[LOGO] FEDERATED INVESTORS
Federated International
Growth Fund
(A Portfolio Of World Investment Series, Inc.)
Class A Shares
Class B Shares
Class C Shares
PROSPECTUS
JUNE 30, 1997
An Open-End, Diversified
Management Investment Company
Federated International
Growth Fund
Class A Shares
Class B Shares
Class C Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
Distributor
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Adviser
Federated Global Research Corp.
175 Water Street
New York, NY 10038-4965
Custodian
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
Transfer Agent and
Dividend Disbursing
Agent
Federated Shareholder
Service company
P.O. 8600
Boston, MA 02266-8600
Independent Public
Accountants
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp. Distributor
Cusip 981487739
Cusip 981487721 [LOGO]
Cusip 981487713 RECYCLED
G02118-01-ABC (6/97) PAPER
Federated International Growth Fund
(A Portfolio of World Investment Series, Inc.)
Class A Shares, Class B Shares, Class C Shares
PROSPECTUS
The shares of Federated International Growth Fund (the "Fund") represent
interests in a diversified investment portfolio of World Investment Series, Inc.
(the "Corporation"), an open-end management investment company (a mutual fund).
The investment objective of the Fund is to provide long-term growth of capital.
Any income received from the portfolio is incidental. The Fund pursues its
investment objective by investing primarily in shares of other mutual funds, the
portfolios of which consist primarily of equity securities of non-U.S. issuers.
The Fund's strategy of investing in other mutual funds may result in greater
aggregate expenses than if you directly purchased shares of those funds.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares and Class C Shares dated June 30, 1997, with the
Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus. The Statement of Additional Information,
material incorporated by reference into this document, and other information
regarding the Fund are maintained electronically with the SEC at Internet Web
site (http:// www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES...................................................... 1
SYNOPSIS...................................................................... 3
INVESTMENT INFORMATION........................................................ 3
INVESTMENT OBJECTIVE....................................................... 3
INVESTMENT POLICIES........................................................ 3
INVESTMENT LIMITATIONS.....................................................13
PORTFOLIO TURNOVER.........................................................14
HUB AND SPOKE OPTION.......................................................14
NET ASSET VALUE...............................................................14
INVESTING IN THE FUND.........................................................14
HOW TO PURCHASE SHARES........................................................15
INVESTING IN CLASS A SHARES................................................15
INVESTING IN CLASS B SHARES................................................17
INVESTING IN CLASS C SHARES................................................17
PURCHASING SHARES..........................................................17
SPECIAL PURCHASE FEATURES..................................................18
EXCHANGE PRIVILEGE............................................................18
HOW TO REDEEM SHARES..........................................................19
SPECIAL REDEMPTION FEATURES................................................20
CONTINGENT DEFERRED SALES CHARGE...........................................20
ELIMINATION OF CONTINGENT DEFERRED
SALES CHARGE............................................................21
ACCOUNT AND SHARE INFORMATION.................................................22
CERTIFICATES AND CONFIRMATIONS.............................................22
DIVIDENDS..................................................................22
CAPITAL GAINS..............................................................22
ACCOUNTS WITH LOW BALANCES.................................................22
CORPORATE INFORMATION.........................................................22
MANAGEMENT OF THE CORPORATION..............................................22
DISTRIBUTION OF SHARES.....................................................23
ADMINISTRATION OF THE FUND.................................................24
EXPENSES OF THE FUND AND CLASS A SHARES,
CLASS B SHARES, CLASS C SHARES..........................................25
BROKERAGE TRANSACTIONS.....................................................25
SHAREHOLDER INFORMATION.......................................................26
VOTING RIGHTS..............................................................26
TAX INFORMATION...............................................................26
FEDERAL INCOME TAX.........................................................26
STATE AND LOCAL TAXES......................................................26
PERFORMANCE INFORMATION.......................................................27
APPENDIX......................................................................28
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).......... 5.50% None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................. None None None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable) (1).............................................. None 5.50% 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)..................... None None None
Exchange Fee........................................................................... None None None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (2)..................................................................... 0.00% 0.00% 0.00%
Asset Allocation Fee (2)............................................................... 0.00% 0.00% 0.00%
12b-1 Fee.............................................................................. 0.00%(3) 0.75% 0.75%
Total Other Expenses (after expense reimbursement)..................................... 0.07% 0.07% 0.07%
Shareholder Services Fee (4)......................................................... 0.00% 0.00% 0.00%
Total Operating Expenses (5)...................................................... 0.07% 0.82% 0.82%
</TABLE>
(1) For shareholders of Class B Shares, the contingent deferred sales charge is
5.50% in the first year declining to 1.00% in the sixth year and 0.00%
thereafter. For shareholders of Class C Shares, the contingent deferred
sales charge assessed is 1.00% of the lesser of the original purchase price
or the net asset value of Shares redeemed within one year of their purchase
date. For a more complete description, see "Contingent Deferred Sales
Charge."
(2) The management fee is contingent upon the grant of certain exemptive relief
from the SEC. If the Fund were paying or accruing the management fee, the
Fund would be able to pay up to 1.25% of its average daily net assets which
are invested in individual stocks, bonds or money market instruments, and
not on those assets invested in shares of the underlying funds. The Fund has
no present intention of paying or accruing the asset allocation fee during
the fiscal year ending November 30, 1997. If the Fund were paying or
accruing the asset allocation fee, the Fund would be able to pay up to 0.20%
of those average daily net assets invested in the underlying funds.
(3) The Class A Shares have no present intention of paying or accruing the 12b-1
fee during the fiscal year ending November 30, 1997. If the Class A Shares
were paying or accruing the 12b-1, the Class A Shares would be able to pay
up to 0.25% of its average daily net assets for the 12b-1 fee.
(4) The shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole discretion. The
maximum shareholder services fee is 0.25%.
(5) The total Class A Shares operating expenses are estimated to be 1.28% absent
the anticipated voluntary waiver described in note 4 above and the
anticipated voluntary reimbursement of certain other operating expenses. The
total Class B Shares and Class C Shares operating expenses are estimated to
be 2.03% absent the anticipated voluntary waiver described in note 4 above
and the anticipated voluntary reimbursement of certain other operating
expenses. Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase.
* Total operating expenses are estimated based on average expenses expected to
be incurred during the period ending November 30, 1997. During the course of
this period, expenses may be more or less than the average amount shown.
<TABLE>
<CAPTION>
PERCENTAGE
CLASS A OF PORTFOLIO'S
EXPENSE RATIO NET ASSETS
<S> <C> <C>
Federated Asia Pacific Growth Fund................................................. 1.85 30%
Federated European Growth Fund..................................................... 1.75 30
Federated Emerging Markets Fund.................................................... 1.97 15
Federated International Small Company Fund......................................... 1.97 15
Federated Latin American Growth Fund............................................... 1.97 10
---
100%
</TABLE>
Federated International Growth Fund will invest substantially all of its assets
in the Class A Shares of the five underlying Federated funds without a sales
charge. Based upon the expense ratios and initial allocations above, the
anticipated average weighted expense ratio for the underlying funds, as of May
31, 1997, would have been 1.87%. An investor in either the A, B or C share
classes of Federated International Growth Fund would therefore incur the 1.87%
expenses of the underlying funds in addition to expenses of the Federated
International Growth Fund shown in the Annual Operating Expenses table. These
figures are only an approximation of the net expenses an investor in Federated
International Growth Fund might expect to incur, since the assets of the
portfolio invested in each of the underlying funds will change over time.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How To Purchase Shares" and "Fund Information." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual
return, (2) redemption at the end of each time period, and (3) payment of the
maximum sales charge.
1 Year.............................................................................. $ 56 $ 66 $ 19
3 Year.............................................................................. $ 57 $ 71 $ 26
You would pay the following expenses on the same investment, assuming no redemption.
1 Year.............................................................................. $ 56 $ 8 $ 8
3 Year.............................................................................. $ 57 $ 26 $ 26
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER 30, 1997.
------------------------------------------------------
SYNOPSIS
The Corporation was established under the laws of the State of Maryland on
January 25, 1994. The Corporation's address is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit the
Corporation to offer separate series of shares representing interests in
separate portfolios of securities. As of the date of this prospectus, the Board
of Directors (the "Directors") has established three classes of shares for the
Fund, known as Class A Shares, Class B Shares, and Class C Shares (individually
and collectively as the context requires, "Shares").
Shares of the Fund are designed for individuals and institutions seeking
long-term growth of capital by investing primarily in shares of other mutual
funds, the portfolios of which consist primarily of equity securities of
non-U.S. issuers and by investing directly in equity securities of companies
domiciled outside the United States.
For information on how to purchase Shares of the Fund, please refer to "How to
Purchase Shares." The minimum initial investment for Class A Shares is $500. The
minimum initial investment for Class B Shares and Class C Shares is $1,500.
However, the minimum initial investment for a retirement account in any class is
$50. Subsequent investments in any class must be in amounts of at least $100,
except for retirement plans which must be in amounts of at least $50.
In general, Class A Shares are sold at net asset value plus an applicable sales
charge and are redeemed at net asset value. However, a contingent deferred sales
charge is imposed under certain circumstances. For a more complete description,
see "How to Redeem Shares."
Class B Shares are sold at net asset value. A contingent deferred sales charge
is imposed on certain Shares which are redeemed within six full years of
purchase. See "How to Redeem Shares."
Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "How to Redeem Shares."
In addition, the Fund pays a shareholder services fee at an annual rate not to
exceed 0.25% of average daily net assets.
Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds can be found under "Exchange Privilege."
Federated Global Research Corp. is the investment adviser (the "Adviser") to the
Fund and receives compensation for its services. The Adviser's address is 175
Water Street, New York, New York 10038-4965.
The Fund and the underlying funds may make certain investments and employ
certain investment techniques that involve risks, including, but not limited to,
investing in foreign securities, lending portfolio securities, investing in
restricted and illiquid securities, investing in securities on a when-issued and
delayed delivery basis, writing put and call options and entering into
repurchase agreements.
The Fund's net asset value and offering price can be found in the mutual funds
section of local newspapers under "Federated" and the appropriate class
designation listing.
------------------------------------------------------
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The Fund's objective is to provide long-term growth of capital. Any income
received from the portfolio is incidental. The investment objective cannot be
changed without the approval of shareholders. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in shares of other
open-end management investment companies for which affiliates of Federated
Investors serve as investment adviser and principal underwriter (the "Federated
Funds," herein referred to as the "underlying funds") that invest primarily in
foreign equity securities. The underlying funds in which the Fund will invest
include, but are not limited to, Federated Asia Pacific Growth Fund, Federated
Emerging Markets Fund, Federated European Growth Fund, Federated International
Small Company Fund, and Federated Latin American Growth Fund.
The charts below show the approximate parameters in which the Fund will
generally invest in large and small capitalization stocks and in developed and
emerging markets. The Adviser can adjust these ranges from time to time at its
sole discretion.
Under normal circumstances, the Fund expects to operate within the following
ranges:
[INSERT LOGO HERE]
Federated Asia Pacific Growth Fund 20--60%
Federated European Growth Fund 20--60%
Federated Emerging Markets Fund 0--25%
Federated International Small Company Fund 0--25%
Federated Latin American Growth Fund 0--25%
The Fund's strategy of investing in the shares of other international equity
funds is designed (but not guaranteed) to reduce the risk associated with
investing in a single sector-or regional-specfic underlying fund. Holding a
diversified portfolio of international equity funds also may provide access to a
wider range of companies, industries, countries, and markets than would be
available through any one underlying fund. International securities and markets
are subject to currency rate fluctuations and potentially greater price
volatility and liquidity considerations than U.S. securities. Investors have
historically sought to reduce these risks through multi-country diversification.
The Fund is designed to give shareholders a single investment that offers broad
international diversification.
Each of the underlying funds is a diversified portfolio which seeks to provide
long-term growth of capital. The Asia Pacific Growth Fund pursues its investment
objective by investing primarily in equity securities of Asian and Pacific Rim
companies. The European Growth Fund pursues its investment objective by
investing primarily in a professionally managed and diversified portfolio of
European companies. The Emerging Markets Fund pursues its investment objective
by investing primarily in a professionally managed and diversified portfolio of
securities of issuers and companies located in countries having emerging
markets. The International Small Company Fund pursues its investment objective
by investing primarily in a professionally managed and diversified portfolio of
equity securities of small foreign companies. The Latin American Growth Fund
pursues its investment objective by investing primarily in equity securities of
Latin American companies.
Under normal market conditions, and as an investment policy, the Fund will
invest at least 65% of its total assets in underlying funds that are
international equity funds. However, as an operational policy, the Fund
anticipates investing substantially all of its assets in international equity
funds. International equity funds are those which invest primarily in equity
securities of companies located in three or more countries outside the United
States. The Adviser will attempt to identify and select a varied portfolio of
international equity funds which presents the greatest long-term capital growth
potential based on the Adviser's analysis of many factors.
The Adviser will allocate the Fund's assets across the underlying funds such
that the Fund will be exposed to large and small capitalization stocks from both
developed and emerging markets outside of the United States. (Small
capitalization companies are those companies that have a market capitalization
of $1.5 billion or less at the time of purchase. Large capitalization companies
are those companies that have a market capitalization of over $1.5 billion at
the time of purchase. Generally included in emerging markets are all countries
in the world except Australia, Canada, Japan, New Zealand, the United States,
and most western European countries. From time to time, the Adviser will alter
the allocation percentages of the underlying funds based on market risk,
economic fundamentals and unique market characteristics within the foreign
markets an asset classes in which the underlying funds invest. The Adviser will
first assess the relative attractiveness of geographic regions and individual
countries. After identifying the most and least attractive countries or regions,
consideration will be given to expected returns and risks before deciding which
areas, if any, to overweight or underweight. By rebalancing the Fund through
investment of the proceeds of new purchases into the Fund, by making purchases
and sales among the shares of the underlying funds, or a combination of the two,
the Adviser will continually manage the Fund's exposure to large and small
capitalization stocks from both developed and emerging markets.
Because the Fund and the underlying funds may invest in substantially similar
securities in a similar fashion, thereby incurring similar risks, all further
references to the Fund hereinafter include the underlying funds unless otherwise
indicated. Although many of the underlying funds may have the same or similar
investment policies as the Fund, they are not required to do so.
Assets not invested in international equity funds may be invested in underlying
funds other than international equity funds, such as global funds (funds that
invest primarily in securities of issuers throughout the world, including the
United States).
The Fund also may enter into forward commitments, repurchase agreements, and
foreign currency transactions; maintain reserves in foreign or U.S. money market
instruments; and purchase options and financial futures contracts.
Unless indicated otherwise, the investment policies of the Fund may be changed
by the Directors without approval of shareholders. Shareholders will be notified
before any material changes in these policies become effective.
Were the Fund to receive certain exemptive relief from the SEC, the Fund would
also be permitted to invest directly in a professionally managed diversified
portfolio of equity securities of companies domiciled outside the United States
that the Adviser believes offer excellent opportunities for long-term growth.
Additionally, the Fund, for liquidity purposes, may maintain direct investments
in short-term money market securities rated A by one or more nationally
recognized statistical rating organizations or, if unrated, are of comparable
quality in the judgement of the Adviser. However, for temporary defensive
purposes, when the Adviser determines that market conditions warrant, the Fund
may invest up to 100% of its total assets in U.S. and foreign money market
instruments.
To the extent that the Fund's assets are invested in the underlying funds, its
investment performance will correspond directly to that of its proportionate
investment in those underlying funds. This strategy involves certain additional
expenses and certain tax results which would not be present in a direct
investment in mutual funds. See "Expenses of the Fund and Shares" and "Federal
Tax Information." The Fund may purchase shares of no-load funds available
without a transaction fee and/or pay their own distribution expenses. See
"Additional Considerations of Investing in Other Investment Companies." Each
underlying fund provides a prospectus and other disclosure documents to the
Fund. These documents are also available to Fund shareholders directly from the
underlying fund.
ACCEPTABLE INVESTMENTS
The equity securities in which the Fund may invest include common stock,
preferred stock (either convertible or non-convertible), sponsored or
unsponsored depositary receipts or shares, and warrants, including other
substantially similar forms of equity with comparable risk characteristics as
well as other forms which may be developed in the future. Securities may be
purchased on securities exchanges, traded over-the-counter, or have no organized
market. The Fund may also purchase corporate and government fixed income
securities denominated in currencies other than U.S. dollars; enter into forward
commitments, repurchase agreements and foreign currency transactions; maintain
reserves in foreign or U.S. money market instruments and cash; and purchase
options and financial futures contracts.
COMMON AND PREFERRED STOCK
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in its
claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate in
company profits on a pro rata basis; profits may be paid out in dividends or
reinvested in the company to help it grow. Increases and decreases in earnings
are usually reflected in a company's stock price, so common stocks generally
have the greatest appreciation and depreciation potential of all corporate
securities. While most preferred stocks pay a dividend, the Fund may purchase
preferred stock where the issuer has omitted, or is in danger of omitting,
payment of its dividend. Such investments would be made primarily for their
capital appreciation potential.
In selecting securities, the Adviser typically evaluates industry trends, a
company's financial strength, its competitive position in domestic and export
markets, technology, recent developments and profitability, together with
overall growth prospects. Other considerations generally include quality and
depth of management, government regulation, and availability and cost of labor
and raw materials. Investment decisions are made without regard to arbitrary
criteria as to minimum asset size, debt-equity ratios or dividend history of
portfolio companies.
DEPOSITARY RECEIPTS
The Fund may invest in foreign issuers by purchasing sponsored or unsponsored
securities representing underlying international securities such as American
Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs"), Global
Depositary Certificates ("GDCs"), International Depositary Receipts ("IDRs"),
and Russian Depositary Certificates ("RDCs") or securities convertible into
foreign equity securities. ADRs and ADSs typically are issued by a United States
bank or trust company and evidence ownership of underlying securities issued by
a foreign corporation. EDRs, which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), GDRs, GDCs, IDRs and RDCs are typically issued by
foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. ADRs, ADSs, CDRs,
EDRs, GDRs, GDCs, IDRs, and RDCs are collectively known as "Depositary
Receipts." Depositary Receipts may be available for investment through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the security underlying the receipt and a depositary,
whereas an unsponsored facility may be established by a depositary without
participation by the issuer of the receipt's underlying security. Holders of an
unsponsored Depositary Receipt generally bear all the costs of the unsponsored
facility. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through to the holders of the receipts voting
rights with respect to the deposited securities.
DEBT SECURITIES
In pursuit of the Fund's objective of long-term growth of capital, the Fund may
invest up to 35% of its total assets in debt securities. Capital appreciation in
debt securities may arise as a result of favorable changes in the
creditworthiness of issuers, relative interest rate levels, or relative foreign
exchange rates. Any income received from debt securities will be incidental to
the Fund's objective of long-term growth of capital. These debt obligations
consist of U.S. and foreign government securities and corporate debt securities,
including, but not limited to, Samurai and Yankee bonds, Eurobonds and
depositary receipts. The issuers of such debt securities may or may not be
domiciled in emerging countries.
The debt securities in which the Fund may invest may be rated, at the time of
purchase, as low as C by Standard & Poor's Ratings Group ("S&P") or Fitch
Investors Service ("Fitch") or by Moody's Investors Service, Inc. ("Moody's"),
or, if unrated, are of comparable quality as determined by the Adviser. Such
debt securities are commonly known as "junk bonds." Downgraded securities will
be evaluated on a case-by-case basis by the Adviser. The Adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The prices of fixed income securities generally
fluctuate inversely to the direction of interest rates. Please refer to the
Appendix in this prospectus for a description of these ratings.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities rated, at the time of purchase, as
low as C by S&P or Fitch or by Moody's, or, if unrated, are of comparable
quality as determined by the Adviser.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible bonds, convertible preferred stock or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The investment characteristics of
each convertible security vary widely, which allows convertible securities to be
employed for a variety of different investment strategies. In selecting a
convertible security, the Adviser evaluates the investment characteristics of
the convertible security as a fixed income investment, and the investment
potential of the underlying security for capital appreciation.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities law. Securities that can be traded without restrictions in
non-U.S. securities markets will not be treated as restricted, even if they
cannot be traded in U.S. securities markets without restriction. Restricted
securities may be issued by new and early stage companies which may include a
high degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the Fund,
or less than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. The Fund
will limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, over-the counter
options, swap agreements not determined to be liquid, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% of its net
assets.
REPURCHASE AGREEMENTS.
The Fund may invest in repurchase agreements. Repurchase agreements are
arrangements by which the Fund purchases a security for cash and obtains a
simultaneous commitment from the seller (usually a bank or broker/dealer) to
repurchase the security at an agreed-upon price and specified future date. The
repurchase price reflects an agreed-upon interest rate for the time period of
the agreement. The Fund's risk is the inability of the seller to pay the agreed-
upon price on the delivery date. However, this risk is tempered by the ability
of the Fund to sell the security in the open market in the case of a default. In
such a case, the Fund may incur costs in disposing of the security which would
increase Fund expenses. The Adviser will monitor the creditworthiness of the
firms with which the Fund enters into repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for different times in the future. The seller's
failure to complete these transactions may cause the Fund to miss a price or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Directors
and will receive collateral in the form of cash or U.S. government securities
equal to at least 100% of the value of the securities loaned at all times.
TEMPORARY INVESTMENTS
For temporary defensive purposes, when the Adviser determines that market
conditions warrant (up to 100% of total assets) and to maintain liquidity (up to
35% of total assets), the Fund may invest in U.S. and foreign debt instruments
as well as cash or cash equivalents, including foreign and domestic money market
instruments, short-term government and corporate obligations, and repurchase
agreements.
FORWARD COMMITMENTS
Forward commitments are contracts to purchase securities for a fixed price at a
date beyond customary settlement time. The Fund may enter into these contracts
if liquid securities in amounts sufficient to meet the purchase price are
segregated on the Fund's records at the trade date and maintained until the
transaction has been settled. Risk is involved if the value of the security
declines before settlement. Although the Fund enters into forward commitments
with the intention of acquiring the security, it may dispose of the commitment
prior to settlement and realize short-term profit or loss.
FOREIGN CURRENCY TRANSACTIONS
The Fund will enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund. Further,
the Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations.
Cross-hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability that
is the subject of the hedge.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs ("trade date"). The
period between the trade date and settlement date will vary between 24 hours and
60 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the Adviser
will consider the likelihood of changes in currency values when making
investment decisions, the Adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the value of the Fund's assets
denominated in that currency at the time the contract was initiated, but as
consistent with their other investment policies and as not otherwise limited in
their ability to use this strategy.
OPTIONS
The Fund may deal in options on foreign currencies, securities, and securities
indices, and on futures contracts involving these items, which options may be
listed for trading on an international securities exchange or traded over-the-
counter. The Fund may use options to manage interest rate and currency risks.
The Fund may also write covered call options and secured put options to seek to
generate income or lock in gains.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option period. The
writer of a covered call owns assets that are acceptable for escrow, and the
writer of a secured put invests an amount not less than the exercise price in
eligible assets to the extent that it is obligated as a writer. 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. In writing puts, there is the risk that the Fund may
be required to take delivery of the underlying asset at a disadvantageous price.
Over-the-counter options ("OTC options") differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the Fund
may experience material losses. However, in writing options, the premium is paid
in advance by the dealer. OTC options, which may not be continuously liquid, are
available for a greater variety of assets, and with a wider range of expiration
dates and exercise prices, than are exchange traded options.
It is not certain that a secondary market for positions in options, or futures
contracts (see below), will exist at all times. Although the Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
FUTURES AND OPTIONS ON FUTURES
The Fund may enter into futures contracts involving foreign currency,
securities, and securities indices, or options thereon, for bona fide hedging
purposes. The Fund may also enter into such futures contracts or related options
for purposes other than bona fide hedging if the aggregate amount of initial
margin deposits exclusive of the margin needed for foreign currency hedging, on
the Fund's futures and related options positions would not exceed 5% of the net
liquidation value of the Fund's assets, provided further that in the case of an
option that is in-the-money at the time of the purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. In addition, the Fund may not
sell futures contracts if the value of such futures contracts exceeds the total
market value of the Fund's portfolio securities. Futures contracts and options
thereon sold by the Fund are generally subject to segregation and coverage
requirements established by either the Commodities Futures Trading Commission
("CFTC") or the SEC, with the result that, if the Fund does not hold the
instrument underlying the futures contract or option, the Fund will be required
to segregate on an ongoing basis with its custodian cash, U.S. government
securities, or other liquid high grade debt obligations in an amount at least
equal to the Fund's obligations with respect to such instruments.
The Fund may enter into securities index futures contracts and purchase and
write put and call options on securities index futures contracts that are traded
on regulated exchanges, including non-U.S. exchanges, to the extent permitted by
the CFTC. Securities index futures contracts are based on indexes that reflect
the market value of securities of the firms included in the indexes. An index
futures contract is an agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to the differences between the value of
the index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
The Fund may enter into securities index futures contracts to sell a securities
index in anticipation of or during a market decline to attempt to offset the
decrease in market value of securities in its portfolio that might otherwise
result. When the Fund is not fully invested and anticipates a significant market
advance, it may enter into futures contracts to purchase the index in order to
gain rapid market exposure that may in part or entirely offset increases in the
cost of securities that it intends to purchase. In many of these transactions,
the Fund will purchase such securities upon termination of the futures position
but, depending on market conditions, a futures position may be terminated
without the corresponding purchases of common stock. The Fund may also invest in
securities index futures contracts when the Adviser believes such investment is
more efficient, liquid, or cost-effective than investing directly in the
securities underlying the index.
An option on a securities index futures contract gives the purchaser the right,
in return for the premium paid, to assume a position in a securities index
futures contract. The Fund may purchase and write put and call options on
securities index futures contracts in order to hedge all or a portion of its
investment and may enter into closing purchase transactions with respect to
written options in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. The Fund may also invest in
options on securities index futures contracts when the Adviser believes such
investment is more efficient, liquid or cost-effective than investing directly
in the futures contract or in the securities underlying the index, or when the
futures contract or underlying securities are not available for investment upon
favorable terms.
The use of futures and related options involves special consideration and risks,
for example, (1) the ability of the Fund to utilize futures successfully will
depend on the Adviser's ability to predict pertinent market movements; (2) there
might be imperfect correlation, or even no correlation, between the change in
market value of the securities held by the Fund and the prices of the futures
and options thereon relating to the securities purchased or sold by the Fund.
The use of futures and related options may reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements but they
can also reduce the opportunity for gain by offsetting the positive effect of
favorable price movements in positions. No assurance can be given that the
Adviser's judgment in this respect will be correct.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser will consider
liquidity before entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
New futures contracts, options thereon, and other financial products and risk
management techniques continue to be developed. The Fund may use these
investments and techniques to the extent consistent with its investment
objectives and regulatory and federal tax considerations.
RISKS OF FUTURES AND OPTIONS TRANSACTIONS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio securities to market changes. In addition, the Adviser could
be incorrect in its expectations about the direction or extent of market factors
such as stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser will consider
liquidity before entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
SWAP AGREEMENTS
As one way of managing its exposure to different types of investments, the Fund
may enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield.
Swap agreements are sophisticated instruments that typically involve a small
investment of cash relative to the magnitude of risks assumed. As a result,
swaps can be highly volatile and may have a considerable impact on the Fund's
performance. Swap agreements are subject to risks related to the counterparty's
ability to perform, and may decline in value if the counterparty's
creditworthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements to reduce its exposure through
offsetting transactions. When the Fund enters into a swap agreement, assets of
the Fund equal to the value of the swap agreement will be segregated by the
Fund.
RISK CHARACTERISTICS OF FOREIGN SECURITIES
Investing in non-U.S. securities carries substantial risks in addition to those
associated with domestic investments. In an attempt to reduce some of these
risks, the Fund diversifies its investments broadly among foreign countries
which may include both developed and developing countries.
The Fund may take advantage of the unusual opportunities for higher returns
available from investing in developing countries. These investments carry
considerably more volatility and risk because they generally are associated with
less mature economies and less stable political systems.
The economies of foreign countries may differ from the U.S. economy in such
respects as growth of gross domestic product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, and balance of
payments position. Further, the economies of developing countries generally are
heavily dependent on international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been, and may continue to be, adversely affected by economic
conditions in the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
certain debt securities and domestic companies may be subject to limitation.
Foreign ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations.
Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
countries. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental registration or approval for such repatriation.
Any investment subject to such repatriation controls will be considered illiquid
if it appears reasonably likely that this process will take more than seven
days.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of the Fund's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.
Brokerage commissions, custodial services, and other costs relating to
investment may be more expensive than in the United States. Foreign markets may
have different clearance and settlement procedures such as requiring payment for
securities before delivery. In certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
RISK CONSIDERATIONS IN EMERGING MARKETS
Investing in securities of issuers in emerging market countries involves
exposure to significantly higher risk than investing in countries with developed
markets. Emerging market countries may have economic structures that are
generally less diverse and mature and political systems that can be expected to
be less stable than those of developed countries.
Securities prices in emerging market countries can be significantly more
volatile than in developed countries, reflecting the greater uncertainties of
investing in lesser developed markets and economies. In particular, emerging
market countries may have relatively unstable governments, and may present the
risk of nationalization of businesses, expropriation, confiscatory taxation or,
in certain instances, reversion to closed market, centrally planned economies.
Such countries may also have restrictions on foreign ownership or prohibitions
on the repatriation of assets, and may have less protection of property rights
than developed countries.
The economies of emerging market countries may be predominantly based on only a
few industries or dependent on revenues from particular commodities or on
international aid or development assistance, may be highly vulnerable to changes
in local or global trade conditions, and may suffer from extreme and volatile
debt burdens or inflation rates. In addition, securities markets in emerging
market countries may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially resulting in a
lack of liquidity and in volatility in the price of securities traded on those
markets. Also, securities markets in emerging market countries typically offer
less regulatory protection for investors.
CURRENCY RISKS
Because the majority of securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment income
and capital gain, if any, to be distributed to shareholders by the Fund. If the
value of a foreign currency rises against the U.S. dollar, the value of Fund
assets denominated in the currency will increase; correspondingly, if the value
of a foreign currency declines against the U.S. dollar, the value of Fund assets
denominated in that currency will decrease. Under the United States Internal
Revenue Code, (the "Code"), the Fund is required to separately account for the
foreign currency component of gains or losses, which will usually be viewed
under the Code as items of ordinary and distributable income or loss, thus
affecting the Fund's distributable income. (See "Federal Income Tax").
The exchange rates between the U.S. dollar and foreign currencies are a function
of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental intervention, speculation and
other economic and political conditions. Although the Fund values its assets
daily in U.S. dollars, the Fund will not convert its holdings of foreign
currencies to U.S. dollars daily. When the Fund converts its holdings to another
currency, it may incur conversion costs. Foreign exchange dealers may realize a
profit on the difference between the price at which they buy and sell
currencies.
FOREIGN COMPANIES
Other differences between investing in foreign and U.S. companies include:
less publicly available information about foreign companies;
the lack of uniform accounting, auditing, and financial reporting standards
and practices or regulatory requirements comparable to those applicable to
U.S. companies;
less readily available market quotations on foreign companies;
differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;
differences in legal systems which may affect the ability to enforce
contractual obligations or obtain court judgments;
the limited size of many foreign securities markets and limited trading volume
in issuers compared to the volume of trading in U.S. securities could cause
prices to be erratic for reasons apart from factors that affect the quality of
securities;
the likelihood that foreign securities may be less liquid or more volatile;
foreign brokerage commissions may be higher;
unreliable mail service between countries;
political or financial changes which adversely affect investments in some
countries;
increased risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities;
certain markets may require payment for securities before delivery;
religious and ethnic instability; and
certain national policies which may restrict the Fund's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests.
U.S. GOVERNMENT POLICIES
In the past, U.S. government policies have discouraged or restricted certain
investments abroad by investors such as the Fund. Investors are advised that
when such policies are instituted, the Fund will abide by them.
DIVERSIFICATION
With respect to 75% of the value of total assets, the Fund will not invest more
than 5% in securities of any one issuer, other than cash, cash items, securities
of investment companies or securities issued or guaranteed by the government of
the United States or its agencies or instrumentalities and repurchase agreements
collateralized by U.S. government securities or acquire more than 10% of the
outstanding voting securities of any one issuer (for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts and securities of mutual funds shall not be subject to this
restriction). This policy cannot be changed without the approval of holders of a
majority of the Fund's shares.
NON-DIVERSIFICATION
The underlying funds in which the Fund invests may be non-diversified investment
companies. As such, there is no Investment Company Act of 1940 ("1940 Act")
limit on the percentage of assets which can be invested in any single issuer. An
investment in such funds, therefore, will entail greater risks than would exist
in diversified investment companies because the higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the fund's portfolio. Any economic, political, or regulatory developments
affecting the value of the securities of such issuer held by the fund will have
a greater impact on the total value of the fund's portfolio than would be the
case if the fund were diversified among more issuers.
However, it is anticipated that the underlying funds will comply with Subchapter
M of the Internal Revenue Code. This requires that at the end of each quarter of
the taxable year, the aggregate value of all investments in any one issuer
(except U.S. government obligations, cash, cash items and other investment
companies) which exceed 5% of a fund's total assets shall not exceed 50% of the
value of its total assets, and, with respect to the remaining assets, no more
than 25% of a fund's assets shall be invested in a single issuer.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
The debt securities in which the Fund invests are usually not in the three
highest rating categories of a nationally recognized statistical rating
organization (AAA, AA, or A for S&P or Fitch and Aaa, Aa, or A for Moody's), but
are in the lower rating categories or are unrated, but are of comparable quality
and have speculative characteristics or are speculative. Lower-rated bonds or
unrated bonds are commonly referred to as "junk bonds." A description of the
rating categories is contained in the Appendix of this prospectus.
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds.
The Fund's Adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments.
ADDITIONAL CONSIDERATIONS OF INVESTING IN OTHER
INVESTMENT COMPANIES
Any investment in a mutual fund involves risk and, although the Fund invests in
a number of underlying funds, this practice does not eliminate investment risk.
Under certain circumstances an underlying fund may determine to make payment of
a redemption by a Fund wholly or partly by a distribution in kind of securities
from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In
such cases, the Fund may hold portfolio securities distributed by an underlying
fund until the Adviser determines that it is appropriate to dispose of such
securities.
The Fund may purchase shares of both load and no-load underlying funds
(including those with a contingent deferred sales charge). However, in most
cases, the Fund anticipates purchasing fund shares without a sales charge or
qualifying for a reduction or waiver of any sales charge because of the amount
it intends to invest in the underlying fund.
Under the 1940 Act, a mutual fund must sell its shares at the price (including
sales charge, if any) described in its prospectus, and current rules under the
1940 Act do not permit negotiation of sales charges. Therefore, the Fund
currently is not able to negotiate the level of the sales charges at which it
will purchase shares of load funds. Nevertheless, when appropriate, the Fund
will purchase such shares pursuant to (i) letters of intent, permitting it to
obtain reduced or no sales charges by aggregating its intended purchases over
time (generally 13 months from the initial purchase under the letter); (ii)
rights of accumulation, permitting it to obtain reduced or no sales charges as
it purchases additional shares of an underlying fund; and (iii) the right to
obtain reduced or no sales charges by aggregating its purchases of several funds
within a family of mutual funds.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of
the value of its total assets and pledge its assets to secure such borrowings;
or
with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
securities of other investment companies, or securities issued or guaranteed
by the U.S. government and its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in the Fund's portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. Generally, a high portfolio turnover rate results in increased
transaction costs and higher taxes paid by the Fund's shareholders. In addition,
a high rate of portfolio turnover may result in the realization of a larger
amount of capital gains which, when distributed to the Fund's shareholders, are
taxable to them. Transactions for the Fund's portfolio will be based only upon
investment considerations and will not be limited by any other considerations
when the Fund's Adviser deems it appropriate to make changes in the Fund's
portfolio. There is no limit on the underlying funds' portfolio turnover rates.
HUB AND SPOKE OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Global
Research) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
------------------------------------------------------
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value 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.
The net asset value of each class of Shares of the Fund is determined as of the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities that its net
asset value might be materially affected; (ii) days during which no Shares are
tendered for redemption and no orders to purchase Shares are received; or (iii)
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
------------------------------------------------------
INVESTING IN THE FUND
The Fund offers investors three classes of Shares that carry sales charges and
contingent deferred sales charges in different levels of expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales charge of 5.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed. Certain purchases of Class A Shares qualify for reduced
sales charges. See "Reducing or Eliminating the Sales Charge." Class A Shares
have no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares will automatically convert into Class A
Shares, based on relative net asset value, on or around the fifteenth of the
month eight full years after the purchase date. Class B Shares provide an
investor the benefit of putting all of the investor's dollars to work from the
time the investment is made, but (until conversion) will have a higher expense
ratio and pay lower dividends than Class A Shares due to a 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales charge, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to their 12b-1 fee. Class C Shares have no conversion feature.
------------------------------------------------------
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)
In connection with any sale, Federated Securities Corp., may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE DEALER
AS A PERCENTAGE CONCESSION AS
PUBLIC NET A PERCENTAGE OF
AMOUNT OF OFFERING AMOUNT PUBLIC OFFERING
TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1,000,000 2.00% 2.04% 1.80%
$1,000,000 or
greater 0.00% 0.00% 0.25%*
</TABLE>
* See sub-section entitled "Dealer Concession" below.
No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, Adviser, or
other financial intermediary may be charged a service or other fee by the
financial intermediary. Additionally, no sales charge is imposed on shareholders
designated as Liberty Life Members or on Class A Shares purchased through "wrap
accounts" or similar programs, under which clients pay a fee for services.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor. However, the distributor may offer
to pay dealers up to 100% of the sales charge retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund, or other special events at
recreational-type facilities, or of items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales charge; however, the distributor will make
twelve monthly payments to the dealer totaling 0.25% of the public offering
price over the first year following the purchase. Such payments are based on the
original purchase price of Shares outstanding at each month end.
The sales charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases.
signing a 13-month letter of intent; or
using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As shown in the table on the previous page, larger purchases may reduce the
sales charge paid. The Fund will combine purchases of Class A Shares made on the
same day by the investor, the investor's spouse, and the investor's children
under age 21 when it calculates the sales charge. In addition, the sales charge,
if applicable, is eliminated or reduced for purchases made at one time by a
trustee or fiduciary for a single trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales charge as a percentage of public offering price on the additional
purchase according to the schedule now in effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce the sales charge after it
confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge elimination or reduction, a
shareholder has the privilege of combining concurrent purchases of Class A
Shares of two or more Federated Funds, the purchase price of which includes a
sales charge. For example, if a shareholder concurrently invested $30,000 in
Class A Shares of one of the other Federated Funds with a sales charge, and
$20,000 in this Fund, the sales charge would be reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate or reduce the
sales charge after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of Class A Shares of
Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold up to 5.50% of the total amount intended to be purchased in
escrow (in Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the
amount specified in the letter of intent is not purchased, an appropriate number
of escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge applicable
to the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any Federated
Fund, excluding money market accounts, will be aggregated to provide a purchase
credit towards fulfillment of the letter of intent. Prior trade prices will not
be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales charge. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales charge,
under certain circumstances described under "Contingent Deferred Sales
Charge--Class B Shares," a contingent deferred sales charge may be applied by
the distributor at the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and will no longer be subject to a fee under the Fund's Distribution Plan
(see "Distribution of Shares"). Such conversion will be on the basis of the
relative net asset value per Share, without the imposition of any sales charge,
fee, or other charge. Class B Shares acquired by exchange from Class B Shares of
another Federated Fund will convert into Class A Shares based on the time of the
initial purchase. Each time any Class B Shares in the shareholder's account
purchased through the reinvestment of distributions convert to Class A Shares,
an equal pro rata portion of the Class B Shares purchased through the
reinvestment of distributions will also convert to Class A Shares. The
conversion of Class B Shares to Class A Shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B Shares to Class A Shares will not occur
if such ruling or opinion is not available. In such event, Class B Shares would
continue to be subject to higher expenses than Class A Shares for an indefinite
period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES
PURCHASING SHARES
Through A Financial Institution. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders placed through a financial institution are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a registered broker/dealer must be received by
the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker
to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be purchased
at that day's price. Purchase orders through other financial institutions must
be received by the financial institution and transmitted to the Fund before 4:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders promptly.
Financial institutions may charge additional fees for their services.
The financial institutions which maintain investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless they
account for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by Federal Reserve
wire by calling the Fund. All information needed will be taken over the
telephone, and the order is considered received immediately. Payment for
purchases which are subject to a sales charge must be received within three
business days following the order. Payment for purchases on which no sales
charge is imposed must be received before 3:00 p.m. (Eastern time) on the next
business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund
Class); (Fund Number--this number can be found on the account statement or by
contacting the Fund); Account Number; Trade Date and Order Number; Group Number
or Dealer Number; Nominee or Institution Name; and ABA Number 011000028. Shares
cannot be purchased by wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by mailing a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600. Orders by mail are considered received when payment by
check is converted into federal funds (normally the business day after the check
is received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
applicable sales charge. Shareholders should contact their financial institution
or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or for
Individual Retirement Accounts ("IRAs"). For further details, contact the Fund
and consult a tax adviser.
------------------------------------------------------
EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other Federated Funds at net asset value. Neither the Fund nor any of the
Federated Funds imposes any additional fees on exchanges. Shareholders in
certain other Federated Funds may exchange all or some of their shares for Class
A Shares.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other Federated Funds. (Not all Federated Funds currently offer Class B
Shares. Contact your financial institution regarding the availability of other
Class B Shares of the Federated Funds). Exchanges are made at net asset value
without being assessed a contingent deferred sales charge on the exchanged
Shares. To the extent that a shareholder exchanges Shares for Class B Shares in
other Federated Funds, the time for which the exchanged-for Shares are to be
held will be added to the time for which exchanged-from Shares were held for
purposes of satisfying the applicable holding period. For more information, see
"Contingent Deferred Sales Charge."
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for Class C Shares
of other Federated Funds at net asset value without a contingent deferred sales
charge. (Not all Federated Funds currently offer Class C Shares. Contact your
financial institution regarding the availability of other Class C Shares of the
Federated Funds.) To the extent that a shareholder exchanges Shares for Class C
Shares of other Federated Funds, the time for which the exchanged-for Shares are
to be held will be added to the time for which exchanged-from Shares were held
for purposes of satisfying
the applicable holding period. For more information, see "Contingent Deferred
Sales Charge."
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Fund
into which your Shares may be exchanged free of charge.
Shareholders of Class A Shares who have been designated Liberty Life Members are
exempt from sales charges on future purchases in and exchanges between the Class
A Shares of any Federated Fund, as long as they maintain a $500 balance in one
of the Federated Funds.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other fund. The exchange privilege may be modified or terminated at any time.
Shareholders will be notified of the modification or termination of the exchange
privilege.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending on the circumstances, a short-term or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanging may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to Federated Shareholder Services Company, 1099 Hingham Street, Rockland,
Massachusetts 02370-3317.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600, and deposited to the shareholder's account before
being exchanged. Telephone exchange instructions may be recorded and will be
binding upon the shareholder. Such instructions will be processed as of 4:00
p.m. (Eastern time) and must be received by the Fund before that time for Shares
to be exchanged the same day. Shareholders exchanging into a fund will not
receive any dividend that is payable to shareholders of record on that date.
This privilege may be modified or terminated at any time.
------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Investors who redeem Shares through a financial intermediary may be
charged a service fee by that financial intermediary. Redemption requests must
be received in proper form and may be made as described below.
REDEEMING SHARES THROUGH YOUR FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check to the
shareholder's address of record or wire-transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System.
The minimum amount for a wire transfer is $1,000. Proceeds from redeemed Shares
purchased by check or through an ACH will not be wired until that method of
payment has been cleared. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your shareholder services representative at the telephone
number listed on your account statement.
Telephone redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston,
Massachusetts 02266-8600. If share certificates have been issued, they should be
sent unendorsed with the written request by registered or certified mail to the
address noted above.
The written request should state: the Fund name and the Share class designation;
the account name as registered with the Fund; the account number; and the number
of Shares to be redeemed or the dollar amount requested. All owners of the
account must sign the request exactly as the Shares are registered. Normally, a
check for the proceeds is mailed within one business day, but in no event more
than seven days, after the receipt of a proper written redemption request.
Dividends are paid up to and including the day that a redemption request is
processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000, other than retirement accounts subject to required minimum
distributions. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales charge, it is not advisable for shareholders to continue to purchase Class
A Shares while participating in this program. A contingent deferred sales
charge may be imposed on Class B Shares and Class C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of .50% for redemptions made
within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) Shares held for more than six full years from the date of purchase
with respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares; (3) Shares held for
fewer than six years with respect to Class B Shares and less than one full year
from the date of purchase with respect to Class C Shares and applicable Class A
Shares on a first-in, first-out basis. A contingent deferred sales charge is not
assessed in connection with an exchange of Fund Shares for shares of other
Federated Funds in the same class (see "Exchange Privilege"). Any contingent
deferred sales charge imposed at the time the exchanged-for Shares are redeemed
is calculated as if the shareholder had held the Shares from the date on which
he became a shareholder of the exchanged-from Shares. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain redemptions
(see "Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of the last
surviving shareholder; (2) redemptions representing minimum required
distributions from an IRA or other retirement plan to a shareholder who has
attained the age of 70-1/2; (3) involuntary redemptions by the Fund of Shares in
shareholder accounts that do not comply with the minimum balance requirements;
and (4) qualifying redemptions of Class B Shares under a Systematic Withdrawal
Program. To qualify for elimination of the contingent deferred sales charge
through a Systematic Withdrawal Program, the redemptions of Class B Shares must
be from an account: that is at least 12 months old, has all Fund distributions
reinvested in Fund Shares, and has a value of at least $10,000 when the
Systematic Withdrawal Program is established. Qualifying redemptions may not
exceed 1.00% monthly of the account value as periodically determined by the
Fund. For more information regarding the elimination of the contingent deferred
sales charge through a Systematic Withdrawal Program contact your financial
intermediary or the Fund. No contingent deferred sales charge will be imposed on
redemptions of Shares held by Directors, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or distributor, and their
immediate family members; employees of any financial institution that sells
Shares of the Fund pursuant to a sales agreement with the distributor; and
spouses and children under the age of 21 of the aforementioned persons. Finally,
no contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an Adviser registered
under the Advisers Act of 1940 or retirement plans where the third party
administrator has entered into certain arrangements with Federated Securities
Corp. or its affiliates, or any other financial institution, to the extent that
no payments were advanced for purchases made through such entities. The Fund
reserves the right to discontinue or modify the elimination of the contingent
deferred sales charge. Shareholders will be notified of a discontinuation. Any
Shares purchased prior to the termination of such waiver would have the
contingent deferred sales charge eliminated as provided in the Fund's prospectus
at the time of the purchase of the Shares. If a shareholder making a redemption
qualifies for an elimination of the contingent deferred sales charge, the
shareholder must notify Federated Securities Corp. or the transfer agent in
writing that the shareholder is entitled to such elimination.
------------------------------------------------------
ACCOUNT AND SHARE INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a Share account for each shareholder. Share certificates are not issued unless
requested in writing to Federated Shareholder Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Annual confirmations are sent to report dividends paid during the
year.
DIVIDENDS
Dividends are declared and paid annually to all shareholders invested in the
Fund on the record date. Dividends are automatically reinvested in additional
Shares on the payment date, at the ex-dividend date net asset value without a
sales charge, unless shareholders request cash payments on the new account form
or by writing to the transfer agent. All shareholders on the record date are
entitled to the dividend. If Shares are redeemed or exchanged prior to the
record date, or purchased after the record date, those Shares are not entitled
to that year's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Shares required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
------------------------------------------------------
CORPORATION INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation is managed by a Board of Directors. The Directors are
responsible for managing the Corporation's business affairs and for exercising
all the Corporation's powers except those reserved for the shareholders. An
Executive Committee of the Board of Directors handles the Board's
responsibilities between meetings of the Board.
ADVISER
Investment decisions for the Fund are made by Federated Global Research Corp.,
the Fund's Adviser, subject to direction by the Directors. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
Because the Fund does not invest in individual securities at the present time,
it pays the Adviser no advisory fee.
The investment advisory fees of the underlying funds are not included in the
Fund's advisory fee. There are separate investment advisory fees paid by each
underlying fund. You would not incur the Fund's expenses if you were to invest
in the underlying funds directly.
ASSET ALLOCATION FEE
The Fund has no present intention of paying or accruing the asset allocation fee
during the fiscal year ending November 30, 1997. If an asset allocation fee were
to be charged to the Fund, it could range up to an annual fee of .20% of the
average daily net assets invested in the underlying funds. Before this fee would
be implemented, the Directors' approval would be required.
ADVISER'S BACKGROUND
Federated Global Research Corp., incorporated in Delaware on May 12, 1995, is a
registered investment adviser under the Advisers Act of 1940. It is a subsidiary
of Federated Investors. All of the Class A (voting) shares of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue,
Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr.
Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated
Investors.
Federated Global Research Corp. and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services to a
number of investment companies. With over $76 billion invested across more than
348 funds under management and/or administration by its subsidiaries, as of
December 31, 1996, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company in 1955.
Federated Funds are presently at work in and through 4,500 financial
institutions nationwide.
Drew J. Collins has been the Fund's portfolio manager since inception. Mr.
Collins joined Federated Investors in 1995 as a Senior Vice President of the
Fund's Adviser. Mr. Collins served as a Vice President/Portfolio Manager of
international equity portfolios at Arnhold and S. Bleichroeder, Inc. from 1994
to 1995. He served as an Assistant Vice President/ Portfolio Manager for
international equities at the College Retirement Equities Fund from 1986 to
1994. Mr. Collins is a Chartered Financial Analyst and received his M.B.A. in
finance from the Wharton School of The University of Pennsylvania.
Henry A. Frantzen has been the Fund's portfolio manager since inception. Mr.
Frantzen joined Federated Investors in 1995 as an Executive Vice President of
the Fund's Adviser. Mr. Frantzen served as Chief Investment Officer of
international equities at Brown Brothers Harriman & Co. from 1992 until 1995.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of these codes are subject to review by the Directors, and
could result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to 0.25% for Class A Shares and up to 0.75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor may
not exceed an annual rate of 0.75% of Class B Shares' average daily net assets,
it will take the distributor a number of years to recoup the expenses it has
incurred for its sales services and distribution-related support services
pursuant to the Plan.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). The fee paid by the Fund to Federated Shareholder
Services will be reduced to the extent that the Fund receives a fee from an
underlying fund pursuant to the underlying fund's Shareholder Services Agreement
with Federated Shareholder Services. Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform Shareholder Services directly
or will select financial institutions to perform Shareholder Services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
In addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of sales services, distribution-related support
services, or shareholder services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to 0.50% of the net asset value of
Class A Shares purchased by their clients or customers under certain qualified
retirement plans as approved by Federated Securities Corp. (Such payments are
subject to a reclaim from the financial institution should the assets leave the
program within 12 months after purchase.)
Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
Federated Securities Corp. and Federated Shareholder Services may offer to pay a
fee from their own assets to financial institutions as financial assistance for
providing substantial sales services, distribution related support services or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's Adviser or its affiliates.
ADMINISTRATION OF THE FUND
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Corporation and the Fund. Federated
Services Company provides these at an annual rate which relates to the average
aggregate daily net assets of all funds advised by affiliates of Federated
Investors as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<S> <C>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
on assets in excess of $750
.075% million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
EXPENSES OF THE FUND AND CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES
Holders of Class A, Class B, and Class C Shares pay their allocable portion of
Corporation and portfolio expenses.
The Corporation expenses for which holders of Class A, Class B, and Class C
Shares pay their allocable portion include, but are not limited to: the cost of
organizing the Corporation and continuing its existence; registering the
Corporation with federal and state securities authorities; Directors' fees;
auditors' fees; the cost of meetings of Directors; legal fees of the
Corporation; association membership dues; and such non-recurring and
extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Class A, Class B, and Class C Shares
pay their allocable portion include, but are not limited to: registering the
portfolio and Shares of the portfolio; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such
non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Class A, Class
B, and Class C Shares as classes are expenses under the Corporation's
Distribution Plan and fees for Shareholder Services. However, the Directors
reserve the right to allocate certain other expenses to holders of Class A,
Class B, and Class C Shares as it deems appropriate ("Class Expenses"). In any
case, Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Class A, Class
B, and Class C Shares; fees for Shareholder Services; printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders; registration fees
paid to the Securities and Exchange Commission and registration fees paid to
state securities commissions; expenses related to administrative personnel and
services as required to support holders of Class A, Class B, and Class C Shares;
legal fees relating solely to Class A, Class B, and Class C Shares and
Directors' fees incurred as a result of issues relating solely to Class A, Class
B, and Class C Shares.
An investor in the Fund should recognize that you may invest directly in
underlying funds and that, by investing in underlying funds indirectly through
the Fund, you will bear not only your proportionate share of the expenses of the
Fund and as described above, but also, indirectly, similar expenses of the
underlying funds. In addition, you will bear your proportionate share of
expenses, if any, related to the distribution of the Fund's shares, see
"Distribution of Shares," and also may indirectly bear expenses paid by an
underlying fund related to the distribution of its shares. You also will bear
your proportionate share of any sales charges incurred by the Fund related to
the purchase of shares of the underlying funds. However, in certain instances,
the Fund may be eligible to purchase underlying funds at a reduced or no sales
charge, whereas an individual investor would have to pay the full sales charge
if the investor directly invested in such underlying funds. In those instances,
it may be possible for an investor to bear greater transaction and operating
expenses by investing directly in the underlying funds than if the investor were
to invest indirectly through such underlying funds as a shareholder in the Fund
(even after aggregating the transaction and operating expenses of the Fund and
the underlying funds). Finally, you should recognize that, as a result of the
Fund's policies of investing in other mutual funds, you may receive taxable
capital gains distributions to a greater extent than would be the case if you
invested directly in the underlying funds. See "Dividends," "Capital Gains" and
"Federal Income Tax."
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet this criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.
------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All Shares of each portfolio
or class in the Corporation have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that particular Fund
or class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under certain
circumstances.
Directors may be removed by the Directors or by shareholders at a special
meeting. The Directors shall call a special meeting of shareholders upon the
written request of shareholders owning at least 10% of the Corporation's
outstanding shares entitled to vote.
When the Fund is asked to vote on matters relating to the underlying funds, the
Fund is required to either: seek voting instructions from its shareholders
regarding underlying fund proxies and to vote such proxies in accordance with
the instructions received; or to vote such proxies in the same proportion as the
vote of all other holders of the underlying fund securities.
------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended (the "Code"), applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies. However, the Fund may invest in the stock of certain foreign
corporations which would constitute a Passive Foreign Investment Company
("PFIC"). Federal income taxes may be imposed on the Fund upon disposition of
PFIC investments.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios, if any, will not be combined for tax purposes
with those realized by the Fund.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Fund to
reduced tax rates or exemptions on this income. The effective rate of foreign
tax cannot be predicted since the amount of Fund assets to be invested within
various countries is unknown. However, the Fund intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
The Fund may invest in underlying funds with capital loss carry-forwards. If
such an underlying fund realizes capital gains, it will be able to offset the
gains to the extent of its loss carry-forwards in determining the amount of
capital gains which must be distributed to its shareholders. To the extent that
gains are offset in this manner, the Fund will not realize gains on the related
fund until such time as the underlying fund is sold.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return for each class of
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales charge and contingent deferred sales charges, which, if
excluded, would increase the total return.
Total return will be calculated separately for Class A Shares, Class B Shares,
and Class C Shares. Expense differences between Class A Shares, Class B Shares
and Class C Shares may affect the performance of each class.
From time to time, advertisements for Class A Shares, Class B Shares and Class C
Shares of the Fund may refer to ratings, rankings, and other information in
certain financial publications and/or compare the performance of Class A Shares,
Class B Shares and Class C Shares to certain indices.
------------------------------------------------------
APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term, vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
MOODY'S INVESTORS SERVICE, INC. LONG TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain indentifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
Well established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-1 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL
PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
FEDERATED INTERNATIONAL GROWTH FUND
A PORTFOLIO OF WORLD INVESTMENT SERIES, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Federated International Growth Fund (the ``Fund'), a
portfolio of World Investment Series, Inc. (the ``Corporation') dated
June 30, 1997. This Statement is not a prospectus. You may request a
copy of a prospectus or a paper copy of this Statement of Additional
Information, if you have received it electronically, free of charge by
calling 1-800-341-7400.
Statement dated June 30, 1997
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 981487739
Cusip 981487721
Cusip 981487713
G02118-02-ABC(6/97)
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Lending Portfolio Securities 1
Repurchase Agreements 2
Restricted and Illiquid Securities 2
Futures and Options Transactions 2
Futures Contracts 2
Put Options on Futures Contracts 3
Call Options on Futures Contracts 3
``Margin''in Futures Transactions 4
Regulatory Restrictions 4
Purchasing Put Options on Portfolio Securities4
Writing Covered Call Options on Portfolio
Securities 4
Over-the-Counter Options 4
Risks 5
Foreign Currency Transactions 7
Special Considerations Affecting Emerging 9
Markets
Additional Risk Considerations 9
Portfolio Turnover 10
INVESTMENT LIMITATIONS 10
WORLD INVESTMENT SERIES, INC. MANAGEMENT 13
Fund Ownership 16
Directors Compensation 17
INVESTMENT ADVISORY SERVICES 18
Adviser to the Fund 18
Advisory Fees 18
BROKERAGE TRANSACTIONS 18
OTHER SERVICES 19
Fund Administration 19
Custodian and Portfolio Accountant 19
Transfer Agent 19
Independent Auditors 19
PURCHASING SHARES 19
Distribution Plan and Shareholder Services 19
Conversion to Federal Funds 19
Purchases by Sales Representatives, Directors of
the Corporation, and Employees 20
DETERMINING NET ASSET VALUE 20
Determining Market Value of Securities 20
Trading in Foreign Securities 20
REDEEMING SHARES 20
Redemption in Kind 21
Elimination of the Contingent Deferred Sales
Charge 21
TAX STATUS 21
The Fund's Tax Status 21
Shareholders' Tax Status 22
TOTAL RETURN 22
YIELD 22
PERFORMANCE COMPARISONS 23
Economic and Market Information 24
ABOUT FEDERATED INVESTORS 24
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in World Investment Series, Inc. (the
`Corporation''), which was established under the laws of the State of
Maryland on January 25, 1994.
Shares of the Fund are offered in three classes, known as Class A Shares,
Class B Shares, and Class C Shares (individually and collectively referred
to as `Shares'' as the context may require). This Statement of Additional
Information relates to all three classes of Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide long-term growth of
capital. Any income realized from the portfolio is incidental. The Fund
pursues its investment objective by investing primarily in shares of other
mutual funds, the portfolios of which consist primarily of equity
securities of non-U.S. issuers. Additionally, pursuant to exemptive relief
from the Securities and Exchange Commission (`SEC''), the Fund may also
invest directly in equity securities of companies domiciled outside the
United States. The investment objective cannot be changed without approval
of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in shares of other open-end management
investment companies for which affiliates of Federated Investors serve as
investment adviser and principal underwriter (the `Federated Funds'' and
herein referred to as the `underlying funds'') that invest primarily in
foreign equity securities. To the extent that the Fund's assets are
invested in underlying funds, its investment experience will correspond
directly with that of its proportionate investment in those funds. The Fund
may also invest in a diversified portfolio composed of non-U.S. securities
and directly in the securities held by the underlying funds. Because the
Fund and the underlying funds will have substantially similar investment
experiences and incur similar risks, all further references to the Fund
hereinafter include the underlying funds unless otherwise indicated.
Although many of the underlying funds have the same or similar investment
policies as the Fund, they are not required to do so.
A substantial portion of these instruments will be equity securities of
companies domiciled outside the United States. The Fund will invest in
equity securities denominated in foreign currencies, including European
Currency Units, of issuers located in at least three countries outside of
the United States and sponsored or unsponsored depositary receipts. The
Fund may also enter into forward commitments, repurchase agreements,
foreign currency transactions and maintain reserves in foreign or U.S.
money market instruments.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
There is the risk that when lending portfolio securities, the securities
may not be available to the Fund on a timely basis and the Fund may,
therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would file
for bankruptcy or become insolvent, disposition of the securities may be
delayed pendng court action.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are found by Federated Global Research, the Fund's
investment adviser (the `Adviser'') to be creditworthy pursuant to
guidelines established by the Corporation's Board of Directors (the
`Directors'').
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
In the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by Federated Global Research Corp., the Fund's Adviser (the `Adviser'') to
be creditworthy.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under an SEC staff position set forth in
the adopting release for Rule 144A under the Securities Act of 1933, as
amended (the `Rule''). The Rule is a non-exclusive safe-harbor for
certain secondary market transactions involving registration for resales of
otherwise restricted securities to qualified institutional buyers. The
Rule was expected to further enhance the liquidity of the secondary market
for securities eligible for resale under the Rule. The Fund believes that
the staff of the SEC has left the question of determining the liquidity of
all restricted securities to the Directors. The Directors may consider the
following criteria in determining the liquidity of certain restricted
securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and
the number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
Notwithstanding the foregoing, securities of foreign issuers which are not
listed on a recognized domestic or foreign exchange or for which a bona
fide market does not exist at the time of purchase or subsequent
transaction shall be treated as illiquid securities by the Directors.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may engage in futures and options hedging transactions. In an
effort to reduce fluctuations in the net asset value of Shares, the Fund
may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio
securities and listed put options on futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options
on portfolio securities to attempt to increase its current income. The Fund
will maintain its positions in securities, option rights, and segregated
cash subject to puts and calls until the options are exercised, closed, or
have expired. An option position on financial futures contracts may be
closed out only on the exchange on which the position was established.
FUTURES CONTRACTS
The Fund may engage in transactions in futures contracts. A futures
contract is a firm commitment by two parties: the seller who agrees to make
delivery of the specific type of security called for in the contract
(`going short'') and the buyer who agrees to take delivery of the security
(`going long'') at a certain time in the future. However, a stock index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the difference between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written. No
physical delivery of the underlying securities in the index is made.
The purpose of the acquisition or sale of a futures contract by the Fund is
to protect the Fund from fluctuations in the value of its securities caused
by anticipated changes in interest rates or market conditions without
necessarily buying or selling the securities. For example, in the fixed
income securities market, price generally moves inversely to interest
rates. A rise in rates generally means a drop in price. Conversely, a drop
in rates generally means a rise in price. In order to hedge its holdings of
fixed income securities against a rise in market interest rates, the Fund
could enter into contracts to deliver securities at a predetermined price
(i.e., `go short'') to protect itself against the possibility that the
prices of its fixed income securities may decline during the anticipated
holding period. The Fund would `go long'' (i.e., agree to purchase
securities in the future at a predetermined price) to hedge against a
decline in market interest rates.
PUT OPTIONS ON FUTURES CONTRACTS
The Fund may engage in transactions in put options on futures contracts.
The Fund may purchase listed put options on futures contracts. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price. The Fund would purchase put options on
futures contracts to protect portfolio securities against decreases in
value resulting from market factors, such as an anticipated increase in
interest rates.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option may be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities. Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option will expire
on the date provided in the option contract, and only the premium paid for
the contract will be lost.
When the Fund sells a put on a futures contract, it receives a cash premium
which can be used in whatever way is deemed most advantageous to the Fund.
In exchange for such premium, the Fund grants to the purchaser of the put
the right to receive from the Fund, at the strike price, a short position
in such futures contract, even though the strike price upon exercise of the
option is greater than the value of the futures position received by such
holder. If the value of the underlying futures position is not such that
exercise of the option would be profitable to the option holder, the option
will generally expire without being exercised. The Fund has no obligation
to return premiums paid to it whether or not the option is exercised. It
will generally be the policy of the Fund, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering
into a closing purchase transaction, if available, unless it is determined
to be in the Fund's interest to deliver the underlying futures position. A
closing purchase transaction consists of the purchase by the Fund of an
option having the same term as the option sold by the Fund, and has the
effect of canceling the Fund's position as a seller. The premium which the
Fund will pay in executing a closing purchase transaction may be higher
than the premium received when the option was sold, depending in large part
upon the relative price of the underlying futures position at the time of
each transaction.
CALL OPTIONS ON FUTURES CONTRACTS
The Fund may engage in transactions in call options on futures contracts.
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio against, for
example, an increase in market interest rates. When the Fund writes a call
option on a futures contract, it is undertaking the obligation of assuming
a short futures position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option is exercised.
As market interest rates rise or as stock prices fall, causing the prices
of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase. In other words, as
the underlying future's price goes down below the strike price, the buyer
of the option has no reason to exercise the call, so that the Fund keeps
the premium received for the option. This premium can help substantially to
offset the drop in value of the Fund's portfolio securities. Prior to the
expiration of a call written by the Fund, or exercise of it by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the
premium received by the Fund for the initial option. The net premium income
of the Fund will then help offset the decrease in value of the hedged
securities.
When the Fund purchases a call on a financial futures contract, it receives
in exchange for the payment of a cash premium the right, but not the
obligation, to enter into the underlying futures contract at a strike price
determined at the time the call was purchased, regardless of the
comparative market value of such futures position at the time the option is
exercised. The holder of a call option has the right to receive a long (or
buyer's) position in the underlying futures contract.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio (including cash or cash
equivalents) plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
`MARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of `initial margin'' in cash or U.S.
Treasury bills with the custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that futures contracts initial
margin does not involve a borrowing by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called `variation margin,'' equal to the daily
change in value of the futures contract. This process is known as `marking
to market.''Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions. The Fund is also required to deposit and maintain margin
when it writes call options on futures contracts.
REGULATORY RESTRICTIONS
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid status as a `commodity pool operator,''
the Fund will not enter into a futures contract, or purchase an option
thereon, if immediately thereafter the initial margin deposits for futures
contracts held by it, plus premiums paid by it for open options on futures,
would exceed 5% of the total assets of the Fund. The Fund will not engage
in transactions in futures contracts or options thereon for speculation,
but only to attempt to hedge against changes in market conditions affecting
the value of assets which the Fund holds or intends to purchase. When
futures contracts or options thereon are purchased in order to protect
against a price increase on securities or other assets intended to be
purchased later, it is anticipated that at least 75% of such intended
purchases will be completed. When other futures contracts or options
thereon are purchased, the underlying value of such contracts at all times
will not exceed the sum of (1) accrued profit on such contracts held by the
broker; (2) cash or high-quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days
or less.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may write covered call options to generate income. As a writer of
a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration).
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options (`OTC options'')
on portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities held by
the Fund and not traded on an exchange.
OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are
purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not.
RISKS
OPTIONS
Certain hedging vehicles have risks associated with them including
possible default by the other party to the transaction, illiquidity
and, to the extent the adviser's view as to certain market movements
is incorrect, the risk that the use of such hedging strategies could
result in losses greater than if they had not been used. Use of put
and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions
can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the
related portfolio position of the Fund creates the possibility that
losses on the hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options
markets may both be liquid in all circumstances and certain over-the-
counter options may have not markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures
and options transactions for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result
from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would create a
greater ongoing potential financial risk than would purchase of
options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of hedging strategies would
reduce net asset value, and possibly income, and such losses can be
greater than if the hedging strategies had not been utilized.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transaction (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options,
currency and interest rate transactions (`component" transactions),
instead of a single hedging strategy, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best
interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into
based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio
management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the hedging strategies into which the Fund may enter are
interest rate, currency and index swaps and the purchase or sale of
related caps, floors, and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rating payments of
fixed rate payments with respect to a notional amount of principal. A
currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling
such cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the
party selling such floor to the extent that specified index falls
below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, and collars are entered into
for good faith hedging purposes, the Adviser and the Fund believe such
obligations do not constitute senior securities under the Investment
Company Act of 1940, as amended, and, accordingly, will not treat them
as being subject to its borrowing restrictions. There is no minimal
acceptable rating for a swap, cap, floor, or collar to be purchased or
held in the Fund's portfolio. If there is a default by the
counterparty, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and agents
utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are
more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than
swaps.
RISKS OF HEDGING STRATEGIES OUTSIDE THE U.S.
When conducted outside the U.S., hedging strategies may not be
regulated as rigorously as in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such
positions also could be adversely affected by: (i) other complex
foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms
and procedures and the margin requirements than in the U.S., and (v)
lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many hedging strategies, in addition to other requirements, require
that the Fund segregate liquid high grade assets with its custodian to
the extent Fund obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the
Fund to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of
cash or liquid high grade securities at least equal to the current
amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will
require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient
to purchase and deliver the securities if the call is exercised. A
call option sold by the Fund on an index will require the Fund to own
portfolio securities which correlate with the index or to segregate
liquid high grade assets equal to the excess of the index value over
the exercise price on a current basis. A put option written by the
Fund requires the Fund to segregate liquid high grade assets equal to
the exercise price.
Except when the Fund enters into a forward contract for the purchase
or sale of a security denominated in a particular currency, a currency
contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's
obligations or to segregate liquid high grade assets equal to the
amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OTC issued and exchange
listed index options, will generally provide for cash settlement. As
a result, when the Fund sells these instruments it will only segregate
an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net
amount. These amounts will equal 100% of the exercise price in the
case of a non cash-settled put, the same as an OTC guaranteed listed
option sold by the Fund, or the in-the-money amount plus any sell-back
formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when
the in-the-money amount exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. OTC issued and exchange
listed options sold by the Fund other than those above generally
settle with physical delivery, and the Fund will segregate an equal
amount of assets equal to the full value of the option. OTC options
settling with physical delivery, or with an election of either
physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition
to segregating assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. Such assets may
consist of cash, cash equivalents, liquid debt or equity securities or
other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect
to each swap on a daily basis and will segregate an amount of cash or
liquid high grade securities having a value equal to the accrued
excess. Caps, floors and collars require segregation of assets with a
value equal to the Fund's net obligation, if any.
Strategic transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into
offsetting transactions so that its combined position, coupled with
any segregated assets, equals its net outstanding obligation in
related options and hedging strategies. For example, the Fund could
purchase a put option if the strike price of that option is the same
or higher than the strike price of a put option sold by the Fund.
Moreover, instead of segregating assets if the Fund held a futures or
forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the
price of the contract held. Other hedging strategies may also be
offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction no segregation is
required, but if it terminates prior to such time, assets equal to any
remaining obligation would need to be segregated.
The Fund's activities involving hedging strategies may be limited by
the requirements of Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code") for qualification as a regulated investment
company. (See "Tax Status")
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign currencies are
a function of such factors as supply and demand in the currency
exchange markets, international balances of payments, governmental
intervention, speculation and other economic and political conditions.
Although the Fund values its assets daily in U.S. dollars, the Fund
may not convert its holdings of foreign currencies to U.S. dollars
daily. The Fund may incur conversion costs when it converts its
holdings to another currency. Foreign exchange dealers may realize a
profit on the difference between the price at which the Fund buys and
sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its portfolio investments. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign
currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and a foreign
currency involved in an underlying transaction. However, forward
foreign currency exchange contracts may limit potential gains which
could result from a positive change in such currency relationships.
The Adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The Fund
will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when it would
be obligated to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that
currency or, in the case of a "cross-hedge" denominated in a currency
or currencies that the Adviser believes will tend to be closely
correlated with that currency with regard to price movements.
Generally, the Fund will not enter into a forward foreign currency
exchange contract with a term longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price
on a specified date or during the option period. The owner of a call
option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but not the
obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the option
is obligated to fulfill the terms of the sold option. However, either
the seller or the buyer may, in the secondary market, close its
position during the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally rises in value if the underlying currency
depreciates in value. Although purchasing a foreign currency option
can protect the Fund against an adverse movement in the value of a
foreign currency, the option will not limit the movement in the value
of such currency. For example, if the Fund was holding securities
denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the
value of the currency, the Fund would not have to exercise its put
option. Likewise, if the Fund were to enter into a contract to
purchase a security denominated in foreign currency and, in
conjunction with that purchase, were to purchase a foreign currency
call option to hedge against a rise in value of the currency, and if
the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise
its call. Instead, the Fund could acquire in the spot market the
amount of foreign currency needed for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
risks associated with foreign currency options. The markets in foreign
currency options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Adviser, the market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a particular
option at any specific time.
In addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the
price of the option position may vary with changes in the value of
either or both currencies and may have no relationship to the
investment merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign
currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than
$1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of
very large transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e., less than $1 million)
where rates may be less favorable. The interbank market in foreign
currencies is a global, around-the-clock market. To the extent that
the U.S. option markets are closed while the markets for the
underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same objectives
as it would through the use of forward foreign currency exchange
contracts. The Fund may be able to achieve these objectives possibly
more effectively and at a lower cost by using futures transactions
instead of forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND
RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the use of futures generally. In
addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those
associated with options on currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures
contracts is relatively new. The ability to establish and close out
positions on such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Fund will not purchase or
write options on foreign currency futures contracts unless and until,
in the opinion of the Adviser, the market for such options has
developed sufficiently that the risks in connection with such options
are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the
purchase or sale of foreign currency futures contracts, the purchase
of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures
contract would result in a loss, such as when there is no movement in
the price of the underlying currency or futures contract.
SPECIAL CONSIDERATIONS AFFECTING EMERGING MARKETS
Investing in equity securities of companies in emerging markets may entail
greater risks than investing in equity securities in developed countries.
These risks include (i) less social, political and economic stability; (ii)
the small current size of the markets for such securities and the currently
low or nonexistent volume of trading, which result in a lack of liquidity
and in greater price volatility; (iii) certain national policies which may
restrict the Fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(iv) foreign taxation; and (v) the absence of developed structures
governing private or foreign investment or allowing for judicial redress
for injury to private property. Investing in the securities of companies in
emerging markets, may entail special risks relating to the potential
political and economic instability and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment, convertibility of currencies into U.S. dollars and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose
its entire investment in any such country.
Settlement mechanisms in emerging markets may be less efficient and
reliable than in more developed markets. In such emerging securities
markets there may be share registration and delivery delays or failures.
Most Latin American countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates and corresponding currency
devaluations have had any may continue to have negative effects on the
economies and securities markets of certain Latin American countries.
POLITICAL, SOCIAL AND ECONOMIC RISKS. Even though opportunities for
investment may exist in emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or
policies of any other government which exercises a significant influence
over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of Latin American countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by the Fund.
The claims of property owners against those governments were never finally
settled. There can be no assurance that any property represented by
securities purchased by the Fund will not also be expropriated,
nationalized, or otherwise confiscated. If such confiscation were to occur,
the Fund could lose its entire investment in such countries. The Fund's
investments would similarly be adversely affected by exchange control
regulation in any of those countries.
Certain countries in which the Fund may invest may have groups that
advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry
the potential for widespread destruction or confiscation of property owned
by individuals and entities foreign to such country and could cause the
loss of the Fund's investment in those countries. Instability may also
result from, among other things: (i) authoritarian governments or military
involvement in political and economic decision-making, including changes in
government through extraconsititutional means; (ii) popular unrest
associated with demands for improved political, economic and social
conditions; and (iii) hostile relations with neighboring or other
countries. Such political, social and economic instability could disrupt
the principal financial markets in which the Fund invests and adversely
affect the value of the Fund's assets.
ADDITIONAL RISK CONSIDERATIONS
The Directors consider at least annually the likelihood of the imposition
by any foreign government of exchange control restrictions which would
affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The Directors also
consider the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith or gross negligence on the part
of the Adviser, any losses resulting from the holding of the Fund's
portfolio securities in foreign countries and/or with securities
depositories will be at the risk of shareholders. No assurance can be given
that the Directors' appraisal of the risks will always be correct or that
such exchange control restrictions or political acts of foreign governments
might not occur.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an attempt
to achieve the Fund's investment objective. Portfolio securities will be
sold when the Adviser believes it is appropriate, regardless of how long
those securities have been held. However, the underlying funds may
experience much higher portfolio turnover rates resulting in higher
brokerage commissions, and taxable gains or losses. It is estimated the
rate of portfolio turnover will, generally, not exceed 40%.
For the period from February 28, 1996 (date of initial public investment)
to November 30, 1996 (fiscal year end), the Federated Asia Pacific Growth
Fund's portfolio turnover rate was 99%.
For the period from February 28, 1996 (date of initial public investment)
to November 30, 1996 (fiscal year end), the Federated Emerging Markets
Fund's portfolio turnover rate was 32%.
For the period from February 28, 1996 (date of initial public investment)
to November 30, 1996 (fiscal year end), the Federated European Growth
Fund's portfolio turnover rate was 58%.
For the period from February 28, 1996 (date of initial public investment)
to November 30, 1996 (fiscal year end), the Federated International Small
Company Fund's portfolio turnover rate was 174%.
For the period from February 28, 1996 (date of initial public investment)
to November 30, 1996 (fiscal year end), the Federated Latin American Growth
Fund's portfolio turnover rate was 38%.
INVESTMENT LIMITATIONS
The following investment limitations are fundamental (except that no
investment limitation of the Fund shall prevent the Fund from investing
substantially all of its assets (except for assets which are not considered
`investment securities'' under the Investment Company Act of 1940, as
amended, or assets exempted by the SEC) in an open-end investment company
with substantially the same investment objectives):
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as are necessary for
the clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount borrowed, and except to the extent that the Fund may enter
into futures contracts. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets
are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In these cases, the Fund may pledge
assets as necessary to secure such borrowings. For purposes of this
limitation, the following will not be deemed to be pledges of the
Fund's assets: (a) the deposit of assets in escrow in connection with
the writing of covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral arrangements
with respect to: (i) the purchase and sale of securities options (and
options on securities indexes) and (ii) initial or variation margin
for futures contracts.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry other than investment companies, except that the
Fund may invest 25% or more of the value of its total assets in
securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities, and repurchase agreements collateralized by such
securities.
INVESTING IN COMMODITIES
The Fund will not invest in commodities, except that the Fund reserves
the right to engage in transactions involving futures contracts,
options, and forward contracts with respect to securities, securities
indexes or currencies.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S.
government obligations, corporate bonds, money market instruments,
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 or the Corporation's Articles of
Incorporation.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, securities of investment companies, 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 above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval (except that no investment
limitation of the Fund shall prevent the Fund from investing substantially
all of its assets (except for assets which are not considered `investment
securities''under the Investment Company Act of 1940, as amended, or
assets exempted by the SEC) in an open-end investment company with
substantially the same investment objectives). Shareholders will be
notified before any material changes in these limitations become effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits with maturities over seven days, over-the-counter options,
swap agreements not determined to be liquid, and certain restricted
securities not determined by the Directors to be liquid.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities or futures
contracts, unless the securities or futures contracts are held in the
Fund's portfolio or unless the Fund is entitled to them in deliverable
form without further payment or after segregating cash in the amount
of any further payment.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities or futures contracts are held in the Fund's portfolio or
unless the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount of any further
payment.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Fund has no present intent to borrow money, pledge securities, or
invest in reverse repurchase agreements in excess of 5% of the value of its
total assets in the coming fiscal year. In addition, the Fund expects to
lend not more than 5% of its total assets in the coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings associations having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be `cash items.''
WORLD INVESTMENT SERIES, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with World Investment Series, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Trustee or
Director of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Directer
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
203 Kensington Ct.
Birthdate: October 6, 1926
Director
Former Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or
Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman of
the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
*This Director is deemed to be an ``interested person'' as defined in
the Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilities of the Board between
meetings of the Board.
As used in the table above, `The Funds'' and ``Funds'' mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash
Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Investment Portfolios; Federated Investment Trust; Federated Master Trust;
Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S.
Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding Shares.
DIRECTORS' COMPENSATION
AGGREGATE TOTAL COMPENSATION PAID
NAME , COMPENSATION TO DIRECTORS FROM
POSITION WITH FROM THE THE CORPORATION
THE CORPORATION CORPORATION *# AND FUND COMPLEX +
John F. Donahue, $0 $0 for the Corporation and
Chairman and Director 56 other investment companies in
the Complex
Thomas G. Bigley, $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
John T. Conroy, Jr., $1,120.27 $119,615 for the Corporation and
Director 56 other investment companies in
the Complex
William J. Copeland, $1,120.27 $119,615 for the Corporation and
Director 56 other investment companies in
the Complex
James E. Dowd, $1,120.27 $119,615 for the Corporation and
Director 56 other investment companies in
the Complex
Lawrence D. Ellis, M.D., $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
Edward L. Flaherty, Jr. $1,120.27 $119,615 for the Corporation and
Director 56 other investment companies in
the Complex
Peter E. Madden, $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
Gregor F. Meyer, $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
John E. Murray, Jr. $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
Wesley W. Posvar, $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
Marjorie P. Smuts, $1,018.27 $108,725 for the Corporation and
Director 56 other investment companies in
the Complex
*Information is furnished for the fiscal year ended November 30, 1996.
#The aggregate compensation is provided for the Corporation which is
comprised of 8 portfolios.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's Adviser is Federated Global Research Corp. It is a subsidiary of
Federated Investors. All the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and
his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund, the Corporation, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Corporation.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 1.25% of
the Fund's average daily net assets. This advisory fee applies only to
individual portfolio securities and not to investment in the underlying
funds. The fee paid by the Fund, while higher than the advisory fee paid
by other mutual funds in general, is comparable to fees paid by many mutual
funds with similar objectives and policies. The Adviser may voluntarily
waive a portion of its fee. The Adviser can terminate this voluntary waiver
at any time at its sole discretion.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The Adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Although investment decisions for the Fund are made independently from
those of any other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
The Adviser may engage in other non-U.S. transactions that may have adverse
effects on the market for securities in the Fund's portfolio. The Adviser
is not obligated to obtain any material non-public (`inside'') information
about any securities issuer, or to base purchase or sale recommendations on
such information.
The distributor may assist in the execution of the Fund's portfolio
transactions to purchase underlying fund shares for which it may receive
distribution payments from the underlying funds or their underwriters in
accordance with the distribution plans of those funds. In providing
execution assistance, the distributor receives orders from the Adviser;
places them with the underlying fund's distributor, transfer agent or other
person, as appropriate; confirms the trade, price and number of shares
purchased; and assures prompt payment by the Fund and proper completion of
the order.
With respect to purchases of load fund shares, the Adviser may direct
substantially all of the Fund's orders to the distributor, which may, in
its discretion, direct the order to other broker-dealers in consideration
of sales of the Fund's shares.
The distributor may retain brokerage commissions on portfolio transactions
of mutual funds held in the Fund's portfolio, including funds which have a
policy of considering sales of their shares in selecting broker-dealers for
the execution of their portfolio transactions. Payment of brokerage
commissions to the distributor is not a factor considered by the Adviser in
selecting an underlying fund for investment.
Under certain circumstances, a sales charge incurred by the Fund in
acquiring shares of an underlying fund may not be taken into account in
determining the gain or loss on the disposition of the shares acquired. If
shares are disposed of within 90 days from the date they were purchased and
if shares of a new underlying fund are subsequently acquired without
imposition of a sales charge or imposition of a reduced sales charge
pursuant to a right granted to the Fund to acquire shares without payment
of a sales charge or with the payment of a reduced charge, then the sales
charge paid upon the purchase of the initial shares will be treated as paid
in connection with the acquisition of the new underlying fund's shares
rather than the initial shares.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
PA, provides certain accounting and recordkeeping services with respect to
the Fund's portfolio investments. The fee paid for this service is based
upon the level of the Fund's average net assets for the period, plus out-
of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based on size,
type, and number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
PA.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, Shares are
sold at their net asset value, plus a sales charge (for Class A Shares
only) on days the New York Stock Exchange (`NYSE'') is open for business.
The procedure for purchasing Shares is explained in the prospectus under
`How to Purchase Shares.''
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services as appropriate, to
stimulate distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Directors expect that the Class A
Shares, Class B Shares, and Class C Shares of the Fund will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Fund's objectives, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds before shareholders
begin to earn dividends. Federated Shareholder Services Company acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS OF THE CORPORATION, AND
EMPLOYEES
Directors, employees, and sales representatives of the Fund, the Adviser,
and Federated Securities Corp., or their affiliates and their immediate
family members, or any investment dealer who has a sales agreement with
Federated Securities Corp., and their spouses and children under 21, may
buy Class A Shares at net asset value without a sales charge. Shares may
also be sold without sales charges to trusts or pension or profit-sharing
plans for these persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
Dividend income is recorded on the ex-dividend date, except certain
dividends from foreign securities where the ex-dividend date may have
passed. Such dividends are recorded as soon as the Fund is informed of the
ex-dividend date.
DETERMINING MARKET VALUE OF SECURITIES
Market or fair values of the Fund's portfolio securities are determined as
follows:
oaccording to the last reported sale price on a recognized securities
exchange, if available. (If a security is traded on more than one
exchange, the price on the primary market for that security, as
determined by the Adviser, is used);
oin the absence of recorded sales for equity securities, according to
the mean between the last closing bid and asked prices;
oat fair value as determined in good faith by the Directors; or
ofor short-term obligations with remaining maturities of 60 days or
less at the time of purchase, at amortized cost, which approximates
value.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality; coupon rate;
maturity; type of issue; trading characteristics; and other market data.
The underlying funds in which the Fund may invest value securities in their
portfolios for which market quotations are readily available at their
current market value (generally the last reported sale price) and all other
securities and assets at fair value pursuant to methods established in good
faith by the board of directors/trustees of the underlying fund.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the NYSE. In computing the net asset value, the Fund values
foreign securities at the latest closing price on the exchange on which
they are traded immediately prior to the closing of the NYSE. Certain
foreign currency exchange rates may also be determined at the latest rate
prior to the closing of the NYSE. Foreign securities quoted in foreign
currencies are translated into U.S. dollars at current rates. Occasionally,
events that affect these values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such
events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith by
the Directors, although the actual calculation may be done by others.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions may be subject to
a contingent deferred sales charge. Redemption procedures are explained in
the prospectus under `How to Redeem Shares.'' Although the Fund does not
charge for telephone redemptions, it reserves the right to charge a fee for
the cost of wire-transferred redemptions of less than $5,000.
Class B Shares redeemed within six years of purchase and Class C Shares
redeemed within one year of purchase may be subject to a contingent
deferred sales charge. The amount of the contingent deferred sales charge
is based upon the amount of the administrative fee paid at the time of
purchase by the distributor to the financial institutions for services
rendered, and the length of time the investor remains a shareholder in the
Fund. Should financial institutions elect to receive an amount less than
the administrative fee that is stated in the prospectus for servicing a
particular shareholder, the contingent deferred sales charge and/or holding
period for that particular shareholder will be reduced accordingly.
Since portfolio securities of the Fund may be traded on foreign exchanges
which trade on Saturdays or on holidays on which the Fund will not make
redemptions, the net asset value of each class of Shares of the Fund may be
significantly affected on days when shareholders do not have an opportunity
to redeem their Shares.
REDEMPTION IN KIND
Although the Corporation intends to redeem Shares in cash, it reserves the
right under certain circumstances to pay the redemption price, in whole or
in part, by a distribution of securities from the Fund's portfolio. The
Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which the Corporation is obligated to redeem
Shares for any one shareholder in cash only up to the lesser of $250,000 or
1% of a class of Shares' net asset value during any 90-day period. Any
redemption beyond this amount will also be in cash unless the Directors
determine that further cash payments will have a materially adverse effect
on remaining shareholders. In such a case, the Fund will pay all or a
portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Directors deem fair and
equitable.
Redemption in kind will be made in conformity with applicable SEC rules,
taking such securities at the same value employed in determining net asset
value and selecting the securities in a manner the Directors determine to
be fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made is kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the contingent deferred sales
charge may not exceed 12% annually with reference initially to the value of
the Class B Shares upon establishment of the Systematic Withdrawal Program
and then as calculated at the fiscal year end. Redemptions on a qualifying
Systematic Withdrawal Program can be made at a rate of 1.00% monthly, 3.00%
quarterly, or 6.00% semi-annually with reference to the applicable account
valuation amount. Amounts that exceed the 12.00% annual limit for
redemption, as described, may be subject to the contingent deferred sales
charge. To the extent that a shareholder exchanges Shares for Class B
Shares of other Federated Funds, the time for which the exchanged-for
Shares are to be held will be added to the time for which exchanged-from
Shares were held for purposes of satisfying the 12 month holding
requirement. However, for purposes of meeting the $10,000 minimum account
value requirement, Class B Share accounts values will not be aggregated.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
Income the Fund receives from sources within various foreign countries may
be subject to foreign income taxes withheld at the source. If the Fund has
at least 50% of its assets invested directly in foreign securities at the
end of its taxable year, it may elect to pass through the foreign tax
credit to its shareholders. It is expected that the Fund will not have more
than 50% of the value of its total assets at the close of its taxable year
invested directly in foreign securities, and therefore will not be
permitted to make this election and `pass through'' to its shareholders.
Each shareholder's respective pro rata share of foreign taxes the Fund pays
will, therefore, be netted against their share of the Fund's gross income.
The Fund may invest in any non-U.S. corporations which could be treated as
passive foreign investment companies ("PFICs"). This could result in
adverse tax consequences upon the disposition of, or the receipt of "excess
distributions" with respect to, such equity investments. To the extent the
Fund does invest in PFICs, it may adopt certain tax strategies to reduce or
eliminate the adverse effects of certain federal tax provisions governing
PFIC investments. Many non-U.S. banks and insurance companies may not be
treated as PFICs if they satisfy certain technical requirements under the
Code. To the extent that the Fund does invest in foreign securities which
are determined to be PFIC securities and is required to pay a tax on such
investments, a credit for this tax would not be allowed to be passed
through to its shareholders. Therefore, the payment of this tax would
reduce the Fund's economic return from its PFIC shares, and excess
distributions received with respect to such shares are treated as ordinary
income rather than capital gains.
An underlying fund may invest in non-U.S. corporations which would be
treated as a PFIC or become a PFIC under the Code. This could result in
adverse tax consequences upon the disposition of, or the receipt of "excess
distributions" with respect to, such equity investments. To the extent an
underlying fund does invest in PFICs, it may elect to treat the PFIC as a
"qualified electing fund" or mark-to-market its investments in PFICs
annually. In either case, the underlying fund may be required to distribute
amounts in excess of its realized income and gains. To the extent that the
underlying fund itself is required to pay a tax on income or gain from
investment in PFICs, the payment of this tax would reduce the Fund's
economic return.
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United
States and foreign countries, however, may reduce or eliminate the amount
of foreign taxes to which the Fund would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. The Fund's dividends, and any
short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held the Fund Shares.
TOTAL RETURN
The average annual total return for each class of Shares of the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the offering price per
Share at the end of the period. The number of Shares owned at the end of
the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge on Class A Shares,
adjusted over the period by any additional Shares, assuming the annual
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investment
based on the lesser of the original purchase price or the offering price of
Shares redeemed. Occasionally, total return which does not reflect the
effect of the sales charge may be quoted in advertising.
YIELD
The yield for each class of Shares is determined by dividing the net
investment income per share (as defined by the SEC) earned by the class
over a thirty-day period by the maximum offering price per Share of the
Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over a
twelve-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the class of Share 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 that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
The Fund's performance of each class of Shares depends upon such variables
as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates on money market instruments;
ochanges in the Fund's or a class of Shares' expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any indices used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
oLIPPER ANALYTICAL SERVICES, INC., for example, makes comparative
calculations for one-month, three-month, one-year, and five-year
periods which assume the reinvestment of all capital gains
distributions and income dividends.
oMORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA, AND FAR EAST
(EAFE) INDEX is a market capitalization weighted foreign securities
index, which is widely used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets. The index
covers approximately 1,020 companies drawn from 18 countries in the
above regions. The index values its securities daily in both U.S.
dollars and local currency and calculates total returns monthly.
EAFE U.S. dollar total return is a net dividend figure less
Luxembourg withholding tax. The EAFE is monitored by Capital
International, S.A., Geneva, Switzerland.
oMORGAN STANLEY CAPITAL INTERNATIONAL LATIN AMERICA EMERGING MARKET
INDICES, including the Morgan Stanley Emerging Markets Free Latin
America Index (which excludes Mexican banks and securities companies
which cannot be purchased by foreigners) and the Morgan Stanley
Emerging Markets Global Latin America Index. Both indices include
60% of the market capitalization of the following countries:
Argentina, Brazil, Chile, and Mexico. The indices are weighted by
market capitalization and are calculated without dividends
reinvested.
oINTERNATIONAL FINANCE CORPORATION (IFC) EMERGING MARKETS DATA BASE,
which provides detailed statistics on stock and bond markets in
developing countries, including IFC market indices.
oFINANCIAL TIMES ACTUARIES/STANDARD AND POOR'S WORLD (EX U.S.)
MID/SMALL CAP INDICES, which is a total return, market cap-weighted
index of companies from 25.countries.
oFINANCIAL TIMES ACTUARIES INDICES, including the FTA-World Index
(and components thereof), which are based on stocks in major world
equity markets.
oSTANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to
the total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the Standard & Poor's index assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in Standard & Poor's figures.
oMORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and sales literature for all three classes of Shares may
quote total returns which are calculated on non-standardized base periods.
These total returns also represent the historic change in the value of an
investment in any class of Shares based on annual reinvestment of dividends
over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge or contingent deferred sales charge, as
applicable.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the equity sector, Federated Investors has more than 26 years
experience. As of December 31, 1996, Federated managed 31 equity funds
totaling approximately $7.6 billion in assets across growth, value, equity
income, international, index and sector (i.e. utility) styles. Federated's
value-oriented management style combines quantitive and qualitative
analysis and features a structured, computer-assisted composite modeling
system that was developed in the 1970s.
J. Thomas Madden, Executive Vice President, oversees Federated Investor's
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investor's domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees
the management of Federated Investor's international and global portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000
funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients
is headed by John B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than
1,600 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high rankings in several
surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement. The marketing effort to these
firms is headed by James F. Getz, President, Broker/Dealer Division.
Source: Investment Company Institute
