
|
|
455,000 |
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--continued1 |
|
|
|
|
|
|
Home Equity Loan--continued |
|
|
|
$ |
603 |
|
Advanta Mortgage Loan Trust 1997-1, Class A2, 7.10%, 4/25/2020 |
|
$ |
601 |
|
500,000 |
|
Amresco Residential Securities Mortgage Loan Trust 1996-1, Class A5, 7.05%, 4/25/2027 |
|
|
497,646 |
|
1,000,000 |
|
Cityscape Home Equity Loan Trust 1997-1, Class M1, 7.58%, 3/25/2018 |
|
|
972,455 |
|
1,266,352 |
2 |
Contimortgage Home Equity Loan Trust 1993-3, Class A2, 5.54%, 7/15/2020 |
|
|
1,203,430 |
|
270,000 |
|
Countrywide Asset-Backed Certificates 1999-1, Class AF2, 6.16%, 9/25/2025 |
|
|
265,216 |
|
1,140,000 |
|
EQCC Home Equity Loan Trust 1996-3, Class A6, 7.40%, 12/15/2019 |
|
|
1,142,405 |
|
457,000 |
|
EQCC Home Equity Loan Trust 1997-2, Class A7, 6.89%, 2/15/2020 |
|
|
454,989 |
|
942,642 |
|
Green Tree Home Improvement Loan Trust 1995-C, Class B1, 7.20%, 7/15/2020 |
|
|
928,522 |
|
481,015 |
|
Green Tree Home Improvement Loan Trust 1997-C, Class B2, 7.59%, 8/15/2028 |
|
|
312,660 |
|
390,496 |
|
Headlands Home Equity Loan Trust 1998-2, Class A3, 6.67%, 12/15/2024 |
|
|
382,503 |
|
412,614 |
|
Independent National Mortgage Corp. Home Equity 1997-A, Class BF, 7.39%, 10/25/2028 |
|
|
397,915 |
|
1,500,000 |
|
Long Beach Home Equity Loan Trust 2000-LB1, Class M2V, 7.72%, 6/21/2030 |
|
|
1,500,000 |
|
1,000,000 |
|
Mellon Bank Home Equity Installment Loan 1999-1, Class B, 6.95%, 3/25/2015 |
|
|
942,270 |
|
267,444 |
|
NC Finance Trust 1999-1, Class B, 8.75%, 1/25/2029 |
|
|
250,060 |
|
946,487 |
2 |
Option One Mortgage Securities Corp. 2000-5, Class CTF, 10.65%, 10/26/2030 |
|
|
946,782 |
|
1,500,000 |
|
Saxon Asset Securities Trust 1997-1, Class AF4, 7.76%, 2/25/2027 |
|
|
1,505,772 |
|
303,557 |
|
Saxon Asset Securities Trust 1997-1, Class BV, 7.52%, 4/25/2027 |
|
|
301,043 |
|
250,000 |
2 |
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
|
230,665 |
|
500,000 |
|
Saxon Asset Securities Trust 1999-1, Class BV1, 9.37%, 2/25/2029 |
|
|
499,545 |
|
478,246 |
|
Saxon Asset Securities Trust 2000-2, Class AV1, 6.88%, 7/25/2030 |
|
|
476,507 |
|
61,064 |
|
TMS Home Equity Trust 1996-B, Class A7, 7.55%, 2/15/2020 |
|
|
61,056 |
|
64,591 |
|
UCFC Home Equity Loan 1995-A1, Class A5, 8.55%, 1/10/2020 |
|
|
64,523 |
| ||||||
|
|
|
TOTAL |
|
|
13,791,565 |
| ||||||
|
|
|
Machinery & Equipment--0.5% |
|
|
|
|
541,315 |
|
Case Equipment Loan Trust 1999-A, Class B, 5.96%, 8/15/2005 |
|
|
537,226 |
| ||||||
|
|
|
Manufactured Housing--6.7% |
|
|
|
|
407,335 |
|
Bankamerica Manufactured Housing Contract Trust 1996-1, Class A3, 6.95%, 10/10/2026 |
|
|
407,783 |
|
2,000,000 |
|
Conseco Finance Securitization Corp. 2000-5, Class A2, 7.06%, 2/1/2032 |
|
|
1,999,374 |
|
250,000 |
|
Green Tree Financial Corp. 1996-2, Class B1, 7.55%, 4/15/2027 |
|
|
237,525 |
|
22,663 |
|
Green Tree Financial Corp. 1996-4, Class A4, 6.80%, 6/15/2027 |
|
|
22,666 |
|
1,250,000 |
|
Green Tree Financial Corp. 1997-3, Class B1, 7.51%, 7/15/2028 |
|
|
1,151,888 |
|
1,275,000 |
2 |
Merit Securities Corp. 12, Class 1, 7.98%, 7/28/2033 |
|
|
1,160,250 |
|
1,000,000 |
|
Merit Securities Corp. 13, Class A4, 7.88%, 12/28/2033 |
|
|
1,001,093 |
Principal |
|
|
|
Value | ||
|
|
|
ASSET-BACKED SECURITIES--continued1 |
|
|
|
|
|
|
Manufactured Housing--continued |
|
|
|
$ |
70,649 |
|
Oakwood Mortgage Investors, Inc. 1997-C, Class A2, 6.45%, 11/15/2027 |
|
$ |
70,389 |
|
500,000 |
|
Vanderbilt Mortgage Finance 1999-A, Class 2B2, 9.22%, 6/7/2016 |
|
|
492,700 |
| ||||||
|
|
|
TOTAL |
|
|
6,543,668 |
| ||||||
|
|
|
Other--5.6% |
|
|
|
|
200,000 |
|
Centerior Energy Receivables Master Trust 1996-1, Class A, 7.20%, 4/15/2002 |
|
|
200,538 |
|
1,000,000 |
|
Copelco Capital Funding LLC 1999-B, Class A3, 6.61%, 12/18/2002 |
|
|
999,665 |
|
178,074 |
|
Copelco Capital Funding Corp. X 1997-A, Class A4, 6.47%, 4/20/2005 |
|
|
178,035 |
|
2,000,000 |
2 |
Embarcadero Aircraft Securitization Trust 2000-A, Class A1, 7.10%, 8/15/2025 |
|
|
2,000,000 |
|
613,000 |
|
Green Tree Home Improvement Loan Trust 1996-F, Class HIB2, 7.70%, 11/15/2027 |
|
|
585,850 |
|
60,951 |
|
NationsCredit Grantor Trust 1997-1, Class A, 6.75%, 8/15/2013 |
|
|
60,937 |
|
1,500,000 |
|
Peco Energy Transition Trust 1999-A, Class A4, 5.80%, 3/1/2007 |
|
|
1,448,715 |
| ||||||
|
|
|
TOTAL |
|
|
5,473,740 |
| ||||||
|
|
|
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $52,276,897) |
|
|
51,765,038 |
| ||||||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--15.5%1 |
|
|
|
|
|
|
Commercial Mortgage--0.8% |
|
|
|
|
100,000 |
2 |
K Mart CMBS Financing, Inc. Series 1997-1, Class D, 7.73%, 3/1/2007 |
|
|
99,661 |
|
250,000 |
2 |
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST I, Class A3, 7.20%, 1/15/2003 |
|
|
247,266 |
|
500,000 |
2 |
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST I, Class A5, 7.87%, 1/15/2003 |
|
|
477,813 |
| ||||||
|
|
|
TOTAL |
|
|
824,740 |
| ||||||
|
|
|
Government Agency--0.4% |
|
|
|
|
405,000 |
|
Federal National Mortgage Association, Series 1993-32, Class H, 6.00%, 3/25/2023 |
|
|
367,371 |
| ||||||
|
|
|
Whole Loan--14.3% |
|
|
|
|
389,627 |
2 |
Bayview Financial Acquisition Trust 1998-1, Class MII3, 8.07%, 5/25/2029 |
|
|
356,752 |
|
453,934 |
2 |
Bayview Financial Acquisition Trust 1998-1, Class MII4, 8.37%, 5/25/2029 |
|
|
400,881 |
|
691,394 |
|
Bear Stearns Mortgage Securities, Inc. 1996-8, Class B3, 8.00%, 11/25/2027 |
|
|
673,784 |
|
145,617 |
2 |
C-BASS ABS, LLC Series 1997-1, Class A1, 7.52%, 2/1/2017 |
|
|
144,161 |
|
103,987 |
|
C-BASS ABS, LLC Series 1998-3, Class AF, 6.50%, 1/25/2033 |
|
|
99,828 |
|
1,230,070 |
2 |
C-BASS ABS, LLC Series 1999-3, Class B1, 8.23%, 2/3/2029 |
|
|
970,217 |
|
476,814 |
|
GE Capital Mortgage Services, Inc. 1994-27, Class A3, 6.50%, 7/25/2024 |
|
|
473,098 |
|
90,499 |
2 |
GE Capital Mortgage Services, Inc. 1994-3, Class B4, 6.50%, 1/25/2024 |
|
|
58,032 |
|
181,224 |
|
GE Capital Mortgage Services, Inc. 1996-3, Class A1, 7.00%, 3/25/2026 |
|
|
180,195 |
|
1,500,000 |
|
GE Capital Mortgage Services, Inc. 1998-3, Class A4, 6.25%, 1/25/2028 |
|
|
1,460,070 |
|
315,743 |
|
GE Capital Mortgage Services, Inc. 1998-11, Class 1A1, 6.75%, 6/25/2028 |
|
|
313,566 |
|
957,566 |
|
Headlands Mortgage Securities Inc. 1997-1, Class B3, 7.75%, 3/25/2027 |
|
|
937,816 |
Principal |
|
|
|
Value | ||
|
|
|
COLLATERALIZED MORTGAGE OBLIGATIONS--continued1 |
|
|
|
|
|
|
Whole Loan--continued |
|
|
|
$ |
519,000 |
|
Homeside Mortgage Securities, Inc. 1998-1, Class A2, 6.75%, 2/25/2028 |
|
$ |
486,409 |
|
900,000 |
2 |
Mellon Residential Funding Corp. 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
|
687,796 |
|
1,258,000 |
2 |
Mellon Residential Funding Corp. 1999-TBC1, Class B4, 6.43%, 1/25/2029 |
|
|
943,302 |
|
1,254,187 |
2 |
Merrill Lynch Mortgage Investors, Inc., Class BB, 8.00%, 3/1/2031 |
|
|
1,224,987 |
|
481,940 |
2 |
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
|
383,142 |
|
1,000,000 |
|
Residential Accredit Loans, Inc. 1997-QS12, Class A6, 7.25%, 11/25/2027 |
|
|
990,000 |
|
110,495 |
|
Residential Asset Securitization Trust 1997-A2, Class A3, 9.00%, 4/25/2027 |
|
|
110,190 |
|
1,000,000 |
|
Residential Asset Securitization Trust 1997-A7, Class A5, 7.50%, 9/25/2027 |
|
|
998,620 |
|
293,407 |
|
Residential Asset Securitization Trust 1998-A12, Class A1, 6.75%, 11/25/2028 |
|
|
290,154 |
|
829,919 |
|
Residential Funding Mortgage Securities I 1994-S13, Class M1, 7.00%, 5/25/2024 |
|
|
797,079 |
|
180,667 |
2, 3 |
SMFC Trust Asset-Backed Certificates, Series 1997-A, Class 4, 7.27%, 1/28/2025 |
|
|
144,082 |
|
812,871 |
|
Structured Asset Securities Corp. 1999-ALS2, Class A2, 6.75%, 7/25/2029 |
|
|
781,133 |
| ||||||
|
|
|
TOTAL |
|
|
13,905,294 |
| ||||||
|
|
|
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS |
|
|
15,097,405 |
| ||||||
|
|
|
CORPORATE BONDS--7.0% |
|
|
|
|
|
|
Banking--1.0% |
|
|
|
|
1,000,000 |
|
Wells Fargo Co., Note, 6.50%, 9/3/2002 |
|
|
996,770 |
| ||||||
|
|
|
Finance - Automotive--1.0% |
|
|
|
|
945,000 |
|
Ford Motor Credit Co., 8.55%, 4/8/2002 |
|
|
965,100 |
| ||||||
|
|
|
Financial Intermediaries--1.0% |
|
|
|
|
250,000 |
|
Lehman Brothers Holdings, Inc., Bond, 6.20%, 1/15/2002 |
|
|
247,200 |
|
200,000 |
|
Lehman Brothers Holdings, Inc., Medium Term Note, 6.00%, 2/26/2001 |
|
|
199,158 |
|
500,000 |
|
Lehman Brothers Holdings, Inc., Medium Term Note, 6.38%, 3/15/2001 |
|
|
498,435 |
| ||||||
|
|
|
TOTAL |
|
|
944,793 |
| ||||||
|
|
|
Food & Drug Retailers--0.5% |
|
|
|
|
500,000 |
|
Great Atlantic & Pacific Tea Co., Inc., Sr. Note, 7.70%, 1/15/2004 |
|
|
432,500 |
| ||||||
|
|
|
Forest Products--0.6% |
|
|
|
|
400,000 |
|
Fort James Corp., Sr. Note, 6.23%, 3/15/2001 |
|
|
398,552 |
|
200,000 |
|
Quno Corp., Sr. Note, 9.13%, 5/15/2005 |
|
|
210,478 |
| ||||||
|
|
|
TOTAL |
|
|
609,030 |
| ||||||
|
|
|
Insurance--0.2% |
|
|
|
|
250,000 |
|
HSB Group, Inc., Company Guarantee, 7.64%, 7/15/2027 |
|
|
235,003 |
| ||||||
|
|
|
Retailers--0.1% |
|
|
|
|
50,000 |
|
Shopko Stores, Inc., 8.50%, 3/15/2002 |
|
|
49,478 |
| ||||||
Principal |
|
|
|
Value | ||
|
|
|
CORPORATE BONDS--continued |
|
|
|
|
|
|
Technology Services--1.6% |
|
|
|
$ |
1,500,000 |
|
Unisys Corp., Sr. Note, 11.75%, 10/15/2004 |
|
$ |
1,590,000 |
| ||||||
|
|
|
Telecommunications & Cellular--1.0% |
|
|
|
|
1,000,000 |
|
AT&T Corp., Global Bond, 5.63%, 3/15/2004 |
|
|
955,980 |
| ||||||
|
|
|
TOTAL CORPORATE BONDS (IDENTIFIED COST $6,946,682) |
|
|
6,778,654 |
| ||||||
|
|
|
U.S. GOVERNMENT AGENCIES--1.2%1 |
|
|
|
|
500,000 |
|
Federal Home Loan Bank System, Sr. Note, 5.80%, 9/2/2008 |
|
|
470,830 |
|
252,797 |
|
Government National Mortgage Association ARM, 8902, 30 Year, 7.38%, 1/20/2022 |
|
|
254,250 |
|
133,042 |
|
Government National Mortgage Association, Pool 423843, 8.50%, 8/15/2026 |
|
|
136,826 |
|
242,019 |
|
Government National Mortgage Association, Pool 780360, 11.00%, 9/15/2015 |
|
|
262,363 |
| ||||||
|
|
|
TOTAL U.S. GOVERNMENT AGENCIES (IDENTIFIED COST $1,175,471) |
|
|
1,124,269 |
| ||||||
|
|
|
FOREIGN GOVERNMENTS/AGENCIES--0.5% |
|
|
|
|
|
|
Government Agency--0.3% |
|
|
|
|
276,750 |
|
Brazil, Government of, IDU, 7.88%, 1/1/2001 |
|
|
276,504 |
| ||||||
|
|
|
Sovereign--0.2% |
|
|
|
|
200,000 |
|
Korea Development Bank, Bond, 7.13%, 9/17/2001 |
|
|
199,766 |
| ||||||
|
|
|
TOTAL FOREIGN GOVERNMENT/AGENCIES (IDENTIFIED COST $440,461) |
|
|
476,270 |
| ||||||
|
|
|
PREFERRED STOCKS--0.2% |
|
|
|
|
|
|
Steel--0.2% |
|
|
|
|
10,000 |
|
USX Capital LLC, Preferred, Series A (identified cost $254,375) |
|
|
240,625 |
| ||||||
|
|
|
U.S. TREASURY OBLIGATIONS--12.8% |
|
|
|
$ |
1,122,000 |
|
4.750%, 2/15/2004 |
|
|
1,082,584 |
|
250,000 |
|
5.375%, 6/30/2003 |
|
|
246,542 |
|
500,000 |
|
5.625%, 5/15/2001 |
|
|
498,040 |
|
1,000,000 |
|
5.750%, 11/15/2000 |
|
|
999,650 |
|
2,000,000 |
|
6.125%, 8/31/2002 |
|
|
2,003,140 |
|
2,000,000 |
|
6.500%, 2/15/2010 |
|
|
2,085,260 |
|
4,000,000 |
|
6.750%, 5/15/2005 |
|
|
4,143,760 |
|
1,400,000 |
|
7.500%, 11/15/2001 |
|
|
1,418,620 |
| ||||||
|
|
|
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $12,478,779) |
|
|
12,477,596 |
| ||||||
Shares |
|
|
|
Value | ||
|
|
|
MUTUAL FUNDS--13.4% |
|
|
|
|
10,659,689 |
|
Prime Value Obligations Fund, Class IS |
|
$ |
10,659,689 |
|
307,375 |
|
High Yield Bond Portfolio |
|
|
2,425,186 |
| ||||||
|
|
|
TOTAL MUTUAL FUNDS (IDENTIFIED COST $13,271,464) |
|
|
13,084,875 |
| ||||||
|
|
|
TOTAL INVESTMENTS (IDENTIFIED COST $102,424,429)4 |
|
$ |
101,044,732 |
|
1 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.
2 Denotes a restricted security which is subject to restrictions on resale under federal securities laws. At September 30, 2000, these securities amounted to $13,305,469 which represents 13.7% of net assets. Included in these amounts, securities which have been deemed liquid amounted to $144,082 which represents 0.1% of net assets.
3 Denotes a restricted security that has been deemed liquid by the Fund's Adviser according to criteria approved by the Fund's Board of Directors.
4 The cost of investments for federal tax purposes amounts to $102,429,878. The net unrealized depreciation of investments on a federal tax basis amounts to $1,385,146 which is comprised of $203,732 appreciation and $1,588,878 depreciation at September 30, 2000.
Note: The categories of investments are shown as a percentage of net assets ($97,404,984) at September 30, 2000.
The following acronym is used throughout the portfolio:
ARM |
--Adjustable Rate Mortgage |
See Notes which are an integral part of the Financial Statements
September 30, 2000
Assets: |
|
|
|
|
|
|
|
Total investments in securities, at value (identified cost $102,424,429 and tax cost $102,429,878) |
|
|
|
|
$ |
101,044,732 |
|
Cash |
|
|
|
|
|
55,797 |
|
Income receivable |
|
|
|
|
|
674,358 |
|
Receivable for shares sold |
|
|
|
|
|
1,135,981 |
|
| |||||||
TOTAL ASSETS |
|
|
|
|
|
102,910,868 |
|
| |||||||
Liabilities: |
|
|
|
|
|
|
|
Payable for investments purchased |
|
$ |
5,004,482 |
|
|
|
|
Payable for shares redeemed |
|
|
56,790 |
|
|
|
|
Income distribution payable |
|
|
423,453 |
|
|
|
|
Accrued expenses |
|
|
21,159 |
|
|
|
|
| |||||||
TOTAL LIABILITIES |
|
|
|
|
|
5,505,884 |
|
| |||||||
Net assets for 9,950,412 shares outstanding |
|
|
|
|
$ |
97,404,984 |
|
| |||||||
Net Assets Consist of: |
|
|
|
|
|
|
|
Paid in capital |
|
|
|
|
$ |
99,586,209 |
|
Net unrealized depreciation of investments |
|
|
|
|
|
(1,379,697 |
) |
Accumulated net realized loss on investments |
|
|
|
|
|
(987,342 |
) |
Undistributed net investment income |
|
|
|
|
|
185,814 |
|
| |||||||
TOTAL NET ASSETS |
|
|
|
|
$ |
97,404,984 |
|
| |||||||
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
|
|
|
|
|
|
|
Institutional Shares: |
|
|
|
|
|
|
|
$87,779,809 ÷ 8,967,130 shares outstanding |
|
|
|
|
|
$9.79 |
|
| |||||||
Institutional Service Shares: |
|
|
|
|
|
|
|
$9,625,175 ÷ 983,282 shares outstanding |
|
|
|
|
|
$9.79 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30, 2000
Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
$ |
252,650 |
|
Interest |
|
|
|
|
|
|
|
|
|
|
5,763,966 |
|
| ||||||||||||
TOTAL INCOME |
|
|
|
|
|
|
|
|
|
|
6,016,616 |
|
| ||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment adviser fee |
|
|
|
|
|
$ |
322,300 |
|
|
|
|
|
Administrative personnel and services fee |
|
|
|
|
|
|
155,000 |
|
|
|
|
|
Custodian fees |
|
|
|
|
|
|
10,001 |
|
|
|
|
|
Transfer and dividend disbursing agent fees and expenses |
|
|
|
|
|
|
49,297 |
|
|
|
|
|
Directors'/Trustees' fees |
|
|
|
|
|
|
3,141 |
|
|
|
|
|
Auditing fees |
|
|
|
|
|
|
10,289 |
|
|
|
|
|
Legal fees |
|
|
|
|
|
|
2,448 |
|
|
|
|
|
Portfolio accounting fees |
|
|
|
|
|
|
61,321 |
|
|
|
|
|
Distribution services fee--Institutional Service Shares |
|
|
|
|
|
|
21,891 |
|
|
|
|
|
Shareholder services fee--Institutional Shares |
|
|
|
|
|
|
179,547 |
|
|
|
|
|
Shareholder services fee--Institutional Service Shares |
|
|
|
|
|
|
21,891 |
|
|
|
|
|
Share registration costs |
|
|
|
|
|
|
28,203 |
|
|
|
|
|
Printing and postage |
|
|
|
|
|
|
23,423 |
|
|
|
|
|
Insurance premiums |
|
|
|
|
|
|
1,300 |
|
|
|
|
|
Taxes |
|
|
|
|
|
|
2,271 |
|
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
1,882 |
|
|
|
|
|
| ||||||||||||
TOTAL EXPENSES |
|
|
|
|
|
|
894,205 |
|
|
|
|
|
| ||||||||||||
Waivers and Reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
|
Waiver of investment adviser fee |
|
$ |
(322,300 |
) |
|
|
|
|
|
|
|
|
Waiver of distribution services fee--Institutional Service Shares |
|
|
(17,512 |
) |
|
|
|
|
|
|
|
|
Waiver of shareholder services fee--Institutional Shares |
|
|
(179,547 |
) |
|
|
|
|
|
|
|
|
Reimbursement of investment adviser fee |
|
|
(381 |
) |
|
|
|
|
|
|
|
|
Reimbursement of other operating expenses |
|
|
(68,556 |
) |
|
|
|
|
|
|
|
|
| ||||||||||||
TOTAL WAIVERS AND REIMBURSEMENTS |
|
|
|
|
|
|
(588,296 |
) |
|
|
|
|
| ||||||||||||
Net expenses |
|
|
|
|
|
|
|
|
|
|
305,909 |
|
| ||||||||||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
5,710,707 |
|
| ||||||||||||
Realized and Unrealized Loss on Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments |
|
|
|
|
|
|
|
|
|
|
(418,667 |
) |
Net realized gain on capital gain distributions from other investment companies |
|
|
|
|
|
|
|
|
|
|
5,048 |
|
Net change in unrealized depreciation of investments |
|
|
|
|
|
|
|
|
|
|
(444,578 |
) |
| ||||||||||||
Net realized and unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
(858,197 |
) |
| ||||||||||||
Change in net assets resulting from operations |
|
|
|
|
|
|
|
|
|
$ |
4,852,510 |
|
|
See Notes which are an integral part of the Financial Statements
Year Ended September 30 |
|
|
2000 |
|
|
|
1999 |
|
Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
5,710,707 |
|
|
$ |
3,573,627 |
|
Net realized gain (loss) on investments ($(575,771) and $2,474, respectively, as computed for federal tax purposes) |
|
|
(418,667 |
) |
|
|
(558,411 |
) |
Net realized gain on capital gain distributions from other investment companies |
|
|
5,048 |
|
|
|
-- |
|
Net change in unrealized depreciation of investments |
|
|
(444,578 |
) |
|
|
(1,379,505 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS |
|
|
4,852,510 |
|
|
|
1,635,711 |
|
| ||||||||
Distributions to Shareholders: |
|
|
|
|
|
|
|
|
Distributions from net investment income |
|
|
|
|
|
|
|
|
Institutional Shares |
|
|
(4,977,835 |
) |
|
|
(2,875,443 |
) |
Institutional Service Shares |
|
|
(580,133 |
) |
|
|
(659,954 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS |
|
|
(5,557,968 |
) |
|
|
(3,535,397 |
) |
| ||||||||
Share Transactions: |
|
|
|
|
|
|
|
|
Proceeds from sale of shares |
|
|
51,525,810 |
|
|
|
62,007,341 |
|
Net asset value of shares issued to shareholders in payment of distributions declared |
|
|
1,171,996 |
|
|
|
674,646 |
|
Cost of shares redeemed |
|
|
(30,155,862 |
) |
|
|
(27,337,842 |
) |
| ||||||||
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS |
|
|
22,541,944 |
|
|
|
35,344,145 |
|
| ||||||||
Change in net assets |
|
|
21,836,486 |
|
|
|
33,444,459 |
|
| ||||||||
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
75,568,498 |
|
|
|
42,124,039 |
|
| ||||||||
End of period (including undistributed net investment income of $185,814 and $33,075, respectively) |
|
$ |
97,404,984 |
|
|
$ |
75,568,498 |
|
|
See Notes which are an integral part of the Financial Statements
September 30, 2000
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.
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.
U.S. government securities, listed corporate bonds, other fixed income and 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. Investments in other open-end regulated investment companies are valued at net asset 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.
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.
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. The Fund, along with other affiliated companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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"). Dividend income and distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares, which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
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 provision for federal tax is necessary. Withholding taxes on foreign interest and dividends have been provided for in accordance with the applicable country's tax rules and rates.
At September 30, 2000, the Fund, for federal tax purposes, had a capital loss carryforward of $579,262, 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 as follows:
Expiration Year |
|
Expiration Amount |
2006 |
|
$ 3,491 |
| ||
2008 |
|
575,771 |
|
Additionally, net capital losses of $404,603 attributable to security transactions incurred after October 31, 1999 were treated as arising on October 1, 2000, the first day of the Fund's next taxable year.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under contract.
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, 2000 is as follows:
Security |
|
Acquisition |
|
Acquisition |
125 Home Loan Owner Trust 1998-1, Class B2, 12.16%, 2/15/2029 |
|
07/30/1998 |
|
$ 499,844 |
| ||||
Banco Nacional de Mexico SA, Credit Card Merchant Voucher Receivables Master Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 |
|
01/09/1997 |
|
95,851 |
| ||||
Bayview Financial Acquisition Trust 1998-1, Class MII3, 8.07%, 5/25/2029 |
|
05/14/1998 |
|
388,835 |
| ||||
Bayview Financial Acquisition Trust 1998-1, Class MII4, 8.37%, 5/25/2029 |
|
06/02/1998 |
|
453,012 |
| ||||
C-BASS ABS, LLC Series 1997-1, Class A1, 7.52%, 2/1/2017 |
|
02/25/1997 |
|
144,770 |
| ||||
C-BASS ABS, LLC Series 1999-3, Class B1, 8.23%, 2/3/2029 |
|
12/10/1998 |
|
101,282 |
| ||||
Circuit City Credit Card Master Trust 2000-1, Class CTF, 7.82%, 2/15/2006 |
|
02/23/2000 |
|
500,000 |
| ||||
Contimortgage Home Equity Loan Trust 1993-3, Class A2, 5.54%, 7/15/2020 |
|
02/07/2000 |
|
1,149,441 |
| ||||
Embarcadero Aircraft Securitization Trust 2000-A, Class A1, 7.10%, 8/15/2025 |
|
08/17/2000 |
|
2,000,000 |
| ||||
GE Capital Mortgage Services, Inc. 1994-3, Class B4, 6.50%, 1/25/2024 |
|
07/10/1997 |
|
61,792 |
| ||||
K Mart CMBS Financing, Inc. Series 1997-1, Class D, 7.73%, 3/1/2007 |
|
02/27/1997 |
|
100,000 |
| ||||
Mellon Residential Funding Corp. 1998-TBC1, Class B4, 6.60%, 10/25/2028 |
|
12/16/1998 |
|
717,526 |
| ||||
Mellon Residential Funding Corp. 1999-TBC1, Class B4, 6.43%, 1/25/2029 |
|
03/12/1999 |
|
966,029 |
| ||||
Merrill Lynch Mortgage Investors, Inc., Class BB, 8.00%, 3/1/2031 |
|
04/13/2000 |
|
1,177,188 |
| ||||
Merit Securities Corp. 12, Class 1, 7.98%, 7/28/2033 |
|
09/02/1999 |
|
1,211,719 |
| ||||
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST 1, Class A3, 7.20%, 1/15/2003 |
|
09/23/1998 |
|
243,750 |
| ||||
Nomura Depositor Trust Commercial Mortgage Pass-Thru Series 1998-ST 1, Class A5, 7.87%, 1/15/2003 |
|
02/03/1998 |
|
500,000 |
| ||||
Option One Mortgage Securities Corp. 2000-5, Class CTF, 10.65%, 10/26/2030 |
|
08/11/2000 |
|
901,686 |
| ||||
Paragon Auto Receivables Owner Trust 1998-A, Class B, 7.47%, 11/15/2004 |
|
05/14/1998 |
|
159,203 |
| ||||
Paragon Auto Receivables Owner Trust 1998-B, Class B, 7.03%, 3/15/2005 |
|
09/09/1998 |
|
399,262 |
| ||||
Resecuritization Mortgage Trust 1998-A, Class B3, 7.99%, 10/26/2023 |
|
02/12/1999 |
|
410,718 |
| ||||
Saxon Asset Securities Trust 1998-1, Class BF2, 8.00%, 12/25/2027 |
|
03/05/1998 |
|
233,196 |
|
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.
Investment transactions are accounted for on a trade date basis.
At September 30, 2000, par value shares ($0.001 per share) authorized were as follows:
Share Class Name |
|
Number of Par Value |
Institutional Shares |
|
1,000,000,000 |
Institutional Service Shares |
|
1,000,000,000 |
TOTAL |
|
2,000,000,000 |
Transactions in capital stock were as follows:
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Shares: |
|
Shares |
|
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
|
Shares sold |
|
4,868,532 |
|
|
$ |
47,619,117 |
|
|
5,262,382 |
|
|
$ |
52,646,943 |
|
Shares issued to shareholders in payment of distributions declared |
|
91,968 |
|
|
|
898,837 |
|
|
40,839 |
|
|
|
408,205 |
|
Shares redeemed |
|
(2,756,648 |
) |
|
|
(26,928,213 |
) |
|
(1,494,996 |
) |
|
|
(14,918,969 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS |
|
2,203,852 |
|
|
$ |
21,589,741 |
|
|
3,808,225 |
|
|
$ |
38,136,179 |
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30 |
|
2000 |
|
|
1999 |
| ||||||||
Institutional Service Shares: |
|
Shares |
|
|
|
Amount |
|
|
Shares |
|
|
|
Amount |
|
Shares sold |
|
399,891 |
|
|
$ |
3,906,693 |
|
|
933,821 |
|
|
$ |
9,360,398 |
|
Shares issued to shareholders in payment of distributions declared |
|
27,949 |
|
|
|
273,159 |
|
|
26,571 |
|
|
|
266,441 |
|
Shares redeemed |
|
(330,146 |
) |
|
|
(3,227,649 |
) |
|
(1,238,993 |
) |
|
|
(12,418,873 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE |
|
97,694 |
|
|
$ |
952,203 |
|
|
(278,601 |
) |
|
$ |
(2,792,034 |
) |
| ||||||||||||||
NET CHANGE RESULTING FROM |
|
2,301,546 |
|
|
$ |
22,541,944 |
|
|
3,529,624 |
|
|
$ |
35,344,145 |
|
|
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment adviser 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.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest in Prime Value Obligations Fund which is managed by the Adviser. The Adviser has agreed to reimburse certain investment adviser fees as a result of these transactions.
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 a scale that ranges from 0.15% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.
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.
Under the terms of a Shareholder Services Agreement with Federated Shareholder Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSSC is used to finance certain services for shareholders and to maintain shareholder accounts. FSSC may voluntarily choose to waive any portion of its fee. FSSC can modify or terminate this voluntary waiver at any time at its sole discretion.
FServ, through its subsidiary 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.
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.
Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding short-term securities (and in-kind contributions), for the year ended September 30, 2000, were as follows:
Purchases |
|
$ |
43,919,250 |
| |||
Sales |
|
$ |
25,795,873 |
|
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Limited Duration Fund (the "Fund") as of September 30, 2000, and the related statement of operations for the year then ended, the statement of changes in net assets for the years ended September 30, 2000 and 1999, and the financial highlights for the periods 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. The financial highlights for the years ended September 30, 1998 and 1997 were audited by other auditors whose report dated November 13, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to provide 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 the securities owned at September 30, 2000, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Federated Limited Duration Fund as of September 30, 2000, the results of its operations, and the changes in its net assets and its financial highlights for the years ended September 30, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
November 13, 2000
A Statement of Additional Information (SAI) dated November 30, 2000, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.
You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at [email protected] or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.
Federated
World-Class Investment Manager®
Federated Limited Duration Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated Securities Corp., Distributor
Investment Company Act File No. 811-7115
Cusip 31428Q309
G01744-02-SS (11/00)
Federated is a registered mark of Federated Investors, Inc. 2000 ©Federated Investors, Inc.
Federated Limited Duration Fund (Institutional Service Shares)
APPENDIX: RISK/RETURN BAR CHART
The graphic presentation displayed here consists of a bar chart representing the annual total returns of Federated Limited Duration Fund's Institutional Service Shares as of the calendar year-end for each of three years.
The 'y' axis reflects the "% Total Return" beginning with "0" and increasing in increments of 2% up to 8%.
The 'x' axis represents calculation periods from the earliest first full calendar year-end of the Fund's start of business through the calendar year ended December 31, 1999. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Funds Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1997 through 1999, The percentages noted are: 7.39%, 6.06%, and 3.02%.
A Portfolio of Federated Total Return Series, Inc.
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November 30, 2000
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This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Federated Limited Duration Fund--Institutional Shares and Institutional Service Shares (Fund), dated November 30, 2000. Obtain the prospectuses and the Annual Report's Management Discussion of Fund Performance without charge by calling 1-800-341-7400.
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Federated
World-Class Investment Manager®
Federated Limited
Duration Fund
Federated Investors Funds
5800 Corporate
Drive
Pittsburgh, PA
15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated
Securities Corp., Distributor
G01744-03 (11/00)
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Federated is a registered mark of Federated Investors, Inc. 2000© Federated Investors, Inc.
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
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What Do Shares Cost? 9
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How is the Fund Sold? 9
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Subaccounting Services 10
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Redemption in Kind 10
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Account and Share Information 10
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Tax Information 10
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Who Manages and Provides Services to the Fund? 11
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How Does the Fund Measure Performance? 14
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Who is Federated Investors, Inc.? 15
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Investment Ratings 16
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Addresses 18
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The Fund is a diversified portfolio of Federated Total Return Series, Inc. (Corporation). The Corporation is an open-end, management investment company that was established under the laws of the State of Maryland on October 11, 1993. The Corporation may offer separate series of shares representing interests in separate portfolios of securities. The Corporation changed its name from Insight Institutional Series, Inc. to Federated Total Return Series, Inc. on March 21, 1995. The Fund changed its name from Federated Total Return Limited Duration Fund to Federated Limited Duration Fund on May 14, 1997.
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The Board of Directors (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to both classes of Shares. The Fund's investment adviser is Federated Investment Management Company (Adviser).
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In pursuing its investment strategy, the Fund may invest in the following securities for any purpose that is consistent with its investment objective.
Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields.
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The following describes the types of fixed income securities in which the Fund invests:
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Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks.
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Agency securities are issued or guaranteed by a federal agency or other government sponsored entity acting under federal authority (a "GSE"). The United States supports some GSEs with its full faith and credit. Other GSEs receive support through federal subsidies, loans or other benefits. A few GSEs have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. Agency securities are generally regarded as having low credit risks, but not as low as treasury securities.
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The Fund treats mortgage backed securities guaranteed by GSEs as agency securities. Although a GSE guarantee protects against credit risks, it does not reduce the interest rate and prepayment risks of these mortgage backed securities.
Corporate debt securities are fixed income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory requirements.
Commercial paper is an issuer's obligation with a maturity of less than nine months. Companies typically issue commercial paper to pay for current expenditures. Most issuers constantly reissue their commercial paper and use the proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue to obtain liquidity in this fashion, its commercial paper may default. The short maturity of commercial paper reduces both the market and credit risks as compared to other debt securities of the same issuer.
Demand instruments are corporate debt securities that the issuer must repay upon demand. Other demand instruments require a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond one year.
Municipal securities are issued by states, counties, cities and other political subdivisions and authorities. Although many municipal securities are exempt from federal income tax, the Fund may invest in taxable municipal securities.
Mortgage backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Mortgages may have fixed or adjustable interest rates. Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely complicated terms. The simplest form of mortgage backed securities is pass-through certificates. An issuer of pass-through certificates gathers monthly payments from an underlying pool of mortgages. Then, the issuer deducts its fees and expenses and passes the balance of the payments onto the certificate holders once a month. Holders of pass-through certificates receive a pro rata share of all payments and prepayments from the underlying mortgages. As a result, the holders assume all the prepayment risks of the underlying mortgages. The Fund may invest in mortgage backed securities primarily by investing in another investment company (which is not available for general investment by the public) that owns those securities and that is advised by an affiliate of the Adviser. This other investment company is managed independently of the Fund and may incur additional administrative expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional expenses. The Fund may also invest in such securities directly.
CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage backed securities. This creates different prepayment and market risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
In a sequential pay CMO, one class of CMOs receives all principal payments and prepayments. The next class of CMOs receives all principal payments after the first class is paid off. This process repeats for each sequential class of CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks of subsequent classes.
More sophisticated CMOs include planned amortization classes (PACs) and targeted amortization classes (TACs). PACs and TACs are issued with companion classes. PACs and TACs receive principal payments and prepayments at a specified rate. The companion classes receive principal payments and prepayments in excess of the specified rate. In addition, PACs will receive the companion classes' share of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs and TACs to control prepayment risks by increasing the risks to their companion classes.
CMOs may allocate interest payments to one class (Interest Only or IOs) and principal payments to another class (Principal Only or POs). POs increase in value when prepayment rates increase. In contrast, IOs decrease in value when prepayments increase, because the underlying mortgages generate less interest payments. However, IOs tend to increase in value when interest rates rise (and prepayments decrease), making IOs a useful hedge against market risks.
Another variant allocates interest payments between two classes of CMOs. One class (Floaters) receives a share of interest payments based upon a market index such as LIBOR. The other class (Inverse Floaters) receives any remaining interest payments from the underlying mortgages. Floater classes receive more interest (and Inverse Floater classes receive correspondingly less interest) as interest rates rise. This shifts prepayment and interest rate risks from the Floater to the Inverse Floater class, reducing the price volatility of the Floater class and increasing the price volatility of the Inverse Floater class.
CMOs must allocate all payments received from the underlying mortgages to some class. To capture any unallocated payments, CMOs generally have an accrual (Z) class. Z classes do not receive any payments from the underlying mortgages until all other CMO classes have been paid off. Once this happens, holders of Z class CMOs receive all payments and prepayments. Similarly, REMICs have residual interests that receive any mortgage payments not allocated to another REMIC class.
The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.
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Asset backed securities are payable from pools of obligations other than mortgages. Most asset backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed income securities) may be used to create an asset backed security. Asset backed securities may take the form of commercial paper, notes, or pass-through certificates. Asset backed securities have prepayment risks. Like CMOs, asset backed securities may be structured like Floaters, Inverse Floaters, IOs and POs.
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Bank instruments are unsecured interest bearing deposits with banks. Bank instruments include bank accounts, time deposits, certificates of deposit and banker's acceptances. Yankee instruments are denominated in U.S. dollars and issued by U.S. branches of foreign banks. Eurodollar instruments are denominated in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.
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Zero coupon securities do not pay interest or principal until final maturity unlike debt securities that provide periodic payments of interest (referred to as a coupon payment). Investors buy zero coupon securities at a price below the amount payable at maturity. The difference between the purchase price and the amount paid at maturity represents interest on the zero coupon security. Investors must wait until maturity to receive interest and principal, which increases the interest rate and credit risks of a zero coupon security. A zero coupon step-up security converts to a coupon security before final maturity.
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There are many forms of zero coupon securities. Some are issued at a discount and are referred to as zero coupon or capital appreciation bonds. Others are created from interest bearing bonds by separating the right to receive the bond's coupon payments from the right to receive the bond's principal due at maturity, a process known as coupon stripping. Treasury STRIPs, IOs and POs are the most common forms of stripped zero coupon securities. In addition, some securities give the issuer the option to deliver additional securities in place of cash interest payments, thereby increasing the amount payable at maturity. These are referred to as pay-in-kind or PIK securities.
Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement.
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Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security.
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Convertible securities are fixed income securities that the Fund has the option to exchange for equity securities at a specified conversion price. The option allows the Fund to realize additional returns if the market price of the equity securities exceeds the conversion price. For example, the Fund may hold fixed income securities that are convertible into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common stock reached $12, the Fund could realize an additional $2 per share by converting its fixed income securities.
Convertible securities have lower yields than comparable fixed income securities. In addition, at the time a convertible security is issued the conversion price exceeds the market value of the underlying equity securities. Thus, convertible securities may provide lower returns than non-convertible fixed income securities or equity securities depending upon changes in the price of the underlying equity securities. However, convertible securities permit the Fund to realize some of the potential appreciation of the underlying equity securities with less risk of losing its initial investment.
The Fund treats convertible securities as both fixed income and equity securities for purposes of its investment policies and limitations, because of their unique characteristics.
Foreign securities are securities of issuers based outside the United States. The Fund considers an issuer to be based outside the United States if:
Foreign securities are primarily denominated in foreign currencies. Along with the risks normally associated with domestic securities of the same type, foreign securities are subject to currency risks and risks of foreign investing. Trading in certain foreign markets is also subject to liquidity risks. The Fund may invest more than 10% in foreign securities.
In order to convert U.S. dollars into the currency needed to buy a foreign security, or to convert foreign currency received from the sale of a foreign security into U.S. dollars, the Fund may enter into spot currency trades. In a spot trade, the Fund agrees to exchange one currency for another at the current exchange rate. The Fund may also enter into derivative contracts in which a foreign currency is an underlying asset. The exchange rate for currency derivative contracts may be higher or lower than the spot exchange rate. Use of these derivative contracts may increase or decrease the Fund's exposure to currency risks.
Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.
Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract.
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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative contracts may increase or decrease the Fund's exposure to interest rate and currency risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.
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The Fund may trade in the following types of derivative contracts:
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Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts. Futures contracts traded OTC are frequently referred to as forward contracts.
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The Fund may buy and sell financial and foreign currency futures contracts.
Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. The writer of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option.
The Fund may:
The Fund may also write call options on portfolio securities, financial and foreign currency futures contracts to generate income from premiums, and in anticipation of a decrease or only limited increase in the value of the underlying asset. If a call written by the Fund is exercised, the Fund foregoes any possible profit from an increase in the market price of the underlying asset over the exercise price plus the premium received.
The Fund may also write put options on financial and foreign currency futures contracts to generate income from premiums, and in anticipation of an increase or only limited decrease in the value of the underlying asset. In writing puts, there is a risk that the Fund may be required to take delivery of the underlying asset when its current market price is lower than the exercise price.
When the Fund writes options on futures contracts, it will be subject to margin requirements similar to those applied to futures contracts.
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.
Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:
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Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount of fixed income securities, in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million London Interbank Offer Rate (LIBOR) swap would require one party to pay the equivalent of the LIBOR interest rate (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount.
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Repurchase agreements are transactions in which the Fund buys a security from a dealer or bank and agrees to sell the security back at a mutually agreed upon time and price. The repurchase price exceeds the sale price, reflecting the Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions, such as securities dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities subject to repurchase agreements. The Adviser or subcustodian will monitor the value of the underlying security each day to ensure that the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
Reverse repurchase agreements are repurchase agreements in which the Fund is the seller (rather than the buyer) of the securities, and agrees to repurchase them at an agreed upon time and price. A reverse repurchase agreement may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In addition, reverse repurchase agreements create leverage risks because the Fund must repurchase the underlying security at a higher price, regardless of the market value of the security at the time of repurchase.
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Delayed delivery transactions, including when-issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default. 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.
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The Fund may lend portfolio securities to borrowers that the Adviser deems creditworthy. In return, the Fund receives cash or liquid securities from the borrower as collateral. The borrower must furnish additional collateral if the market value of the loaned securities increases. Also, the borrower must pay the Fund the equivalent of any dividends or interest received on the loaned securities.
The Fund will reinvest cash collateral in securities that qualify as an acceptable investment for the Fund. However, the Fund must pay interest to the borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower. The Fund will not have the right to vote on securities while they are on loan, but it will terminate a loan in anticipation of any important vote. The Fund may pay administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash collateral to a securities lending agent or broker.
Securities lending activities are subject to interest rate risks and credit risks.
In order to secure its obligations in connection with derivatives contracts or special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on derivative contracts or special transactions.
The SEC has granted an exemption that permits the Fund and all other funds advised by subsidiaries of Federated Investors, Inc. ("Federated funds") to lend and borrow money for certain temporary purposes directly to and from other Federated funds. Participation in this inter-fund lending program is voluntary for both borrowing and lending funds, and an inter-fund loan is only made if it benefits each participating fund. Federated administers the program according to procedures approved by the Fund's Board, and the Board monitors the operation of the program. Any inter-fund loan must comply with certain conditions set out in the exemption, which are designed to assure fairness and protect all participating funds.
For example, inter-fund lending is permitted only (a) to meet shareholder redemption requests, and (b) to meet commitments arising from "failed" trades. All inter-fund loans must be repaid in seven days or less. The Fund's participation in this program must be consistent with its investment policies and limitations, and must meet certain percentage tests. Inter-fund loans may be made only when the rate of interest to be charged is more attractive to the lending fund than market-competitive rates on overnight repurchase agreements (the "Repo Rate") and more attractive to the borrowing fund than the rate of interest that would be charged by an unaffiliated bank for short-term borrowings (the "Bank Loan Rate"), as determined by the Board. The interest rate imposed on inter-fund loans is the average of the Repo Rate and the Bank Loan Rate.
The Fund may invest its assets in securities of other investment companies, including the securities of affiliated money market funds, as an efficient means of carrying out its investment policies and managing its uninvested cash.
The Fund may invest in mortgage backed and high yield securities primarily by investing in another investment company (which is not available for general investment by the public) that owns those securities and that is advised by an affiliate of the Adviser. This other investment company is managed independently of the Fund and may incur additional administrative expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional expenses. The Fund may also invest in such securities directly.
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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized rating services. For example, Standard and Poor's, a rating service, assigns ratings to investment grade securities (AAA, AA, A and BBB) based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment grade. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.
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There are many factors which may affect an investment in the Fund. The Fund's principal risks are described in its prospectus. Additional risk factors are outlined below.
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Unlike traditional fixed income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due) payments on mortgage backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding mortgage backed securities.
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For example, when interest rates decline, the values of mortgage backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on mortgage backed securities.
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Conversely, when interest rates rise, the values of mortgage backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of mortgage backed securities, and cause their value to decline more than traditional fixed income securities.
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Generally, mortgage backed securities compensate for the increased risk associated with prepayments by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage backed security and the yield of a U.S. Treasury security with a comparable maturity (the spread). An increase in the spread will cause the price of the mortgage backed security to decline. Spreads generally increase in response to adverse economic or market conditions. Spreads may also increase if the security is perceived to have an increased prepayment risk or is perceived to have less market demand.
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The Fund's investment objective is to provide total return. The investment objective may not be changed by the Fund's Directors without shareholder approval.
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.
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.
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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.
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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.
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.
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.
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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.
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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.
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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 unless authorized by the Board of Directors (Board) and by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act. The following limitations, however, may be changed by the Board without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective.
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.
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For purposes of the above 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." Except with respect to borrowing money, if a percentage limitations 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 limitation.
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Prices provided by independent pricing services may be determined without relying exclusively on quoted prices and may consider institutional trading in similar groups of securities, yield, quality, stability, risk, coupon rate, maturity, type of issue, trading characteristics and other market data or factors. From time to time, when prices cannot be obtained from an independent pricing service, securities may be valued based on quotes from broker/dealers or other financial institutions that trade the securities.
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The Fund's net asset value (NAV) per Share fluctuates and is based on the market value of all securities and other assets of the Fund. The NAV for each class of Shares may differ 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.
</R>
<R>
</R>
Under the Distributor's Contract with the Fund, the Distributor (Federated Securities Corp.) offers Shares on a continuous, best-efforts basis.
<R>
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per share expenses and provide cash for orderly portfolio management and Share redemptions. In addition, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee.
</R>
<R>
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing-related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses.
</R>
The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees.
<R>
Investment professionals (such as broker/dealers or banks) may be paid fees, in significant amounts, out of the assets of the Distributor and/or Federated Shareholder Services Company. (These fees do not come out of Fund assets.) The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates.
</R>
<R>
Investment professionals receive such fees for providing distribution-related and/or shareholder services, such as advertising, providing incentives to their sales personnel, sponsoring other activities intended to promote sales, and maintaining shareholder accounts. These payments may be based upon such factors as the number or value of Shares the investment professional sells or may sell; the value of client assets invested; and/or the type and nature of sales or marketing support furnished by the investment professional.
</R>
<R>
Certain investment professionals may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent may charge a fee based on the level of subaccounting services rendered. Investment professionals holding Shares in a fiduciary, agency, custodial or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services that may be related to the ownership of Shares. This information should, therefore, be read together with any agreement between the customer and the investment professional about the services provided, the fees charged for those services, and any restrictions and limitations imposed.
</R>
Although the Fund intends to pay Share redemptions in cash, it reserves the right, as described below, to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.
<R>
Because the Fund has elected to be governed by Rule 18f-1 under the 1940 Act, the Fund is obligated to pay Share redemptions to any one shareholder in cash only up to the lesser of $250,000 or 1% of the net assets represented by such Share class during any 90-day period.
</R>
Any Share redemption payment greater than this amount will also be in cash unless the Fund's Board determines that payment should be in kind. In such a case, the Fund will pay all or a portion of the remainder of the redemption in portfolio securities, valued in the same way as the Fund determines its NAV. The portfolio securities will be selected in a manner that the Fund's Board deems fair and equitable and, to the extent available, such securities will be readily marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving the portfolio securities and selling them before their maturity could receive less than the redemption value of the securities and could incur certain transaction costs.
Each share of the Fund gives the shareholder one vote in Director elections and other matters submitted to shareholders for vote. All Shares of the Corporation have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote.
Directors may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Corporation's outstanding shares of all series entitled to vote.
<R>
As of November 7, 2000, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Institutional Shares: S & E Trust Company, C/O Sunflower Bank N.A. Careco, Attn: Mutual Fund Administrator, One Freedom Valley Drive, Oaks, PA 19456, 7.62%; JAS & Co., #2004589, Bremer Trust, N.A., Attn: Trust Company, P.O. Box 986, St. Cloud, MN 56302-0986, 25.43%; Grand Old Co., Attn: FFSG, N.A., P.O. Box 2307, Zanesville, OH 43702-2307, 9.35%; Black & Co., Howland Capital Management Inc., Clients Fund, Attn: Sophie Costley, 75 Federal Street, Suite 1100, Boston, MA 02110-1900, 10.41%; First MAR & Co. C/O Wells Fargo Bank Michigan N.A., Attn: Linda J. Olgren-Carlson, Investment Mgt. & Tr., P.O. Box 850, Marquette, MI 49855-0580, 6.90%; and Saxon and Co., FBO 20-10-002-1042380, 31428Q101, P.O. Box 7780-1888, Philadelphia, PA 19182-0001, 5.06%.
</R>
<R>
As of November 7, 2000, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Institutional Service Shares: Frepath Co., Fremont National Bank & Trust Co., Attn: Trust Dept., P.O. Box 169, Fremont, NE 68026-0169, 7.27%; Anbee & Company, C/O Greatbanc Trust Company, Attn: Trust Dept., 105 East Galena Blvd, Suite 500, Aurora, IL 60505-3357, 34.79%, MRT Stock Company, First State Bank of Gainesville, Paradigm Accounts, Attn: Trust Dept., P.O. Box 10, Gainesville, TX 76241-0010, 7.89%; National Investor Services Corp. for the Exclusive Benefit of our Customers, 55 Water Street, 32nd Floor, New York, NY 10041-3299, 6.85%; and Norwest Bank MN N.A., FBO Walsh Construction, Attn: Mutual Fund OPS, P.O. Box 1533, Minneapolis, MN 55480-1533, 16.44%.
</R>
Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders.
The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Corporation's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carryforward, which may reduce the taxable income or gain that the Fund would realize, and to which the shareholder would be subject, in the future.
<R>
The Board is responsible for managing the Corporation's business affairs and for exercising all the Corporation's powers except those reserved for the shareholders. Information about each Board member is provided below and includes each person's: name; address; present position(s) held with the Corporation; principal occupations for the past five years and positions held prior to the past five years; total compensation received as a Director from the Corporation for its most recent fiscal year, if applicable; and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Corporation is comprised of four funds and the Federated Fund Complex is comprised of 43 investment companies, whose investment advisers are affiliated with the Fund's Adviser.
</R>
<R>
As of November 7, 2000, the Fund's Board and Officers as a group owned approximately less than 1% of the Fund's outstanding Shares.
</R>
Name |
|
Principal Occupations for |
|
Aggregate |
|
Total |
John F. Donahue*# |
|
Chief Executive Officer and Director or Trustee of the Federated Fund Complex; Chairman and Director, Federated Investors, Inc.; Chairman, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd.; formerly: Trustee, Federated Investment Management Company and Chairman and Director, Federated Investment Counseling. |
|
$0 |
|
$0 for the Corporation and |
Thomas G. Bigley |
|
Director or Trustee of the Federated Fund Complex; Director, Member of Executive Committee, Children's Hospital of Pittsburgh; Director and Chairman of Audit Committee, Robroy Industries, Inc. (coated steel conduits/computer storage equipment); formerly: Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc. (physician practice management); Director, Member of Executive Committee, University of Pittsburgh. |
|
$1,413.,94 |
|
$116,760.63 for the Corporation |
John T. Conroy, Jr. |
|
Director or Trustee of the Federated Fund Complex; Chairman of the Board, Investment Properties Corporation; Partner or Trustee in private real estate ventures in Southwest Florida; formerly: President, Investment Properties Corporation; Senior Vice President, John R. Wood and Associates, Inc., Realtors; President, Naples Property Management, Inc. and Northgate Village Development Corporation. |
|
$1,445.29 |
|
$128,455.37 for the Corporation |
Nicholas P. Constantakis |
|
Director or Trustee of the Federated Fund Complex; Director and Chairman of the Audit Committee, Michael Baker Corporation (engineering, construction, operations and technical services); formerly: Partner, Andersen Worldwide SC. |
|
$1,413.94 |
|
$73,191.21 for the Corporation |
John F. Cunningham |
|
Director or Trustee of some of the Federated Fund Complex; Chairman,
President and Chief Executive Officer, Cunningham & Co., Inc.
(strategic business consulting); Trustee Associate, Boston College;
Director, Iperia Corp. (communications/software); formerly: Director,
Redgate Communications and EMC Corporation (computer storage
systems). |
|
$1,313.72 |
|
$93,190.48 for the Corporation |
Lawrence D. Ellis, M.D.* |
|
Director or Trustee of the Federated Fund Complex; Professor of Medicine, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center -- Downtown; Hematologist, Oncologist and Internist, University of Pittsburgh Medical Center; Member, National Board of Trustees, Leukemia Society of America. |
|
$1,313.72 |
|
$116,760.63 for the Corporation |
Peter E. Madden |
|
Director or Trustee of the Federated Fund Complex; formerly:
Representative, Commonwealth of Massachusetts General Court; President,
State Street Bank and Trust Company and State Street Corporation.
|
|
$1,345.94 |
|
$109,153.60 for the Corporation |
Charles F. Mansfield, Jr. |
|
Director or Trustee of some of the Federated Fund Complex; Management
Consultant; formerly: Executive Vice President, Legal and External
Affairs, DVC Group, Inc. (formerly, Dugan Valva Contess, Inc.) (marketing,
communications, technology and consulting). |
|
$1,445.29 |
|
$102,573.91 for the Corporation |
John E. Murray, Jr., J.D., S.J.D.# |
|
Director or Trustee of the Federated Fund Complex; President, Law
Professor, Duquesne University; Consulting Partner, Mollica & Murray;
Director, Michael Baker Corp. (engineering, construction, operations and
technical services). |
|
$1,345.08 |
|
$128,455.37 for the Corporation |
Marjorie P. Smuts |
|
Director or Trustee of the Federated Fund Complex; Public
Relations/Marketing/Conference Planning. |
|
$1,313.72 |
|
$116,760.63 for the Corporation |
John S. Walsh |
|
Director or Trustee of some of the Federated Fund Complex; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc.; Director, Walsh & Kelly, Inc. (heavy highway contractor); formerly: Vice President, Walsh & Kelly, Inc. |
|
$1,313.72 |
|
$94,536.85 for the Corporation |
J. Christopher Donahue* |
|
President or Executive Vice President of the Federated Fund Complex; Director or Trustee of some of the Funds in the Federated Fund Complex; President, Chief Executive Officer and Director, Federated Investors, Inc.; President, Chief Executive Officer and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; President, Chief Executive Officer and Director, Federated Global Investment Management Corp.; President and Chief Executive Officer, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company; formerly: President, Federated Investment Counseling. |
|
$0 |
|
$0 for the Corporation and |
Edward C. Gonzales |
|
President, Executive Vice President and Treasurer of some of the Funds in the Federated Fund Complex; Vice Chairman, Federated Investors, Inc.; Trustee, Federated Administrative Services; formerly: Trustee or Director of some of the Funds in the Federated Fund Complex; CEO and Chairman, Federated Administrative Services; Vice President, Federated Investment Management Company, Federated Investment Counseling, Federated Global Investment Management Corp. and Passport Research, Ltd.; Director and Executive Vice President, Federated Securities Corp.; Director, Federated Services Company; Trustee, Federated Shareholder Services Company. |
|
$0 |
|
$0 for the Corporation and |
John W. McGonigle |
|
Executive Vice President and Secretary of the Federated Fund Complex; Executive Vice President, Secretary and Director, Federated Investors, Inc.; formerly: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
|
$0 |
|
$0 for the Corporation and |
Richard J. Thomas |
|
Treasurer of the Federated Fund Complex; Senior Vice President, Federated Administrative Services; formerly: Vice President, Federated Administrative Services; held various management positions within Funds Financial Services Division of Federated Investors, Inc. |
|
$0 |
|
$0 for the Corporation and |
William D. Dawson III |
|
Chief Investment Officer of this Fund and various other Funds in the Federated Fund Complex; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp., Federated Investment Management Company and Passport Research, Ltd.; Director, Federated Global Investment Management Corp. and Federated Investment Management Company; Registered Representative, Federated Securities Corp.; Portfolio Manager, Federated Administrative Services; Vice President, Federated Investors, Inc.; formerly: Executive Vice President and Senior Vice President, Federated Investment Counseling Institutional Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd. |
|
$0 |
|
$0 for the Corporation and |
Joseph M. Balestrino |
|
Joseph M. Balestrino is Vice President of the Corporation. Mr. Balestrino joined Federated in 1986 and has been a Senior Portfolio Manager and Senior Vice President of the Fund's Adviser since 1998. He was a Portfolio Manager and a Vice President of the Fund's Adviser from 1995 to 1998. Mr. Balestrino served as a Portfolio Manager and an Assistant Vice President of the Adviser from 1993 to 1995. Mr. Balestrino is a Chartered Financial Analyst and received his Master's Degree in Urban and Regional Planning from the University of Pittsburgh. |
|
$0 |
|
$0 for the Corporation and |
|
|
|
|
|
|
|
<R>
* An asterisk denotes a Director who is deemed to be an interested person as defined in the 1940 Act.
</R>
# A pound sign denotes a Member of the Board's Executive Committee, which handles the Board's responsibilities between its meetings.
<R>
Mr. Donahue is the father of J. Christopher Donahue, President of the Corporation.
</R>
<R>
Messrs. Cunningham, Mansfield and Walsh became members of the Board of Directors on April 1, 1999.
</R>
The Adviser conducts investment research and makes investment decisions for the Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Corporation or any Fund shareholder for any losses that may be sustained in the purchase, holding, or sale of any security or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Corporation.
Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of Fund Shares offered by the Distributor.
<R>
</R>
<R>
As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted codes of ethics. These codes govern securities trading activities of investment personnel, Fund Directors, and certain other employees. Although they do permit these people to trade in securities, including those that the Fund could buy, they also contain significant safeguards designed to protect the Fund and its shareholders from abuses in this area, such as requirements to obtain prior approval for, and to report, particular transactions.
</R>
When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. The Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. In selecting among firms believed to meet these criteria, the Adviser may give consideration to those firms which have sold or are selling Shares of the Fund and other funds distributed by the Distributor and its affiliates. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Fund's Board.
<R>
Investment decisions for the Fund are made independently from those of other accounts managed by the Adviser. When the Fund and one or more of those accounts invests in, or disposes of, the same security, available investments or opportunities for sales will be allocated among the Fund and the account(s) in a manner believed by the Adviser to be equitable. While the coordination and ability to participate in volume transactions may benefit the Fund, it is possible that this procedure could adversely impact the price paid or received and/or the position obtained or disposed of by the Fund.
</R>
Federated Services Company, a subsidiary of Federated, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Services Company provides these at the following annual rate of the average aggregate daily net assets of all Federated Funds as specified below:
Maximum Administrative Fee |
|
Average Aggregate Daily |
0.150 of 1% |
|
on the first $250 million |
0.125 of 1% |
|
on the next $250 million |
0.100 of 1% |
|
on the next $250 million |
0.075 of 1% |
|
on assets in excess of $750 million |
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses.
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank.
Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type and number of accounts and transactions made by shareholders.
<R>
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs its audit so that it may provide an opinion as to whether the Fund's financial statements and financial highlights are free of material misstatement in accordance with accounting principles generally accepted in the United States of America.
</R>
For the Year Ended September 30 |
|
<R>2000</R> |
|
<R>1999</R> |
|
<R>1998</R> |
Advisory Fee Earned |
|
<R>$322,300</R> |
|
<R>$224,110</R> |
|
<R>$91,284</R> |
| ||||||
Advisory Fee Reduction |
|
<R>322,300</R> |
|
<R>224,110</R> |
|
<R>91,284</R> |
| ||||||
Brokerage Commissions |
|
0 |
|
0 |
|
0 |
| ||||||
Administrative Fee |
|
<R>155,000</R> |
|
<R>157,308</R> |
|
<R>155,001</R> |
| ||||||
<R>12b-1 Fee: </R> |
|
|
|
|
|
|
| ||||||
Institutional Service Shares |
|
<R>4,379</R> |
|
-- |
|
-- |
| ||||||
<R>Shareholder Services Fee:</R> |
|
|
|
|
|
|
| ||||||
Institutional Shares |
|
<R>0</R> |
|
-- |
|
-- |
| ||||||
Institutional Service Shares |
|
<R>21,891</R> |
|
-- |
|
-- |
|
Fees are allocated among classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable class of Shares.
The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information.
The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings fluctuate daily. Both net earnings and offering price per Share are factors in the computation of yield and total return.
<R>
Total returns are given for the one-year and Start of Performance periods ended September 30, 2000.
</R>
<R>
Yield is given for the 30-day period ended September 30, 2000.
</R>
Share Class |
|
30-Day Period |
|
1 Year |
|
Start of |
Institutional Shares: |
|
|
|
|
|
|
Total Return |
|
|
|
6.17% |
|
6.27% |
Yield |
|
7.14% |
|
-- |
|
-- |
Institutional Service Shares: |
|
|
|
|
|
|
Total Return |
|
|
|
5.86% |
|
5.99% |
Yield |
|
6.84% |
|
-- |
|
-- |
Total return represents the change (expressed as a percentage) in the value of Shares over a specific period of time, and includes the investment of income and capital gains distributions.
The average annual total return for Shares is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of Shares owned at the end of the period by the NAV per Share at the end of the period. The number of Shares owned at the end of the period is based on the number of Shares purchased at the beginning of the period with $1,000, less any applicable sales charge, adjusted over the period by any additional Shares, assuming the annual reinvestment of all dividends and distributions.
The yield of Shares is calculated by dividing: (i) the net investment income per Share earned by the Shares over a 30-day period; by (ii) the maximum offering price per Share on the last day of the period. This number is then annualized using semi-annual compounding. This means that the amount of income generated during the 30-day period is assumed to be generated each month over a 12-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by Shares because of certain adjustments required by the SEC and, therefore, may not correlate to the dividends or other distributions paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in connection with services provided in conjunction with an investment in Shares, the Share performance is lower for shareholders paying those fees.
Advertising and sales literature may include:
<R>
The Fund may compare its performance, or performance for the types of securities in which it invests, to a variety of other investments, including federally insured bank products such as bank savings accounts, certificates of deposit and Treasury bills.
</R>
<R>
The Fund may quote information from reliable sources regarding individual countries and regions, world stock exchanges and economic and demographic statistics.
</R>
You may use financial publications and/or indices to obtain a more complete view of Share performance. When comparing performance, you should consider all relevant factors such as the composition of the index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include:
Merrill Lynch 1-3 Year U.S. Treasury Index is an unmanaged index tracking short-term U.S. government securities with maturities between 1 and 2.99 years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
<R>
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.
</R>
Lehman 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.
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 Fund will quote its Lipper ranking in the "Short Intermediate Grade Bond Funds" category in advertising and sales literature.
Federated is dedicated to meeting investor needs by making structured, straightforward and consistent investment decisions. Federated investment products have a history of competitive performance and have gained the confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound methodologies backed by fundamental and technical research. At Federated, success in investment management does not depend solely on the skill of a single portfolio manager. It is a fusion of individual talents and state-of-the-art industry tools and resources. Federated's investment process involves teams of portfolio managers and analysts, and investment decisions are executed by traders who are dedicated to specific market sectors and who handle trillions of dollars in annual trading volume.
<R>
In the municipal sector, as of December 31, 1999, Federated managed 12 bond funds with approximately $2.0 billion in assets and 24 money market funds with approximately $13.1 billion in total assets. In 1976, Federated introduced one of the first municipal bond mutual funds in the industry and is now one of the largest institutional buyers of municipal securities. The Funds may quote statistics from organizations including The Tax Foundation and the National Taxpayers Union regarding the tax obligations of Americans.
</R>
<R>
In the equity sector, Federated has more than 29 years' experience. As of December 31, 1999, Federated managed 53 equity funds totaling approximately $18.3 billion in assets across growth, value, equity income, international, index and sector (i.e. utility) styles. Federated's value-oriented management style combines quantitative and qualitative analysis and features a structured, computer-assisted composite modeling system that was developed in the 1970s.
</R>
<R>
In the corporate bond sector, as of December 31, 1999, Federated managed 13 money market funds and 29 bond funds with assets approximating $35.7 billion and $7.7 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 27 years of experience in the corporate bond sector. In 1972, Federated introduced one of the first high-yield bond funds in the industry. In 1983, Federated was one of the first fund managers to participate in the asset backed securities market, a market totaling more than $209 billion.
</R>
<R>
In the government sector, as of December 31, 1999, Federated managed 9 mortgage backed, 11 government/agency and 16 government money market mutual funds, with assets approximating $4.7 billion, $1.6 billion and $34.1 billion, respectively. Federated trades approximately $450 million in U.S. government and mortgage backed securities daily and places approximately $25 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $43.8 billion in government funds within these maturity ranges.
</R>
<R>
In the money market sector, Federated gained prominence in the mutual fund industry in 1974 with the creation of the first institutional money market fund. Simultaneously, the company pioneered the use of the amortized cost method of accounting for valuing shares of money market funds, a principal means used by money managers today to value money market fund shares. Other innovations include the first institutional tax-free money market fund. As of December 31, 1999, Federated managed more than $83.0 billion in assets across 54 money market funds, including 16 government, 13 prime, 24 municipal and 1 euro-denominated with assets approximating $34.1 billion, $35.7 billion, $13.1 billion and $115 million, respectively.
</R>
<R>
The Chief Investment Officers responsible for oversight of the various investment sectors within Federated are: U.S. equity and high yield--J. Thomas Madden; U.S. fixed income--William D. Dawson III; and global equities and fixed income--Henry A. Frantzen. The Chief Investment Officers are Executive Vice Presidents of the Federated advisory companies.
</R>
Thirty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $5 trillion to the more than 7,300 funds available, according to the Investment Company Institute.
Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include:
<R>
Federated meets the needs of approximately 1,160 institutional clients nationwide by managing and servicing separate accounts and mutual funds for a variety of purposes, including defined benefit and defined contribution programs, cash management, and asset/liability management. Institutional clients include corporations, pension funds, tax exempt entities, foundations/endowments, insurance companies, and investment and financial advisers. The marketing effort to these institutional clients is headed by John B. Fisher, President, Institutional Sales Division, Federated Securities Corp.
</R>
Other institutional clients include more than 1,600 banks and trust organizations. Virtually all of the trust divisions of the top 100 bank holding companies use Federated Funds in their clients' portfolios. The marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank Marketing & Sales.
Federated Funds are available to consumers through major brokerage firms nationwide--we have over 2,200 broker/dealer and bank broker/dealer relationships across the country--supported by more wholesalers than any other mutual fund distributor. Federated's service to financial professionals and institutions has earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for service quality measurement. The marketing effort to these firms is headed by James F. Getz, President, Broker/Dealer Sales Division, Federated Securities Corp.
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.
<R>
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.
</R>
<R>
B--Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
</R>
<R>
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
</R>
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.
<R>
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.
</R>
AA--Bonds which are rated AA are judged to be of high quality by all standards. Together with the AAA group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in AAA securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
CA--Bonds which are rated CA represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest-rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
AAA--Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
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:
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.
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-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.
Institutional Shares
Institutional Service Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA
15237-7000
Federated Securities Corp.
Federated Investors Tower
1001 Liberty
Avenue
Pittsburgh, PA 15222-3779
Federated Investment Management Company
Federated Investors Tower
1001
Liberty Avenue
Pittsburgh, PA 15222-3779
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA
02266-8600
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA
02266-8600
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
Item 23. | Exhibits: | ||
(a) | (i) | Conformed copy of Articles of Incorporation of the Registrant; (1) | |
(ii) | Conformed copy of Articles of Amendment and Restatement of the Registrant;+ | ||
(iii) | Conformed copy of Amendment No. 5 to Articles of Amendment of the Registrant;+ | ||
(iv) | Conformed copy of Amendment No. 6 to Articles of Amendment of the Registrant;+ | ||
(v) | Conformed copy of Amendment No. 7 to Articles of Amendment of the Registrant:+ | ||
(vi) | Conformed copy of Amendment No. 8 to Articles of Amendment of the Registrant;+ | ||
(vii) | Conformed copy of Amendment No. 9 to Articles of Amendment of the Registrant;+ | ||
(viii) | Conformed copy of Amendment No. 10 to Articles of Amendment of the Registrant;+ | ||
(ix) | Conformed copy of Amendment No. 11 to Articles of Amendment of the Registrant;+ | ||
(x) | Conformed copy of Amendment No. 12 to Articles of Amendment of the Registrant;+ | ||
(b) | (i) | Copy of By-Laws of the Registrant; (1) | |
(ii) | Copy of Amendment No. 1 to the By-Laws of the Registrant; (16) | ||
(iii) | Copy of Amendment No. 2 to the By-Laws of the Registrant; (16) | ||
(iv) | Copy of Amendment No. 3 to the By-Laws of the Registrant; (16) | ||
(c) | Copy of Specimen Certificate for Shares of Beneficial Interest of the Registrant; (10) | ||
(d) | (i) | Conformed Copy of Investment Advisory Contract of the Registrant and conformed copies of Exhibits A and B of Investment Advisory Contract of the Registrant; (7) | |
(ii) | Conformed Copy of Exhibit C to the Investment Advisory Contract of the Registrant; + | ||
(iii) | Conformed copies of Exhibits D and E of Investment Advisory Contract of the Registrant; (11) | ||
(iv) | Conformed copy of Exhibit F of Investment Advisory Contract of the Registrant; (18) |
+ | 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) |
(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) |
(16) | Response is incorporated by reference to Registrant's Post-Effective Amendment No. 16 on Form N-1A filed October 28, 1998. (File Nos. 33-50773 and 811-7115) |
(18) | Response is incorporated by reference to Registrant's Post-Effective Amendment No. 20 on Form N-1A filed February, 15, 2000. (File Nos. 33-50773 and 811-7115) |
(v) | Conformed copy of Limited Power of Attorney of the Investment Advisory Contract of the Registrant;+ | ||
(vi) | Conformed copy of Schedule 1 to Limited Power of Attorney of the Registrant;+ | ||
(e) | (i) | Conformed Copy of Distributor's Contract of the Registrant and Conformed copies of Exhibits A, B, C, and D to Distributor's Contract of the Registrant;(4) | |
(ii) | Conformed Copy of Exhibits E and F to Distributor's Contract of the Registrant; (10) | ||
(iii) | Conformed copies of Exhibits G and H to Distributor's Contract of the Registrant; (11) | ||
(iv) | Conformed copy of Exhibit I to Distributor's Contract of the Registrant; + | ||
(v) | 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). | ||
(f) | Not Applicable; | ||
(g) | (i) | Conformed copy of the Custodian Agreement of the Registrant; (3) | |
(ii) | Conformed Copy of Custodian Fee Schedule; (13) | ||
(h) | (i) | Conformed copy of Fund Accounting Services, Administrative Services, Transfer Agency Services, and Custody Services Procurement Agreement of the Registrant; (13) | |
(ii) | Conformed copy of Administrative Services Agreement; (1) | ||
(iii) | Conformed copy of Exhibit B of Funds Participating in Services Agreement; (15) | ||
(iv) | The responses described in Item 23(e)(v) are hereby incorporated by reference; | ||
(v) | Conformed Copy of Amended and Restated Shareholder Services Agreement of the Registrant; (13) |
+ | 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) |
(3) | Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 2 on Form N-1A filed January 18, 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) |
(13) | Response is incorporated by reference to Registrant's Post-Effective Amendment No. 13 on Form N-1A filed November 26, 1997. (File Nos. 33-50773 and 811-7115) |
(15) | Response is incorporated by reference to Registrant's Post-Effective Amendment No. 15 on Form N-1A filed August 28, 1998. (File Nos. 33-50773 and 811-7115) |
(i) | Conformed copy of Opinion and Consent of Counsel as to legality of shares being registered; (2) | ||
(j) | Conformed copy of Consent of Independent Auditors; + | ||
(k) | Not Applicable; | ||
(l) | Conformed copy of Initial Capital Understanding; (3) | ||
(m) | (i) | Conformed copy of Distribution Plan of the Registrant including Exhibits A and B; (11) | |
(ii) | Conformed copy of Exhibits C to Distribution Plan of the Registrant;(10) | ||
(iii) | Conformed copy of Exhibit D and E to Distribution Plan of the Registrant; (11) | ||
(iv) | The responses described in Item 23(e)(v) are hereby incorporated by reference; | ||
(n) | 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); | ||
(o) | (i) | Conformed copy of Power of Attorney of the Registrant;+ | |
(ii) | Conformed copy of Power of Attorney for William D. Dawson, Chief Investment Officer of the Registrant;+ | ||
(p) | The Registrant hereby incorporates the conformed copy of the Code of Ethics for Access Persons from Item 23(p) of the Money Market Obligations Trust Registration Statement on form N-1A filed with the Commission on February 25, 2000. (File Nos. 33-31602 and 811-5950). |
Item 24. | Persons Controlled by or Under Common Control with the Fund: None |
Item 25. | Indemnification: (1) |
+ | 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) |
(3) | Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 2 on Form N-1A filed January 18, 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) |
Item 26. | Business and Other Connections of Investment Adviser: | |
For a description of the other business of the investment adviser, see the section entitled "Who Manages the Fund?" in
Part A. The affiliations with the Registrant of four of the Trustees and one of the Officers of the investment adviser
are included in Part B of this Registration Statement under "Who Manages and Provides Services to the Fund?" The
remaining Trustees of the investment adviser and, in parentheses, their principal occupations are: Thomas R. Donahue,
(Chief Financial Officer, Federated Investors, Inc.), 1001 Liberty Avenue, Pittsburgh, PA, 15222-3779 and Mark D. Olson
(a principal of the firm Mark D. Olson & Company, L.L.C. and Partner, Wilson, Halbrook & Bayard, P.A.), Suite 301
Little Falls Center Two, 2751 Centerville Road, Wilmington, DE 19808. The remaining Officers of the investment adviser are: |
||
Executive Vice Presidents: | William D. Dawson, III Henry A. Frantzen J. Thomas Madden |
|
Senior Vice Presidents: | Stephen F. Auth Joseph M. Balestrino David A. Briggs Jonathan C. Conley Deborah A. Cunningham Michael P. Donnelly Linda A. Duessel Mark E. Durbiano James E. Grefenstette Jeffrey A. Kozemchak Sandra L. McInerney Susan M. Nason Mary Jo Ochson Robert J. Ostrowski Bernard A. Picchi Peter Vutz |
|
Vice Presidents: | Todd A. Abraham J. Scott Albrecht Arthur J. Barry Randall S. Bauer G. Andrew Bonnewell Micheal W. Casey Robert E. Cauley Lee R. Cunningham, II Alexandre de Bethmann Anthony Delserone, Jr. Donald T. Ellenberger Eamonn G. Folan Kathleen M. Foody-Malus Thomas M. Franks Marc Halperin John W. Harris Patricia L. Heagy Susan R. Hill William R. Jamison Constantine J. Kartsonas Robert M. Kowit Richard J. Lazarchic Steven J. Lehman Marian R. Marinack Christopher Matyszewski Joseph M. Natoli Jeffrey A. Petro John Quartarolo Keith J. Sabol Ihab Salib Frank Semack Aash M. Shah Michael W. Sirianni, Jr. Christopher Smith Edward J. Tiedge Timothy G. Trebilcock Leonardo A. Vila Paige M. Wilhelm Richard Winkowski Lori A. Wolff George B. Wright |
|
Assistant Vice Presidents: | Catherine A. Arendas Angela Auchey Nancy J. Belz Regina Chi Ross M. Cohen James R. Crea, Jr. Karol M. Krummie Fred B. Crutchfield James H. Davis, II Joseph DelVecchio Paul S. Drotch Salvatore A. Esposito John T. Gentry David Gilmore Nikola A. Ivanov Carol Kayworth Nathan H. Kehm John C. Kerber J. Andrew Kirschler Ted T. Lietz, Sr. Monica Lugani Natalie F. Metz Theresa Miller Thomas Mitchell Bob Nolte Mary Kay Pavuk Rae Ann Rice Roberto Sanchez-Dahl, Sr. Sarath Sathkumara James W. Schaub John Sidawi Diane R. Startari Diane Tolby Peter Tropaitis Michael R. Tucker Steven J. Wagner |
|
Secretary: | G. Andrew Bonnewell |
|
Treasurer: | Thomas R. Donahue |
|
Assistant Secretaries: | C. Grant Anderson Leslie K. Ross |
|
Assistant Treasurer: | Denis McAuley, III | |
The business address of each of the Officers of the investment adviser is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779. These individuals are also officers of a majority of the investment advisers to the investment companies in the Federated Fund Complex described in Part B of this Registration Statement. |
Item 27. | Principal Underwriters: |
|
(a) | Federated Securities Corp. the Distributor for shares of the Registrant, acts as principal underwriter for the following open-end investment companies, including the Registrant: |
Cash Trust Series II; Cash Trust Series, Inc.; CCB Funds; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Limited Duration Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fixed Income Securities, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; 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 International Series, Inc.; Federated Investment Series Funds, Inc.; Federated Managed Allocation Portfolios; Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Securities Income Trust; Federated Short-Term Municipal Trust; Federated Stock and Bond Fund, Inc.; Federated Stock 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.; Federated World Investment Series, Inc.; FirstMerit Funds; Hibernia Funds; Independence One Mutual Funds; Intermediate Municipal Trust; Marshall Funds, Inc.; Money Market Obligations Trust; Regions Funds; RIGGS Funds; SouthTrust Funds; Wachovia Variable Insurance Funds; The Wachovia Funds; The Wachovia Municipal Funds; and Vision Group of Funds, Inc.
(b) (1) Name and Principal Business Address |
(2) Positions and Offices With Distributor |
(3) Positions and Offices With Registrant |
Richard B. Fisher Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Chairman, Federated Securities Corp. |
-- |
Arthur L. Cherry Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Director, Federated Securities Corp. |
-- |
John B. Fisher Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
President-Institutional Sales and Director, Federated Securities Corp. |
-- |
Thomas R. Donahue Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Director, Executive Vice Vice President and Assistant Secretary, Federated Securities Corp. |
-- |
James F. Getz Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
President-Broker/Dealer and Director, Federated Securities Corp. |
-- |
David M. Taylor Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Executive Vice President, Federated Securities Corp. |
-- |
Mark W. Bloss Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Richard W. Boyd Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Laura M. Deger Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Theodore Fadool, Jr. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Bryant R. Fisher Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Christopher T. Fives Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
James S. Hamilton Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
James M. Heaton Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Keith Nixon Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Solon A. Person, IV Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Ronald M. Petnuch Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Timothy C. Pillion Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Thomas E. Territ Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Senior Vice President, Federated Securities Corp. |
-- |
Ernest G. Anderson Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Teresa M. Antoszyk Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
John B. Bohnet Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Jane E. Broeren-Lambesis Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Matthew W. Brown Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
David J. Callahan Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Mark Carroll Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Steven R. Cohen Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Mary J. Combs Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
R. Edmond Connell, Jr. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Kevin J. Crenny Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Daniel T. Culbertson Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
G. Michael Cullen Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Marc C. Danile Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Robert J. Deuberry Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
William C. Doyle Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Timothy Franklin Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp |
-- |
Mark A. Gessner Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Joseph D. Gibbons Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
John K. Goettlicher Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
G. Tad Gullickson Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Scott Gundersen Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Dayna C. Haferkamp Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Anthony J. Harper Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Bruce E. Hastings Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Charlene H. Jennings Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
H. Joseph Kennedy Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Michael W. Koenig Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Ed Koontz Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Dennis M. Laffey Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Christopher A. Layton Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Michael H. Liss Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Michael R. Manning Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Amy Michalisyn Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Mark J. Miehl Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Richard C. Mihm Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Alec H. Neilly Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Thomas A. Peter III Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Raleigh Peters Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Robert F. Phillips Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Richard A. Recker Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Eugene B. Reed Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Paul V. Riordan Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
John Rogers Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Brian S. Ronayne Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Thomas S. Schinabeck Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Edward J. Segura Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Edward L. Smith Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
David W. Spears Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
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John A. Staley Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Colin B. Starks Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Jeffrey A. Stewart Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
William C. Tustin Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Paul A. Uhlman Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Richard B. Watts Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Terence Wiles Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Edward J. Wojnarowski Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Michael P. Wolff Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Vice President, Federated Securities Corp. |
-- |
Robert W. Bauman Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
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Edward R. Bozek Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
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Charles L. Davis, Jr. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
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Beth C. Dell Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
-- |
Donald C. Edwards Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
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John T. Glickson Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
-- |
Ernest L. Linane Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
-- |
Renee L. Martin Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. |
-- |
Lynn Sherwood-Long Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Vice President, Federated Securities Corp. | -- |
Kirk A. Montgomery Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Secretary, Federated Securities Corp. |
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Denis McAuley, III Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Treasurer, Federated Securities Corp. |
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Timothy S. Johnson Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Secretary, Federated Securities Corp. |
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Victor R. Siclari Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Assistant Secretary, Federated Securities Corp. |
-- |
(c) Not applicable
Item 28. | Location of Accounts and Records: |
All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at one of the following locations: |
Registrant | Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (Notices should be sent to the Agent for service at the above address.) Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 |
Federated Shareholder Services Company ("Transfer Agent, Dividend Disbursing Agent and Portfolio Recordkeeper") | P.O. Box 8600 Boston, MA 02266-8600 |
Federated Services Company ("Administrator") | Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
Federated Investment Management Company ("Adviser") | Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 |
State Street Bank and Trust Company ("Custodian") | P.O. Box 8600 Boston, MA 02266-8600 |
Item 29. | Management Services: Not applicable. |
Item 30. | Undertakings: |
Registrant hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act with respect to the removal of Directors and the calling of special shareholder meetings by shareholders.
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 of the requirements for effectiveness of this Amendment to its 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, duly authorized, all in the City of Pittsburgh and Commonwealth of Pennsylvania, on the 29th day of November, 2000.
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 By: /s/ C. Grant Anderson C. Grant Anderson ASSISTANT SECRETARY |
TITLE Attorney In Fact For the Persons Listed Below |
DATE November 29, 2000 |
NAME John F. Donahue* |
TITLE Chairman and Director (Chief Executive Officer) |
|
J. Christopher Donahue* | President and Director | |
Edward C. Gonzales* | Executive Vice President | |
John W. McGonigle* | Executive Vice President and Secretary | |
Richard J. Thomas* | Treasurer | |
William D. Dawson III* | Chief Investment Officer | |
Thomas G. Bigley* | Director | |
John T. Conroy, Jr.* | Director | |
Nicholas P. Constantakis* | Director | |
John F. Cunningham* | Director | |
Lawrence D. Ellis, M.D.* | Director | |
Peter E. Madden* | Director | |
Charles F. Mansfield, Jr.* | Director | |
John E. Murray, Jr.* | Director | |
Marjorie P. Smuts* | Director | |
John S. Walsh* | Director | |
* By Power of Attorney |
|