Federated Global Financial Services Fund
(A Portfolio of World Investment Series, Inc.)
Class A Shares, Class B Shares, Class C Shares
Prospectus
The shares of Federated Global Financial Services Fund (the "Fund") offered by
this prospectus represent interests in the Fund, which is a diversified
investment portfolio in World Investment Series, Inc. (the "Corporation"), an
open-end, management investment company (a mutual fund).
The Fund's investment objective is to provide long-term growth of capital. The
Fund invests primarily in equity securities of companies located throughout the
world that operate in the financial services industry.
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 Class A Shares, Class B Shares and Class C Shares of 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 September 30, 1998, 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 make inquiries about the Fund, contact your financial
institution. 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 September 30, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
General Information 2
Calling the Fund 2
Investment Information 2
Investment Objective 2
Investment Policies 2
European Currency Unification 10
Uncertainties as Unification Nears 10
Uncertainties after Unification Currency 10
Portfolio Turnover 11
Investment Limitations 11
Hub and Spoke(R) Option 12
Net Asset Value 12
Investing in the Fund 13
Purchasing Shares 13
Purchasing Shares Through a Financial Intermediary 13
Purchasing Shares by Wire 14
Purchasing Shares by Check 14
Systematic Investment Program 14
Retirement Plans 14
Class A Shares 14
Class B Shares 15
Class C Shares 15
Redeeming and Exchanging Shares 15
Redeeming or Exchanging Shares Through a
Financial Intermediary 15
Redeeming or Exchanging Shares by Telephone 15
Redeeming or Exchanging Shares by Mail 16
Requirements for Redemption 16
Requirements for Exchange 16
Systematic Withdrawal Program 16
Systematic Withdrawal Program ("SWP")
on Class B Shares 16
Contingent Deferred Sales Charge 17
Account and Share Information 17
Confirmations and Account Statements 17
Dividends and Distributions 17
Accounts with Low Balances 17
Corporation Information 18
Management of the Corporation 18
Distribution of Shares 19
Distribution Plan and Shareholder Services 19
Administration of the Fund 20
Expenses of the Fund and Class A Shares,
Class B Shares, and Class C Shares 20
Brokerage Transactions 21
Shareholder Information 21
Tax Information 21
Federal Income Tax 21
State and Local Taxes 21
Performance Information 21
Appendix 22
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
(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 (after waiver)(2) 0.00% 0.00% 0.00%
12b-1 Fee (1) 0.00% 0.75% 0.75%
Total Other Expenses (after expense reimbursement) 1.60% 1.60% 1.60%
Shareholder Services Fee 0.25% 0.25% 0.25%
Total Operating Expenses (4) 1.60% 2.35% 2.35%
</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 estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 1.00%.
(3) The Class A Shares have no present intention of paying or accruing the 12b-1
fee during the fiscal year ending November 30, 1998. If Class A Shares were
paying or accruing the 12b-1 fee, 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 total Class A Shares, Class B Shares and Class C Shares operating
expenses are estimated to be 3.69%, 4.44%, and 4.44%, respectively, absent
the anticipated voluntary waiver of the management fee 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, 1998. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Purchasing Shares" and "Corporation 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 $ 70 $ 80 $34
3 Years $103 $117 $73
You would pay the following expenses on the same investment, assuming no
redemption.
1 Year $70 $24 $24
3 Years $103 $73 $73
</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.
GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
January 25, 1994. The Board of Directors ("Directors") has established three
classes of shares known as Class A Shares, Class B Shares and, Class C Shares
which represent interests in a single portfolio of securities. This prospectus
relates to the Class A Shares, Class B Shares and Class C Shares of the Fund
("Shares") which are designed to give institutions and individuals a convenient
means of seeking long-term growth of capital without undue risk through a
professionally managed, diversified portfolio comprised primarily of equity
securities of companies located throughout the world that operate in the
financial services industry. The Fund is not intended to provide a complete
investment program for an investor.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
Calling the Fund Call the Fund at 1-800-341-7400.
Year 2000 Statement
Like other mutual funds and business organizations worldwide, the Fund's service
providers (among them, the adviser,the sub-adviser, distributor, administrator
and transfer agent) must ensure that their computer systems are adjusted to
properly process and calculate date-related information from and after January
1, 2000. Many software programs and, to a lesser extent, the computer hardware
in use today cannot distinguish the year 2000 from the year 1900. Such a design
flaw could have a negative impact in the handling of securities trades, pricing
and accounting services. The Fund and its service providers are actively working
on necessary changes to computer systems to deal with the Year 2000 issue and
believe that systems will be Year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a Year 2000 compliant
program on the Fund's operations.
INVESTMENT INFORMATION
Investment Objective
The investment objective of the Fund is to provide long-term growth of capital.
The investment objective of the Fund cannot be changed without the approval of
the 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. Unless indicated otherwise, the investment
policies may be changed by the Directors without the approval of shareholders.
Shareholders will be notified before any material changes in these policies
become effective.
Investment Policies
The Fund will seek to achieve its investment objective by investing at least 65%
of its total assets in common and preferred stocks and warrants to acquire such
securities issued by financial services companies. A "financial services"
company is an entity in which (i) at least 50% of either the revenues or
earnings was derived from financial services activities, or (ii) at least 50% of
the assets was devoted to such activities, based on the company's most recent
fiscal year. The remainder of the Fund's assets may be invested in debt
securities issued by financial services companies and/or equity and debt
securities of companies outside of the financial services industry, which in the
opinion of the adviser and sub-adviser, stand to benefit from the developments
in the financial services industry.
Global Financial Services Industries Investments
Examples of financial services companies include commercial banks and savings
institutions and loan associations and their holding companies; consumer and
industrial finance companies; investment banks; insurance brokerages; securities
brokerage and investment advisory companies; real estate-related companies;
leasing companies; and a variety of firms in all segments of the insurance field
such as multi-line, property and casualty and life insurance holding companies.
The adviser and sub-adviser believe an accelerating rate of global economic
interdependence will lead to significant growth in the demand for financial
services. In addition, in the adviser's and sub-adviser's views, as the
industries evolve, opportunities will emerge for those companies positioned for
the future. Thus, the adviser and sub-adviser expect that banking and related
financial institution consolidation in the developed countries, increased demand
for retail borrowing in developing countries, a growing need for international
trade-based financing, a rising demand for sophisticated risk management, the
proliferating number of liquid securities markets around the world, and larger
concentrations of investable assets should lead to growth in financial service
companies that are positioned for the future.
Under normal market conditions, the Fund's portfolio will include issuers
located in at least three countries, although the adviser and sub-adviser expect
to invest in more than three countries. From time to time, the adviser and sub-
adviser may invest a majority of the Fund's assets in issuers in any one
country. Such exposure to a single market may increase the volatility of the
Fund.
Risk Factors and Investment Considerations
The Fund will attempt to meet its investment objective by being at least 65%
invested in securities issued by financial services companies. As a result, the
Fund may be subject to greater market fluctuation than a fund which has
securities representing a broader range of investment alternatives.
Risk Factors of Investing in the Financial ServicesIndustry
Financial services industries may be subject to greater governmental regulation
than many other industries and changes in governmental policies and the need for
regulatory approvals may have a material effect on the services offered by
companies in the financial services industries. Governmental regulation may
limit both the financial commitments banks can make, including the amounts and
types of loans, and the interest rates, and fees they can charge. In addition,
governmental regulation in certain foreign countries may impose interest rate
controls, credit controls and price controls.
Companies in the financial services sector are subject to rapid business
changes, significant competition, value fluctuations due to the concentration of
loans in particular industries significantly affected by economic conditions
(such as real estate or energy) and volatile performance dependent upon the
availability and cost of capital and prevailing interest rates. In addition,
general economic conditions significantly affect these companies. Credit and
other losses resulting from the financial difficulty of borrowers and other
third parties potentially may have an adverse effect on companies in these
industries. Foreign banks, particularly those of Japan and emerging markets,
have reported financial difficulties attributed to increased competition,
regulatory changes, and general economic difficulties.
The financial services area in the United States and around the world currently
is changing relatively rapidly as existing distinctions between various
financial service segments become less clear. For instance, recent business
combinations have included insurance, finance, and securities brokerage under
single ownership. Some primarily retail corporations have expanded into
securities and insurance fields. Investment banking, securities brokerage and
investment advisory companies are subject to government regulation and risk due
to securities trading and underwriting activities.
Many of the investment considerations discussed in connection with banks,
savings institutions and loan associations, and finance companies also apply to
insurance companies. The performance of insurance company investments will be
subject to risk from several factors. The earnings of insurance companies will
be affected by interest rates, pricing (including severe pricing competition
from time to time), claims activity, marketing competition and general economic
conditions. Particular insurance lines also will be influenced by specific
matters. Property and casualty insurer profits may be affected by certain
weather catastrophes and other disasters. Life and health insurer profits may be
affected by mortality and morbidity rates. Individual companies may be exposed
to material risks, including reserve inadequacy, problems in investment
portfolios (due to real estate or "junk" bond holdings, for example), and the
inability to collect from reinsurance carriers. Insurance companies are subject
to extensive governmental regulation, including the imposition of maximum rate
levels, which may not be adequate for some lines of business. Proposed or
potential anti-trust or tax law changes also may affect adversely insurance
companies' policy sales, tax obligations and profitability.
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 and sub-adviser typically evaluate industry
trends, a company's financial strength (including its debt-to-equity ratio and
its loan exposure), 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.
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 D by Standard & Poor's ("S&P") or Fitch IBCA, Inc. ("Fitch")
or as low as C by Moody's Investors Service, Inc. ("Moody's"), or, if unrated,
are of comparable quality as determined by the adviser and sub-adviser. Such
debt securities are commonly known as "junk bonds." 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.
Warrants
The Fund may invest in warrants. Warrants are options to purchase common stock
at a specific price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants may have
a life ranging from less than a year to twenty years or may be perpetual.
However, most warrants have expiration dates after which they are worthless. In
addition, if the market price of the common stock does not exceed the warrant's
exercise price during the life of the warrant, the warrant will expire as
worthless. Warrants have no voting rights, pay no dividends, and have no rights
with respect to the assets of the corporation issuing them. The percentage
increase or decrease in the market price of the warrant may tend to be greater
than the percentage increase or decrease in the market price of the optioned
common stock.
Convertible Securities
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as DECS-
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security), LYONS- (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS- (Preferred Equity Redemption Cumulative Stock
(an equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES- (Preferred Redeemable
Increased Dividend Securities (which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding, without limit, convertible securities rated below investment grade by
an NRSRO or in the Fund holding such securities where they have acquired a
rating below investment grade after the Fund has purchased it.
Zero Coupon Convertible Securities
Zero coupon convertible securities are securities which are issued at a discount
to their face amount and do not entitle the holder to any periodic payments of
interest prior to maturity. Rather, interest earned on zero coupon convertible
securities accretes at a stated yield until the security reaches its face amount
at maturity. Zero coupon convertible securities are convertible into a specific
number of shares of the issuer's common stock. In addition, zero coupon
convertible securities usually have put features that provide the holder with
the opportunity to put the bonds back to the issuer at a stated price before
maturity. Generally, the prices of zero coupon convertible securities may be
more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income with respect to the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability of federal income taxes, the Fund will be required to distribute
income accrued with respect to zero coupon convertible securities which it owns,
and may have to sell portfolio securities (perhaps at disadvantageous times) in
order to generate cash to satisfy these distribution requirements.
Real Estate Investment Trusts
The Fund may purchase interests in equity, mortgage and hybrid real estate
investment trusts. Hybrid real estate investment trusts have characteristics of
and may have risks associated with both equity and mortgage real estate
investment trusts. Equity and mortgage real estate investment trusts are
dependent upon management skill and are not diversified. Therefore, they are
subject to the risk of financing single projects. Real estate investment trusts
are also subject to heavy cash flow dependency, defaults by borrowers, and self-
liquidation. Additionally, equity real estate investment trusts may be affected
by any changes in the value of the underlying property owned by the trusts, and
mortgage real estate investment trusts may be affected by the quality of any
credit extended. The adviser and sub-adviser seek to mitigate these risks by
selecting real estate investment trusts diversified by sector (shopping malls,
apartment building complexes, and health care facilities) and geographic
location.
Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
Restricted and Illiquid Securities
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. Securities that can be traded without material 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. Under criteria
established by the Directors, certain restricted securities are determined to be
liquid. To the extent that restricted securities are not determined to be
liquid, the Fund will limit their purchase together with other illiquid
securities including non-negotiable time deposits and repurchase agreements
providing for settlement in more than seven days after notice to 15% of its net
assets.
Repurchase Agreements
Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.
When-Issued and Delayed Delivery Transactions
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser and sub-
adviser deem 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 its portfolio
securities 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 and sub-adviser have determined
are creditworthy under guidelines established by the Directors and will receive
collateral in cash or United States government securities that will be
maintained in an amount equal to the current market value of the securities
loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
Temporary Investments
For temporary defensive purposes, when the adviser and sub-adviser determine
that market conditions warrant (up to 100% of total assets) and to maintain
liquidity, the Fund may invest in U.S. and foreign debt instruments as well as
cash or cash equivalents, including, but not limited to 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 transactions 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 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 twenty-four
hours and sixty 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
and sub-adviser will consider the likelihood of changes in currency values when
making investment decisions, the adviser and sub-adviser believe that it is
important to be able to enter into forward contracts when it believes the
interests of the Fund will be served. The Fund will not enter into forward
contracts for hedging purposes in a particular currency in an amount in excess
of the Fund's assets denominated in that currency at the time the contract was
initiated, but as consistent with its other investment policies and as not
otherwise limited in its 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 and sub-
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 Securities and Exchange Commission ("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 and sub-adviser believe 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 and sub-adviser
believe 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 and sub-adviser's abilities 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 and sub-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 and sub-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
objective 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 and
sub-adviser could be incorrect in their 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 and sub-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 hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
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 intends to diversify 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.
Currency Risks
Because the majority of the securities purchased by the Fund may be 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, as amended (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.
EUROPEAN CURRENCY UNIFICATION
Eleven of the fifteen member countries of the European Union ("EU") are about to
adopt a single European currency, the euro. The euro will become legal tender in
these countries effective January 1, 1999. The countries participating in the
Economic and Monetary Union ("EMU") are Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The
notable countries missing from the new unified currency are Great Britain,
Denmark, Sweden and Greece. A new European Central Bank ("ECB") will be created
to manage the monetary policy of the new unified region. On the same day, the
exchange rates will be irrevocably fixed between the EMU member countries.
National currencies will continue to circulate until they are replaced by euro
coins and banks notes by the middle of 2002.
This change is likely to significantly impact the European capital markets in
which the Fund invests a portion of its assets. The biggest changes will be the
additional risks that the Fund will face in pursuing its investment objective.
All of the risks described below may increase the Fund's share price volatility.
Uncertainties as Unification Nears
Taxes
IRS regulations generally provide that euro conversion will not cause a U.S.
taxpayer to realize gain or loss to the extent that taxpayer's rights and
obligations are altered solely by reason of the euro conversion. However, other
changes that may occur contemporaneously to indices, accrual periods, holiday
conventions, or other features may require the realization of gain or loss by
the Fund.
Volatility of Currency Exchange Rates
Exchange rates between the U.S. dollar and European currencies will likely
become more volatile and unstable, particularly between now and January 1, 1999.
Capital Market Reaction
Uncertainty in the lead-up to introduction of the euro may lead to a shift by
institutional money mangers away from European currencies and into other
currencies. This reaction may make markets less liquid and thus more difficult
for the Fund to pursue its investment strategy.
Conversion Costs
European issuers of securities in which the Fund invests, particularly those
that deal in goods and services, may face substantial conversion costs. These
costs may not be accurately anticipated and therefore present another risk
factor that may affect issuer profitability and creditworthiness.
Treatment of European Currency Units
The ECU is the currency basket used as the unit of account by the European
Community. While it is not a currency, it is treated like one by capital markets
for settlement purposes. When the new European currency is introduced, the value
of the ECU will become fixed. Because the treatment of ECU in some financial
contracts is not uniform, their value may be altered by the event.
Lack of European Unanimity
Because some European countries will not be participants in the euro, there
could be greater volatility in the exchange rate between these nonparticipating
countries and new unified currency. While this risk is particularly high between
now and the effective date of currency unification, it could also remain during
the initial periods after unification.
Uncertainties after Unification of Currency
Contract Continuity
Some financial contracts may become unenforceable when the currencies are
unified. These financial contracts may include bank loan agreements, master
agreements for swaps and other derivatives, master agreements for foreign
exchange and currency option transactions and debt securities. The risk of
unenforceability may arise in a number of ways: for example, a contract used to
hedge against exchange-rate volatility between two EU currencies will become
"fixed," rather than "variable," as part of the conversion since the currencies
have, if effect, disappeared for exchange purposes.
The European Council has enacted laws and regulations designed to ensure that
financial contracts will continue to be enforceable after conversion. There is
no guarantee, however, that these laws will be completely effective in
preventing disputes from arising. Disputes and litigation over these contract
issues could negatively impact the Fund's portfolio holdings and may create
uncertainties in the valuation of financial contracts the Fund holds.
ECB Policymaking
As the ECB and European market participants search for a common understanding of
policy targets and instruments, interest rates and exchange rates could become
more volatile.
Foreign Companies
Other differences between investing in foreign and U.S. companies include:
. less publicly available information about foreign issuers;
. credit risks associated with certain foreign governments;
. 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 issues;
. differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, andbanks;
. 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 securities of foreign issuers 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 beforedelivery;
. 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.
Risk Factors Relating to Investing in High Yield Securities
The debt securities in which the Fund invests may not be 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. Bonds rated BBby S&P or Fitch or
Ba by Moody's or lower 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 and sub-adviser attempt 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.
Portfolio Turnover
The Fund does not attempt to set or meet any specific portfolio turnover rate,
since turnover is incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. High turnover rates may result in higher
brokerage commissions and capital gains. See "Tax Information" in this
prospectus.
Investment Limitations
The Fund will not:
. 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; or
. borrow money, issue senior securities, or pledge assets, except that under
certain circumstances the Fund may borrow money and engage in reverse
repurchase transactions in amounts up to one-third of the value of its total
assets, including the amounts borrowed, and pledge its assets to secure such
borrowings.
The above investment limitations cannot be changed without shareholder approval.
Hub and Spoke(R) Option
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ due to the variance in daily net income realized by
each class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
INVESTING IN THE FUND
This prospectus offers three classes of Shares each with the characteristics
described below.
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Minimum and Subsequent $1500/$100 $1500/$100 $1500/$100
Investment Amounts
Minimum and Subsequent $ 250/$100 $ 250/$100 $ 250/$100
Investment Amount
for Retirement Plans
Maximum Sales Charge 5.50%* None None
Maximum Contingent None 5.50+ 1.00%#
Deferred Sales Charge**
Conversion Feature No Yes++ No
</TABLE>
* Class A Shares are sold at NAV, plus a sales charge as follows:
<TABLE>
<CAPTION>
Sales Charge Dealer
as a Percentage Concession as
Public Net a Percentage of
Offering Amount Public Offering
Amount of 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 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%
</TABLE>
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
+ The following contingent deferred sales charge schedule applies to Class B
Shares:
Year of Redemption Contingent Deferred
After Purchase Sales Charge
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
++ Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase. See "Conversion of Class B
Shares."
# The contingent deferred sales charge is assessed on Shares redeemed within
one year of their purchase date.
PURCHASING 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 intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors, Inc. (Federated Funds) may exchange their
Shares for Shares of the corresponding class of the Fund. The Fund reserves the
right to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
Purchasing Shares through a
Financial Intermediary
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class B Shares
or Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial intermediaries may be subject to reclaim by the
distributor for accounts transferred to financial intermediaries which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
Purchasing Shares by Wire
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 when State Street Bank receives payment by wire. Federal funds should
be wired as follows: Federated Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; 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.
Purchasing Shares by Check
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, MA 02266-8600. Orders by mail are
considered received when payment by check is converted intofederal funds
(normally the business day after the check isreceived).
Systematic Investment Program
Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.
Retirement Plans
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
Class A Shares
Class A Shares are sold at NAV, plus a sales charge. However:
No sales charge is imposed for Class A Shares purchased:
. through financial intermediaries that do not receive sales charge dealer
concessions;
. by Federated Life Members; or
. through "wrap accounts" or similar programs under which clients pay a fee for
services.
In addition, the sales charge on Class A Shares can be reduced or eliminated by:
. purchasing in quantity;
. combining concurrent purchases of:
* Shares by you, your spouse, and your children under age21, or
* Shares of the same class of two or more Federated Funds (other than money
market funds);
. accumulating purchases. In calculating the sales charge on an additional
purchase, you may count the current value of previous Share purchases still
invested in the Fund;
. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months; or
. using the reinvestment privilege within 120 days of redeeming Shares of an
equal or lesser amount.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
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 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.
Financial intermediaries purchasing Class A Shares for their customers in
amounts of $1 million or more are eligible to receive an advance commission from
the distributor based on the following breakpoints:
Advance Commission
as a Percentage of
Transaction Amount Public Offering Price
First $1-$5 million 0.75%
Next $5-$20 million 0.50%
Over $20 million 0.25%
For accounts with assets over $1 million, the dealer commission resets annually
to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent or by
combining concurrent purchases. The above commission will be paid only on those
purchases that were not previously subject to a front-end sales charge and
dealer commission. Certain retirement accounts may not be eligible for this
program. Financial intermediaries must notify the Fund once an account reaches
$1 million in order to qualify for advance commissions.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase if a financial
intermediary received an advance commission on the transaction.
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 establishment of customer accounts and
purchases of Shares.
Class B Shares
Class B Shares are sold at NAV. Under certain circumstances, a contingent
deferred sales charge will be assessed at the time of a redemption. Orders for
$250,000 or more of Class B Shares will automatically be invested in Class A
Shares.
Conversion of Class B Shares
Class B Shares will automatically convert into Class A Shares after eight full
years from the purchase date. Such conversion will be on the basis of the
relative NAVs per Share, without the imposition of any charges. 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.
Class C Shares
Class C Shares are sold at NAV. A contingent deferred sales charge of 1.00% will
be charged on assets redeemed within the first full 12 months following
purchase.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
However, in order to protect shareholders of the Fund from possible detrimental
effects of redemptions, the adviser and sub-adviser may cause a delay of two to
seven days in sending redemption proceeds during certain periods of market
volatility or for certain shareholders. Exchanges are made at NAV. Shareholders
who desire to automatically exchange Shares, of a like class, in a
pre-determined amount on a monthly, quarterly, or annual basis may take
advantage of a systematic exchange privilege. Information on this privilege is
available from the Fund or your financial intermediary. Depending upon the
circumstances, a capital gain or loss may be realized when Shares are redeemed
or exchanged.
Redeeming or Exchanging Shares through a Financial Intermediary
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
Redeeming or Exchanging Shares by Telephone
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either 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 ACH will not be
wired until that method of payment has cleared.
Telephone instructions will 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 or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
Redeeming or Exchanging Shares by Mail
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed.
Requirements for Redemption
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.
Requirements for Exchange
Shareholders must exchange Shares having an NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
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 proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
Systematic Withdrawal Program
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. 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 intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class A Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge may be imposed on Class B and C
Shares.
Systematic Withdrawal Program ("SWP") on Class B Shares
A contingent deferred sales charge will not be charged on SWP redemptions on
Class B Shares if:
. Shares redeemed are 12% or less of the account value in a single year;
. the account is at least one year old;
. all dividends and capital gains distributions are reinvested; and
. the account has at least a $10,000 balance when the SWP is established
(multiple Class B Share accounts cannot be aggregated to meet this minimum
balance).
Contingent Deferred Sales Charge
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. 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. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
Eliminating the Contingent Deferred Sales Charge
Upon written notification to Federated Securities Corp. or the transfer agent,
no contingent deferred sales charge will be imposed on 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;
. representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age of
70 1/2;
. which are involuntary redemptions of shareholder accounts that do not comply
with the minimum balance requirements;
. which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
. which are reinvested in the Fund under the reinvestmentprivilege;
. of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, employees of any
financial intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons;
and
. of Shares originally purchased through a bank trust department, an investment
adviser and sub-adviser registered under the Investment 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 intermediary, to the extent that no payments were
advanced for purchases made through such entities.
For more information regarding the elimination of the contingent deferred sales
charge through a Systematic Withdrawal Program, or any of the above provisions,
contact your financial intermediary or the Fund. The Fund reserves the right to
discontinue or modify these provisions. Shareholders will be notified of such
action.
ACCOUNT AND SHARE INFORMATION
Confirmations and Account Statements
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
Dividends and Distributions
Dividends are declared and paid annually to all shareholders invested in the
Fund on the record date. Net long-term capital gains realized by the Fund, if
any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
Accounts with Low Balances
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
CORPORATION INFORMATION
Management of the Corporation
Board of Directors
The Corporation is managed by the 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 Directors handles the Directors' responsibilities between
meetings of the Directors.
Investment Adviser
Except as noted below with regard to the sub-adviser, investment decisions for
the Fund are made by Federated Global Research Corp., the Fund's adviser (the
"Adviser"), subject to direction by the Directors. The Adviser continually
conducts investment research and supervision for the Fund and is responsible for
the purchase or sale of portfolio instruments, for which it receives an annual
fee from the Fund.
Advisory Fees
The Adviser receives an annual investment advisory fee equal to 1.00% of the
Fund's average daily net assets. Under the terms of an Advisory Agreement, which
provides for the voluntary waiver of the advisory fee by the Adviser, the
Adviser may voluntarily waive some or all of its fee. This does not include
reimbursement to the Fund of any expenses incurred by shareholders who use the
transfer agent's subaccounting facilities. The Adviser can terminate this
voluntary waiver at any time at its sole discretion.
Sub-Adviser
Under the terms of the Sub-Advisory Agreement between the Adviser and Federated
Advisers (the "Sub-Adviser"), the Sub-Adviser will provide the Adviser such
investment advice, statistical and other factual information as may, from time
to time, be reasonably requested by the Adviser.
Sub-Advisory Fees
For its services under the Sub-Advisory Agreement, the Sub-Adviser receives an
allocable portion of the Fund's advisory fee. Such allocation is based on the
amount of U.S. securities which the Sub-Adviser manages for the Fund. This fee
is paid by the Adviser out of its resources and is not an incremental Fund
expense.
Adviser's and Sub-Adviser's Backgrounds
Federated Global Research Corp., incorporated in Delaware on May 12, 1995, is a
registered investment adviser under the Investment Advisers Act of 1940.
Federated Advisers, a Delaware business trust organized on April 11, 1989, is a
registered investment adviser under the Investment Advisers Act of 1940.
The Adviser and Sub-Adviser are subsidiaries of Federated Investors, Inc. All of
the Class A (voting) shares of Federated Investors, Inc. are owned by a trust,
the trustees of which are John F. Donahue, Chairman and Director of Federated
Investors, Inc., Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Director of Federated Investors, Inc. Prior to
September 1995, the Adviser had not served as an investment adviser to mutual
funds.
Federated Global Research Corp., Federated Advisers and other subsidiaries of
Federated Investors, Inc. 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 $120
billion invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1997, Federated
Investors, Inc. 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 4,000 financial institutions nationwide.
Drew J. Collins has been portfolio manager of the Fund since September 1998. Mr.
Collins joined Federated Investors, Inc. or its predecessor in 1995 as a Senior
Vice President of the Fund's Adviser. Mr. Collins served as Vice
President/Portfolio Manager of international equity portfolios at Arnhold and
Bleichroeder, Inc. from 1994 to 1995. He served as an Assistant Vice
President/Portfolio Manager for international equities at the College Retirement
Equities Fund from 1986 to 1994. Mr. Collins is a Chartered Financial Analyst
and received his M.B.A. in finance from The University of Pennsylvania.
Marc Halperin has been the Fund's portfolio manager since September 1998. Mr.
Halperin joined Federated Investors, Inc. in September 1998 and is a Vice
President of the Fund's investment adviser. Mr. Halperin served as Associate
Director/Portfolio Manager at UOB Asset Management from 1996 through August
1998. From 1993 through 1995, Mr. Halperin was Vice President, Asian Equities,
at Massachusetts Financial Services Co. Mr. Halperin earned his M.A. with a
major in Municipal Finance from the University of Illinois.
Charles A. Ritter has been the Fund's portfolio manager since September 1998 and
manages the domestic stock asset category of the Fund. Mr. Ritter joined
Federated Investors, Inc. or its predecessor in 1983 and has been a Vice
President of the Fund's Sub-Adviser since 1992. Mr. Ritter is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University of
Chicago and his M.S. in Economics from Carnegie Mellon University.
The Corporation, the Adviser and the Sub-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 the 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.
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, Inc.
The distributor may offer to pay financial institutions an amount equal to 1.00%
of the NAV 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 5.50% of the NAV 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 Distribution 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 Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, Inc., 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"). 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.
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 O.50% of the NAV 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 Adviser or its affiliates.
Administration of the Fund
Administrative Services
Federated Services Company, a subsidiary of Federated Investors, Inc., provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all Federated Funds as specified below:
Maximum Average Aggregate
Fee Daily Net Assets
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.
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,
ClassB, and Class C Shares as it deems appropriate ("ClassExpenses"). 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 SEC 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.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.
SHAREHOLDER INFORMATION
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 Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only Shares of that portfolio or class are
entitled to vote.
Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding Shares of all series entitled to vote.
TAX INFORMATION
Federal Income Tax
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code 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.
No federal income tax is due on any dividends earned in an IRA or qualified
retirement plan until distributed.
Due to differences in the book and tax treatment of fixed income securities
denominated in foreign currencies, it is difficult to project currency effects
on an interim basis. Therefore, to the extent that currency fluctuations cannot
be anticipated, a portion of distributions to shareholders could later be
designated as a return of capital, rather than income, for income tax purposes,
which may be of particular concern to simple trusts.
If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Internal Revenue Code stipulations that would allow
shareholders to claim a foreign tax credit or deduction on their U.S. income tax
returns. The Internal Revenue Code may limit a shareholder's ability to claim a
foreign tax credit. Furthermore, shareholders who elect to deduct their portion
of the Fund's foreign taxes rather than take the foreign tax credit must itemize
deductions on their income tax returns.
State and Local Taxes
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for each class
of Shares.
Total return represents the change, over a specific 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 yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the SEC) earned by each class of Shares over a
thirty day period by the maximum offering price per share of each class on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
each class of Shares, and therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales charge or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares and Class C Shares.
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 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.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's Ratings Group
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Moody's Investors Service, Inc. 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. Of ten 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 a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch IBCA, Inc. Long-Term Debt Rating Definitions
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest orprincipal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Moody's Investors Service, Inc. Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
. Well established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Standard and Poor's Commercial PaperRatings
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch IBCA, Inc. Commercial Paper RatingDefinitions
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
[Logo]
Federated Global Financial Services Fund
(A Portfolio of World Investment Series, Inc.) Class A Shares, Class B Shares,
Class C Shares
Prospectus
September 30, 1998
An Open-End, Diversified Management Investment Company
Federated Global Financial Services Fund Class A Shares
Class B Shares Class C Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Distributor
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Investment Adviser
Federated Global Research Corp.
175 Water Street
New York, NY 10038-4965
Sub-Adviser
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Custodian
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Independent Auditors
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 981487648
Cusip 981487655
Cusip 981487663
G02455-01 (9/98)
Federated Global Financial Services 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 for
Class A Shares, Class B Shares, and Class C Shares of Federated Global Financial
Services Fund (the "Fund"), dated September 30, 1998. 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.
Federated Investor s Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
Statement dated September 30, 1998
Cusip 981487648
Cusip 981487655
Cusip 981487663
G02455-02 (9/98)
<PAGE>
I
Table of Contents
<PAGE>
General Information About the Fund 1
Investment Objective and Policies of the Fund 1
Types of Investments 1
Convertible Securities 1
Real Estate Investment Trusts 1
Investing in Securities of Other Investment
Companies 1
Sovereign Debt Obligations 2
When-Issued and Delayed Delivery Transactions 2
Lending of Portfolio Securities 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Restricted and Illiquid Securites 3
Futures and Options 3
Risks 6
Foreign Currency Transactions 9
Special Considerations Affecting Emerging Markets 11
Portfolio Turnover 11
Investment Limitations 12
World Investment Series, Inc. Management 14
Fund Ownership 18
Directors Compensation 18
Investment Advisory Services 19
Adviser to the Fund 19
Advisory Fees 19
Sub-Adviser to the Fund 19
Sub-Advisory Fees 19
Brokerage Transactions 20
Other Services 20
Fund Administration 20
Custodian and Portfolio Accountant 20
Transfer Agent and Dividend Disbursing Agent 20
Independent Auditors 20
Purchasing Shares 20
Quantity Discounts and Accumulated Purchases 21
Concurrent Purchases 21
Letter of Intent 21
Reinvestment Privilege 21
Conversion of Class B Shares 22
Distribution Plan and Shareholder
Services Agreement 22
Conversion to Federal Funds 22
Purchases by Sales Representatives, Fund
Directors, and Employees 22
Determining Net Asset Value 23
Determining Market Value of Securities23
Trading in Foreign Securities 23
Redeeming Shares 24
Redemption in Kind 24
Contingent Deferred Sales Charge 24
Tax Status 24
The Funds' Tax Status 24
Foreign Taxes 24
Shareholders' Tax Status 25
Total Return 25
Yield 25
Performance Information 25
Economic and Market Information 27
About Federated Investors, Inc. 28
Mutual Fund Market 28
Institutional Clients 28
Bank Marketing 28
Broker/Delaers and Bank Broker/Dealer
Subsidiaries 28
<PAGE>
General Information About the Fund
The Fund is a portfolio in World Investment Series, Inc. (the "Corporation")
which was established as a corporation 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 the above-mentioned Shares.
Investment Objective and Policies
The Fund's investment objective is to provide long-term capital growth.
Types of Investments
The Fund will seek to achieve its investment objective by investing at least 65%
of its total assets in equity securities of domestic and foreign companies
located throughout the world that operate in the financial services industry.
Convertible Securities
Dividend Enhanced Convertible Securities ("DECS"), or similar instruments
marketed under different names, offer a substantial dividend advantage with the
possibility of unlimited upside potential if the price of the underlying common
stock exceeds a certain level. DECS convert to common stock at maturity. The
amount received is dependent on the price of the common stock at the time of
maturity. DECS contain two call options at different strike prices. The DECS
participate with the common stock up to the first call price. They are
effectively capped at that point unless the common stock rises above a second
price point, at which time they participate with unlimited upside potential.
Preferred Equity Redemption Cumulative Stock ("PERCS"), or similar instruments
marketed under different names, offer a substantial dividend advantage, but
capital appreciation potential is limited to a predetermined level. PERCS are
less risky and less volatile than the underlying common stock because their
superior income mitigates declines when the common stock falls, while the cap
price limits gains when the common stock rises.
Real Estate Investment Trusts
The Fund may purchase interests in equity, mortgage and hybrid real estate
investment trusts. Equity real estate investment trusts purchase or lease real
estate. They generate income primarily from rental income and realize capital
gains or losses from appreciated or depreciated property values. Mortgage real
estate investment trusts are interests in real estate mortgages and generate
income from interest payments on mortgage loans.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
Sovereign Debt Obligations
The Fund may purchase sovereign debt instruments issued or guaranteed by foreign
governments or their agencies, including debt of countries with emerging markets
or developing countries. Sovereign debt may be in the form of conventional
securities or other types of debt instruments, such as loans or loan
participations. Sovereign debt of emerging market or developing countries may
involve a high degree of risk, and may be in default or present the risk of
default. Governmental entities responsible for repayment of the debt may be
unable or unwilling to repay principal and interest when due, and may require
renegotiation or rescheduling of debt payments. In addition, prospects for
repayment of principal and interest may depend on political as well as economic
factors. The Fund may also invest in debt obligations of supranational entities,
which include international organizations designed or supported by governmental
entities to promote economic reconstruction or development, and international
banking institutions and related government agencies. Examples of these include,
but are not limited to, the International Bank for Reconstruction and
Development (World Bank), European Investment Bank and Inter-American
Development Bank.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price and 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 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.
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 deemed by the Fund's adviser to
be creditworthy.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933. The Directors consider the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Notwithstanding the foregoing, securities of foreign issuers which are not
listed on a recognized domestic or foreign exchange and 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
The Fund may attempt to hedge all or a portion of its portfolio or gain
relatively rapid, liquid, and cost-effective exposure to certain markets by
buying and selling futures contracts and options on futures contracts.
Futures Contracts
The Fund may engage 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 securities 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 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 unanticipated 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. The Fund may also invest
in securities index futures contracts when the investment adviser believes
such investment is more efficient, liquid, or cost-effective than
investing directly in the securities underlying the index.
Stock Index Options
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the
Fund of options on stock indices will be subject to the ability of the
investment adviser to predict correctly movements in the direction of the
stock market generally or of a particular industry.
Put Options on Financial Futures Contracts
The Fund may purchase listed or over-the-counter put options on financial
futures contracts. The Fund would use these options only to protect
portfolio securities against decreases in value resulting from market
factors such as anticipated increase in interest rates, or when the
investment adviser believes such investment is more efficient, liquid or
cost-effective than investing directly in the futures contract or the
underlying securities or when such futures contracts or securities are
unavailable for investment upon favorable terms.
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. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the second
option will be large enough to offset both the premium paid by the Fund
for the original option plus the realized 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.
The Fund may write listed or over-the counter put options on financial
futures contracts to hedge its portfolio or when the investment adviser
believes such investment is more efficient, liquid or cost-effective than
investing directly in the futures contract or the underlying securities or
when such futures contracts or securities are unavailable for investment
upon favorable terms. When the Fund writes a put option 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 Financial and Stock Index Futures Contracts
In addition to purchasing put options on futures, the Fund may write
listed call options or over-the-counter call options on financial and
stock index futures contracts (including cash-settled stock index
options), to hedge its portfolio against an increase in market interest
rates, a decrease in stock prices, or when the investment adviser believes
such investment is more efficient, liquid or cost-effective than investing
directly in the futures contract or the underlying securities or when such
futures contracts or securities are unavailable for investment upon
favorable terms. When the Fund writes a call option on a futures contract,
it is undertaking the obligation of assuming a short futures position
(selling a futures contract) at the fixed strike price at any time during
the life of the option if the option is exercised. As stock prices fall or
market interest rates rise and cause the price of futures to decrease, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially 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 may then substantially offset the realized
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 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 generally will not maintain open positions in futures contracts
it has sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus the unrealized loss
or minus the unrealized gain on those open positions, adjusted for the
correlation between the hedged securities and the futures contracts. If
this limitation is exceeded at any time, the Fund will take prompt action
to close out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds by the Fund
to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking
to market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put and Call Options on Portfolio Securities
The Fund may purchase put and call 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. A call option gives the Fund, in return for a
premium, the right to buy the underlying securities from the seller.
Writing Covered Put and Call Options on Portfolio Securities
The Fund may write covered put and call options to generate income and
thereby protect against price movements in particular securities in the
Fund's portfolio. As the 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. As the writer
of a put option, the Fund has the obligation to purchase a security from
the purchaser of the option upon the exercise of the option.
The Fund may only write 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). In the case of put options, the Fund will
segregate liquid assets with a value equal to or greater than the exercise
price of the underlying securities.
Over-the-Counter Options
The Fund may purchase and write over-the-counter options ("OTC options")
on portfolio securities or in securities indexes in negotiated
transactions with the buyers or writers of the options when options on the
portfolio securities held by the Fund or when the securities indexes are
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 OTC 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 investment 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 investment 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 rate 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 investment adviser and the Fund believe such
obligations do not constitute senior securities under the Investment
Company Act of 1940 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 possibly 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 investment 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 investment 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 investment 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
investment 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 the securities of issuers domiciled 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.
Emerging securities markets are substantially smaller, less developed, less
liquid and more volatile than the major securities markets. The limited size of
emerging securities markets and limited trading volume in issuers compared to
the volume of trading in U.S. securities could cause price to be erratic for
reasons apart from factors that affect the quality of the securities. For
example, limited market size may cause prices to be unduly influenced by traders
who control large positions. Adverse publicity and investors' perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of portfolio securities in these markets. In addition, securities
traded in certain emerging markets may be subject to risks due to the
inexperience of financial intermediaries, a lack of modern technology, the lack
of a sufficient capital base to expand business operations, and the possibility
of permanent or temporary termination of trading.
Settlement mechanisms in emerging securities markets may be less efficient and
less reliable than in more developed markets. In such emerging securities
markets there may be share registration and delivery delays or failures.
Portfolio Turnover
It is not anticipated that the portfolio trading engaged in by the Fund will
result in its annual rate of portfolio turnover exceeding 100%. The Fund's
investment adviser does not anticipate that portfolio turnover will result in
adverse tax consequences. However, relatively high portfolio turnover may result
in high transaction costs to the Fund.
<PAGE>
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 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 more than 25% of its total assets in securities
of issuers having their principal business activities in one industry,
except the financial services industry.
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 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 other 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 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 association 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
Chief Executive Officer and Director or Trustee of the Funds; Chairman and
Director, Federated Investors, Inc.; Chairman and Trustee, Federated Advisers,
Federated Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport Research,
Ltd. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Corporation.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Director
Director or Trustee of the Funds; formerly, Partner, Anderson Worldwide SC.
<PAGE>
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund; Chairman, Civic Light
Opera.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Director or Trustee of the Funds; Attorney-at-law; Director, The Emerging
Germany Fund, Inc.; formerly, President, Boston Stock Exchange, Inc.; Regional
Administrator, United States Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center Downtown;
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
formerly, Member, National Board of Trustees, Leukemia Society of America.
Richard B. Fisher*
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Director
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Director or Trustee of the Funds; Attorney Of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
<PAGE>
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Director or Trustee of the Funds; President, World Society for Ekistics, Athens;
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation ; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center; formerly, Professor, United States Military
Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Director or Trustee of the Funds; Public Relations/Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
<PAGE>
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President or Executive Vice President of the Funds; Director or Trustee of some
of the Funds; President and Director, Federated Investors, Inc.; President and
Trustee, 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. Mr. Donahue is the son of John F. Donahue, Director and
Chairman of the Corporation.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds; Executive Vice President, Secretary, and Director, Federated Investors,
Inc.; 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.
* 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; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; WesMark Funds; WCT Funds; and World Investment Series,
Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund's outstanding
shares.
Directors Compensation
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
John F. Donahue, $0 $-0- for the Corporation and
Chairman and Director 56 other investment companies
Thomas G. Bigley $1,149 $111,222 for the Corporation and
Director 56 other investment companies
John T. Conroy, Jr., $1,265 $122,362 for the Corporation and
Director 56 other investment companies
Nicholas P. Constantakis $0 $0 for the Corporation and
Director 34 other investment companies
William J. Copeland, $1,265 $122,362 for the Corporation and
Director 56 other investment companies
James E. Dowd, Esq. $1,265 $122,362 for the Corporation and
Director 56 other investment companies
Lawrence D. Ellis, M.D.,$1,149 $111,222 for the Corporation and
Director 56 other investment companies
Richard B. Fisher, $0 $-0- for the Corporation and
President and Director 6 investment companies
Edward L. Flaherty, Jr., Esq.$1,265 $122,362 for the Corporation and
Director 56 other investment companies
Peter E. Madden, $1,149 $111,222 for the Corporation and
Director 56 other investment companies
John E. Murray, Jr., J.D., S.J.D., $1,149 $111,222 for the Corporation and
Director 56 other investment companies Complex
Wesley W. Posvar, $1,149 $111,222 for the Corporation and
Director 56 other investment companies
Marjorie P. Smuts, $1,149 $111,222 for the Corporation and
Director 56 other investment companies
* Information is furnished for the fiscal year ended November 30, 1997.
# The aggregate compensation provided is for the Corporation, which is comprised
of eight portfolios.
The information provided is for the last calendar year end.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Global Research Corp. (the
"Adviser"). It is a subsidiary of Federated Investors, Inc. All the voting
securities of Federated Investors, Inc. are owned by a trust, the trustees of
which are John F. Donahue, his wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
Sub-Adviser to the Fund
The Fund's sub-adviser is Federated Advisers (the "Sub-Adviser"). It is a
subsidiary of Federated Investors, Inc.. All the voting securities of Federated
Investors, Inc. are owned by a trust, the trustees of which are John F. Donahue,
his wife, and his son, J. Christopher Donahue.
The Sub-Adviser shall not be liable to the Fund or any shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
Sub-Advisory Fees
For its sub-advisory services, the Sub-Adviser receives an annual investment
sub-advisory fee as described in the prospectus.
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
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Other Services
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, Inc., 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 and Dividend Disbursing 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 the size, type, and
number of accounts and transactions made by shareholders.
Independent Auditors
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh, PA.
Purchasing Shares
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value (plus a sales charge, if applicable) on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares is
explained in the prospectus under "Investing in the Fund" and "Purchasing
Shares." For further information on any of the programs listed below, please
contact your financial intermediary or Federated Securities Corp.
Quantity Discounts and Accumulated Purchases
As described in the prospectus, larger purchases of the same Share class reduce
or eliminate the sales charge paid. For example, the Fund will combine all Class
A Share purchases 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 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 into the same Share class 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 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 intermediary at the
time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce or eliminate the sales charge
after it confirms the purchases.
Concurrent Purchases
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
To receive a sales charge reduction or elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial intermediary
at the time the concurrent purchases are made. The Fund will reduce or eliminate
the sales charge after it confirms the purchases.
Letter of Intent
A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13-month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable sales charge.
While this letter of intent will not obligate the shareholder to purchase Class
A 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
Funds, excluding money market accounts, will be aggregated to provide a purchase
credit towards fulfillment of the letter of intent. The letter may be dated as
of a prior date to include any purchase made within the past 90 days. Prior
trade prices will not be adjusted.
Reinvestment Privilege
The reinvestment privilege is available for all Shares of the Fund within the
same Share class.
Class A shareholders who redeem from the Fund may reinvest the redemption
proceeds back into the same Share class at the next determined net asset value
without any sales charge. The original Shares must have been subject to a sales
charge and the reinvestment must be within 120 days.
Similarly, Class C shareholders who redeem may reinvest their redemption
proceeds in the same Share class within 120 days. Class B Shares also may be
reinvested within 120 days of redemption, although such reinvestment will be
made into Class A Shares. Shareholders would not be entitled to a reimbursement
of the contingent deferred sales charge if paid at the time of redemption on any
Share class. However, reinvested Shares would not be subject to a contingent
deferred sales charge, if otherwise applicable, upon later redemption.
In addition, if Shares were reinvested through a financial intermediary, the
financial intermediary would not be entitled to an advanced payment from
Federated Securities Corp. on the reinvested Shares, if otherwise applicable.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial intermediary of the reinvestment in order to eliminate a sales
charge or a contingent deferred sales charge. If the shareholder redeems Shares
in the Fund, there may be tax consequences.
Conversion of Class B Shares
Class B Shares will automatically convert into Class A Shares on or around the
15th of the month eight full years from the purchase date. For purposes of
conversion to Class A Shares, Shares purchased through the reinvestment of
dividends and distributions paid on Class B Shares will be considered to be held
in a separate sub-account. Each time any Class B Shares in the shareholder's
account (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of the Class B Shares in the sub-account 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 a 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.
Distribution Plan and Shareholder Services Agreement
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the 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, Fund Directors, and Employees
The following individuals and their immediate family members may buy Class A
Shares at net asset value without a sales charge:
o Directors, employees, and sales representatives of the Fund, Federated
Global Research Corp., and Federated Securities Corp. and its affiliates;
o Federated Life Members (Class A Shares only);
o any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp.; and
o trusts, pensions, or profit-sharing plans for these individuals.
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
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.
Dividend income is recorded on the ex-dividend date, except certain dividends
from foreign securities where the ex-dividend date may have passed, are recorded
as soon as the Fund is informed of the ex-dividend date.
Net asset value is not determined on (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determining Market Value of Securities
Market values of the Fund's portfolio securities, other than options, are
determined as follows:
o for equity securities, according to the last reported sale price in the
market in which they are primarily traded (either a national securities
exchange or the over-the-counter market), if available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the prices as furnished by an
independent pricing service, except that short-term obligations with
remaining maturities of less than 60 days at the time of purchase may be
valued at amortized cost; and
o for all other securities, at fair value as determined in good faith by the
Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices 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 Fund will value futures contracts and options at their market values
established by the exchanges on which they are traded at the close of trading on
such exchanges unless the Directors determine in good faith that another method
of valuing such investments is necessary.
Trading in Foreign Securities
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the 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 "Redeeming and Exchanging Shares." Although the transfer agent
does not charge for telephone redemptions, it reserves the right to charge a fee
for the cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund 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.
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.
The Fund has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem Shares for any shareholder
in cash up to the lesser of $250,000 or 1% of the Fund's net asset value during
any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
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; (3) Shares held for fewer than six years with respect to Class B
Shares and for less than one full year from the date of purchase with respect to
Class C Shares on a first-in, first-out basis.
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 applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
However, the Fund may invest in the stock of certain foreign corporations which
would constitute a Passive Foreign Investment Company (PFIC). Federal income
taxes may be imposed on the Fund upon disposition of PFIC investments.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject.
Shareholders' Tax Status
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 all classes 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, adjusted over the period by any additional Shares, assuming a
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
Yield
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the SEC) earned by any class of
Shares over a thirty-day period by the maximum offering price per Share of any
class of Shares 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 any class of Shares because of
certain adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
Performance Comparisons
The performance of each class of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per Share fluctuate daily. Both net earnings and net asset
value per Share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o MSCI All Country World Finance Index --is a medium- to large- cap index
comprising the banking, financial services, insurance and real estate
industries, and is diversified across 46 countries and more than 400
companies.
o Lipper Analytical Services, Inc. --ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in net asset value over a specific period of
time.
o Europe, Australia, and Far East (EAFE) is a market capitalization weighted
foreign securities index, which is widely used to measure the performance of
European, Australian, New Zealand and Far Eastern stock markets. The index
covers approximately 1,020 companies drawn from 18 countries in the above
regions. The index values its securities daily in both U.S. dollars and
local currency and calculates total returns monthly. EAFE U.S. dollar total
return is a net dividend figure less Luxembourg withholding tax. The EAFE is
monitored by Capital International, S.A., Geneva, Switzerland.
o Standard & 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.
o Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
o Dow Jones Composite Average or its component averages--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume
reinvestment of dividends.
o Dow Jones World Industry Index or its component indices, including, among
others, the utility sector.
o Standard & Poor's 500 Stock Index or its component indices--an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
o The New York Stock Exchange composite or component indices--unmanaged
indices of all industrial, utilities, transportation, and finance stocks
listed on the New York Stock Exchange.
o Financial Times Actuaries Indices--including the FTA-World Index (and
components thereof), which are based on stocks in major world equity
markets.
o Lipper-Mutual Fund Performance Analysis and Lipper-Fixed Income Fund
Performance Analysis--measure of total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Value Line Mutual Fund Survey, published by Value Line Publishing,
Inc.--analyzes price, yield, risk, and total return for equity and fixed
income mutual funds. The highest rating is one, and ratings are effective
for two weeks.
o Mutual Fund Source Book, published by Morningstar, Inc.--analyzes price,
yield, risk, and total return for equity and fixed income funds.
o CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc.--analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Value Line Index--an unmanaged index which follows the stocks of
approximately 1,700 companies.
o Wilshire 5000 Equity Index--represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons
of performance assume reinvestment of dividends.
o Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Smith Barney Shearson and Bloomberg L.P.
o Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines, among
others--provide performance statistics over specified time periods.
o Morgan Stanley Capital International World Indices, including, among others,
the Morgan Stanley Capital International Europe, Australia, Far East Index (
"EAFE Index"). The EAFE index is an unmanaged index of more than 1,000
companies of Europe, Australia and the Far East.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics--a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
o Strategic Insight Mutual Fund Research and Consulting, ranks funds in
various fund categories by making comparative calculations using total
return. Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change in net
asset value over a specific period of time.
Advertisements and sales literature for all four 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
either class of Shares based on quarterly reinvestment of dividends over a
specified period of time.
From time to time as it deems appropriate, the Fund may advertise the
performance of a class of Shares using charts, graphs, and descriptions,
compared to federally insured bank products including certificates of deposit
and time deposits and to money market funds using the Lipper Analytical Services
money market instruments average.
Advertisements may quote performance information which does not reflect the
effect of various sales charges on Class A Shares, Class B Shares and Class C
Shares.
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, Inc.
Federated Investors, Inc. 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, Inc. has more than 27 years'
experience. As of December 31, 1997, Federated managed 29 equity funds totaling
approximately $11.7 billion in assets across growth, value, equity income,
international, index and sector (i.e. utility) styles. Federated's
value-oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system that was
developed in the 1970s.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated Investors, Inc. are: U.S. equity and high
yield - J. Thomas Madden; U.S. fixed income - William D. Dawson, II; and global
equities and fixed income - Henry A. Frantzen. The Chief Investment Officers are
Executive Presidents of the Federated advisory companies.
Mutual Fund Market
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, Inc., through its subsidiaries, distributes mutual funds
for a variety of investment applications. Specific markets include:
Institutional Clients
Federated Investors, Inc. meets the needs of approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country --supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
* source: Investment Company Institute
