SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ X ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or
Sec. 240.14a-12
Federated Stock and Bond Fund, Inc.
(Name of Registrant as Specified In Its Charter)
Board of Directors of Federated Stock and Bond Fund, Inc.
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ X ] Fee paid previously with preliminary proxy materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
FEDERATED STOCK AND BOND FUND, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 26, 1996
To Our Shareholders:
A special meeting (the "Meeting") of the Shareholders of Federated
Stock
and Bond Fund, Inc. (the "Fund"), will be held on August 26, 1996, at 2:00
p.m.,
Eastern time, at the offices of the Fund, Federated Investors Tower,
Pittsburgh,
PA 15222-3779, for the following purposes:
(1)To approve or disapprove changing the Fund's fundamental investment
policies and certain of the Fund's fundamental investment
limitations to
non-fundamental investment policies and non-fundamental investment
limitations as described in the Proxy Statement; and
(2)Other business.
The Board of Directors has fixed June 24, 1996, as the record date for
determination of shareholders entitled to vote at the meeting.
By Order of the Directors
/s/ John W. McGonigle
John W. McGonigle
Secretary
July 10, 1996
SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY TO AVOID ADDITIONAL EXPENSE
YOU CAN HELP THE FUND AVOID THE NECESSITY AND EXPENSE OF SENDING
FOLLOW-UP
LETTERS TO ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU
ARE
UNABLE TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE, AND RETURN THE
ENCLOSED
PROXY SO THAT THE NECESSARY QUORUM MAY BE REPRESENTED AT THE MEETING. THE
ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
FEDERATED STOCK AND BOND FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
PROXY STATEMENT
The enclosed Proxy Statement is solicited on behalf of the Board of
Directors (the "Directors") of Federated Stock and Bond Fund, Inc. (the
"Fund").
The proxies will be voted at the special meeting of shareholders of the
Fund to
be held on August 26, 1996, at 2:00 p.m. (Eastern time) at the offices of
the
Fund, Federated Investors Tower, Pittsburgh, PA 15222-3779 (such special
meeting
and any adjournment or postponement thereof are referred to as the
"Meeting").
The proxy is revocable at any time before it is voted by sending written
notice
of the revocation to the Fund or by appearing personally on August 26,
1996, at
the Meeting. THE COST OF PREPARING AND MAILING THE NOTICE OF MEETING, THIS
PROXY
STATEMENT, PROXY CARD, AND ANY ADDITIONAL PROXY MATERIAL WILL BE BORNE BY
THE
FUND.
Proxy solicitations will be made primarily by mail, but may also be
made by
telephone, telegraph, or personal interview conducted by certain officers
or
employees of the Fund or of Federated Shareholder Services Company (the
Fund's
transfer agent) or Federated Services Company (the Fund's administrator).
In the
event that a Shareholder signs and returns the proxy ballot but does not
indicate a choice as to any of the items on the proxy ballot, the proxy
attorneys will vote those shares in favor of such proposal(s).
The purposes of the Meeting are set forth in the accompanying Notice
of
Special Meeting of Shareholders. The Directors know of no business other
than
that mentioned in the Notice that will be presented for consideration at
the
Meeting. Should other business properly be brought before the Meeting,
proxies
will be voted in accordance with the best judgment of the persons named as
proxies. This Proxy Statement and the enclosed proxy card are expected to
be
mailed on or about July 10, 1996 to shareholders of record at the close of
business on June 24, 1996 (the "Record Date").
Only shareholders of record on the Record Date will be entitled to
vote at
the Meeting. On the Record Date, 7,610,346.781 shares of the Fund were
outstanding and entitled to vote at the Meeting.
Each share of the Fund is entitled to one vote, and fractional shares
are
entitled to proportionate shares of one vote. At the close of business on
June
24, 1996, the following persons owned, to the knowledge of management, 5%
or
more of the outstanding shares of the Fund: NationsBank, as trustee for
ALLTEL
Corp. Thrift Plan, San Francisco, CA, owned approximately 999,205.303
shares
(13.13%). As of the same date, the officers and Directors of the Fund as a
group
owned 98,140.271 (1.29%) of the outstanding shares of the Fund.
For purposes of determining the presence of a quorum and counting
votes on
the matters presented, shares represented by abstentions and "broker non-
votes"
will be counted as present, but not as votes cast, at the Meeting. Under
the
Fund's Articles of Incorporation, the vote required will be determined with
reference to a percentage of votes cast at the Meeting. Under the
Investment
Company Act of 1940 (the "1940 Act"), the affirmative vote necessary to
approve
other matters
may be determined with reference to a percentage of votes present at the
Meeting, which would have the effect of treating abstentions and non-votes
as if
they were votes against the proposal.
Approval by the Fund's Shareholders of the proposal to change the
Fund's
fundamental investment policies and certain of the Fund's fundamental
investment
limitations to non-fundamental investment policies and non-fundamental
investment limitations ("Proposal 1") requires the affirmative "vote of a
majority of the outstanding voting securities" (as defined in the 1940 Act)
of
the Fund. Under the 1940 Act, this means that to be approved, the Proposal
must
receive the affirmative vote of the lesser of (a) 67% of the shares of the
Fund
(all classes voting together) present at this Meeting, if the holders of
more
than 50% of the outstanding shares of the Fund are present or represented
by
proxy, or (b) more than 50% of the outstanding shares of the Fund.
The Fund will furnish, without charge, a copy of the annual report
and most
recent semi-annual report succeeding the annual report, if any, to any
Shareholder of record of the Fund upon request. To request an annual and/or
semi-annual report, call 1-800-341-7400.
IT IS ESSENTIAL THAT SHAREHOLDERS COMPLETE, DATE AND SIGN THE ENCLOSED
PROXY CARD.
In order that your shares may be represented at the Meeting, you are
requested to:
indicate your instructions on the enclosed proxy card;
date and sign the proxy card;
mail the proxy card promptly in the enclosed envelope, which
requires no
postage if mailed in the United States; and
allow sufficient time for the proxy card to be received by 2:00 p.m.
on
August 26, 1996.
PROPOSAL 1: TO APPROVE OR DISAPPROVE CHANGING THE FUND'S FUNDAMENTAL
INVESTMENT
POLICIES AND CERTAIN OF THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS
TO
NON-FUNDAMENTAL INVESTMENT POLICIES AND
NON-FUNDAMENTAL INVESTMENT LIMITATIONS
------------------------
INTRODUCTION
When the Fund was incorporated under the laws of the State of
Maryland on
October 31, 1934, its investment objective, policies, and limitations were
designated as fundamental (i.e., they may not be changed without
Shareholder
approval). The purpose of this Meeting of Shareholders is to consider the
approval or disapproval of Proposal 1 which would have the effect of
changing
the Fund's fundamental investment policies and certain of the Fund's
fundamental
investment limitations to non-fundamental investment policies and
non-fundamental investment limitations.
On April 2, 1996, the Fund's Board of Directors (the "Directors")
voted to
recommend to Shareholders the approval of Proposal 1. In addition to
changing
the Fund's fundamental investment policies and certain of the Fund's
fundamental
investment limitations to non-fundamental investment policies and
non-fundamental investment limitations (i.e., to investment policies and
limitations that may be changed without Shareholder approval), Shareholder
approval of Proposal 1 would also authorize the Directors to implement
certain
revisions to the investment policies pertaining primarily to the fixed-
income
portion of the Fund's portfolio. (Please see "Proposed Amendments to
Investment
Policies" below).
The Directors recommend that Shareholders of the Fund vote to
approve this
Proposal 1. The Directors believe that adopting Proposal 1 will be
advantageous
to the Fund's Shareholders in several respects. Please see "Summary" on
page 21
of this Proxy Statement.
PROPOSED AMENDMENTS TO INVESTMENT POLICIES
On April 2, 1996, the Directors approved, contingent upon Shareholder
approval of Proposal 1, several revisions to the Fund's investment
policies. These revisions, which the Directors believe will be
beneficial
to the Shareholders of the Fund, pertain primarily to the fixed-income
portion of the Fund's portfolio. These revisions will not prevent the
Fund
from continuing to invest in the same fixed-income securities that are
permitted by its current investment policies; the revisions authorized
by
Shareholder approval of Proposal 1 would, however, affect the
proportions
or investment ratings of some of these investments. The revisions
authorized by Shareholder approval of Proposal 1 would also expand the
Fund's current list of acceptable investments to include additional
types
of securities that the Directors believe will enhance the Fund's
ability to
pursue its investment objectives. The approval by Shareholders of
Proposal
1 will authorize the Directors to implement these changes. These
changes
will only be implemented if the Shareholders of the Fund approve
Proposal
1. Please see "Investment Policies" below for a discussion of the
revisions
that would take effect upon Shareholder approval of Proposal 1. This
discussion also describes the anticipated benefits and potential risks
of
these changes.
INVESTMENT POLICIES
The Fund's investment objectives are to provide relative safety of
capital
with the possibility of long-term growth of capital and income.
Consideration is
also given to current income. The Fund invests primarily in a diversified
portfolio of common stocks, bonds, convertible securities, and preferred
stocks
which provide characteristics of stability and relative safety, and
marketable
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
All of the Fund's investment policies are currently fundamental,
(i.e.,
they cannot be changed without the approval of the Fund's Shareholders). At
a
meeting on April 2, 1996, the Directors of the Fund voted to recommend to
Shareholders the approval of a measure, known as Proposal 1, that would
change
all of the Fund's investment policies to non-fundamental policies, (i.e.,
to
policies which may be changed without Shareholder approval). The Directors
believe that Shareholder approval of Proposal 1 would provide the Fund with
the
necessary flexibility to remain competitive in and become more responsive
to
changing market environments. The ability of the Directors to revise the
Fund's
investment policies without Shareholder approval should avoid Fund expenses
when
Shareholder meetings would otherwise need to be held to effect such changes
whenever the Directors determine that changing an investment policy of the
Fund
would enhance the Fund's ability to pursue its investment objectives.
PROPOSED AMENDMENTS TO INVESTMENT POLICIES
Pending Shareholder approval of Proposal 1, the Directors have
approved the
implementation of certain non-fundamental investment policies that pertain
primarily to the fixed-income portion of the Fund's portfolio. The
Directors
believe that these changes to the Fund's investment policies will be
beneficial
to Shareholders in several respects. These revisions are as follows:
Although the Fund would continue to invest in both domestically-
issued
and foreign-issued corporate debt obligations, the Fund would have
the
ability invest beyond its current 5% limit in non-ADR foreign
securities.
Please see "Foreign Securities and Investment Risks" for a
definition of
ADRs.) This would provide the Fund with greater flexibility with
respect
to weighting its assets in domestic and foreign markets. The Fund
would
be able to re-allocate its assets within the domestic and foreign
markets
as market conditions dictate. Please see "Foreign Securities and
Investment Risks," "Foreign Currency Exchange Contracts," "Foreign
Currency Options," and "Special Risks Associated with Foreign
Currency
Options" below under the main heading entitled "Foreign Investments"
for
a discussion of these types of investments and related risks.
The bonds in which the Fund currently invests are investment grade.
(Investment grade securities are generally described as securities
that
are rated in one of the top four rating categories by a nationally
recognized statistical rating organization ("NRSRO"), such as
Moody's
Investors Service, Inc. ("Moody's), Standard & Poor's Ratings Group
("S&P"), or Fitch Investors Service, Inc. ("Fitch") or that are
unrated
but determined by the Fund's investment adviser to be of comparable
quality). The Directors have approved, pending Shareholder approval
of
Proposal 1, the Fund's ability to invest up to, but not including,
35% of
its assets in below investment grade, high yield (i.e., "junk")
bonds.
The Directors believe
that this type of investment may improve the Fund's performance by
contributing a higher total return to the bond portion of the Fund's
portfolio. Please see "Corporate Bonds and Investment Risks" below
under
the main heading entitled "Fixed Income Investments" for a detailed
description of this type of investment and related risks.
In addition, pending Shareholder approval of Proposal 1, the Directors
have approved the Fund's ability to invest in asset-backed and
mortgage-backed securities, time and savings deposits, bankers'
acceptances, zero coupon bonds, and taxable municipal debt
obligations.
See the sections entitled "Mortgage-Backed Securities," "Asset-
Backed
Securities," "Non-Mortgage Related Asset-Backed Securities,"
"Mortgage
Related Asset-Backed Securities," "Collateralized Mortgage
Obligations,"
"Adjustable-Rate Mortgage-Backed Securities," "Real Estate
Investment
Mortgage Conduits," "Resets of Interest," "Caps and Floors,"
"Derivative
Contracts and Securities," "Bank Instruments," "Zero Coupon
Convertible
Securities," and "Municipal Securities," below under the main
heading
entitled "Fixed Income Investments" for additional information
regarding
these types of investments and related risks.
Pending Shareholder approval of Proposal 1, the Fund may also
attempt to
hedge all or a portion of its assets against decreases in value by
investing in options on its portfolio securities and options on
financial
futures. Financial futures may include index futures. The Fund may
also
write covered call options on securities held in its portfolio in an
attempt to generate income. See the sections entitled "Put and Call
Options" and "Derivative Contracts and Securities" below for a
detailed
description of these types of investments and related risks.
The Directors believe that the types of investments described
above will
enhance the Fund's ability to diversify its portfolio holdings while
attempting
to give the bond portion of the Fund a higher total return, and minimize
the
market volatility of the Fund's portfolio relative to bond indices. Because
significantly different asset classes are not as likely to go up and down
in
price together, these changes should result in the Fund's net asset value,
on
average, being somewhat less volatile than the new individual component
asset
classes that would comprise the Fund's portfolio. The Directors believe
that the
additional diversification provided by these types of investments, the
anticipated effect that these revisions will have on the Fund's total
return and
overall performance, as well as the ability to make market calls, outweigh
the
additional credit and currency risks that these changes entail. These
changes,
however, will not ensure that these anticipated benefits will occur.
Subsequent to Shareholder approval of Proposal 1, as a matter of
continuing
non-fundamental investment policy, the Fund would continue to invest, under
normal circumstances, at least 65% of its total assets in stocks and bonds.
The
Directors have not approved, nor are Shareholders being asked to authorize,
any
revisions to the investment policies pertaining to the domestic equity
portion
of the Fund's portfolio. Shareholder approval of Proposal 1 would only
result in
the changes noted above; not all of the Fund's investment policies
pertaining to
the fixed-income securities would be revised as a result of Shareholder
approval
of this Proposal.
The following is a comprehensive list of the Fund's permissible
investments
as they would appear subsequent to Shareholder approval of Proposal 1.
These
investments would include:
domestic and foreign common stocks;
domestic or foreign corporate debt obligations;
obligations of the United States;
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Farm
Credit System (including the National Bank for Cooperatives, Farm
Credit
Banks, and Banks for Cooperatives), Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit
Corporation,
Federal Financing Bank, Student Loan Marketing Association, Federal
Home
Loan Mortgage Corporation, or National Credit Union Administration;
taxable municipal debt obligations (as a matter of operating policy,
the
lowest rated municipal debt obligations in which the Fund will
invest
will be rated BBB or better by an NRSRO, or which are of comparable
quality in the judgment of the Fund's investment adviser);
asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1
or A-2
by S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), or in institutions whose accounts are
insured by
the Savings Association Insurance Fund ("SAIF"), including
certificates
of deposit issued by, and other time deposits in, foreign branches
of
BIF-insured banks which, if negotiable, mature in six months or less
or
if not negotiable, either mature in ninety days or less, or may be
withdrawn upon notice not exceeding ninety days;
bankers' acceptances issued by a BIF-insured bank, or issued by the
bank's Edge Act subsidiary and guaranteed by the bank, with
remaining
maturities of nine months or less. The total acceptances of any bank
held
by the Fund cannot exceed 0.25% of such bank's total deposits
according
to the bank's last published statement of condition preceding the
date of
acceptance;
preferred stock and other equity-related securities which generally
have
bond-like attributes, including zero coupon and/or convertible
securities;
other securities which are deemed by the Fund's investment adviser
to be
consistent with the Fund's investment objective; and
repurchase agreements collateralized by acceptable investments.
All of the Fund's investment policies would be non-fundamental
following
Shareholder approval of Proposal 1. Shareholders would be notified before
any
future material changes to these investment policies would take effect.
The following is a description of the characteristics and related
risks of
the permissible investments identified above. Although Shareholder approval
of
Proposal 1 would not result in revisions to all of the securities in which
the
Fund may invest, the policies pertaining to these types of investments are
also
listed below in order to provide Shareholders with a complete description
of the
Fund's portfolio subsequent to Shareholder approval of Proposal 1. Changes
to
former policies authorized by Shareholder approval of Proposal 1 have been
noted.
EQUITY INVESTMENTS
COMMON STOCKS. The Fund would continue to invest in common stocks. The
common stocks in which the Fund invests are selected by the Fund's
investment
adviser on the basis of traditional research techniques, including
assessment of
earnings and dividend growth, prospects and the risk and volatility of the
company's industry. However, other factors, such as product position,
market
share, or profitability, will also be considered by the Fund's investment
adviser. Please also note the section entitled "Foreign Investments."
FIXED INCOME INVESTMENTS
CORPORATE DEBT OBLIGATIONS AND INVESTMENT RISKS. Although the
corporate
debt obligations in which the Fund will primarily invest are rated as
investment
grade by an NRSRO, or of comparable quality in the judgment of the Fund's
investment adviser, the Fund may invest, as a result of Shareholder
approval of
Proposal 1, in corporate debt obligations that are not investment grade
bonds,
but are rated below BBB by an NRSRO (i.e., "junk bonds"). However, under
normal
circumstances, the Fund will not invest 35% or more of its net assets in
non-investment grade securities. Corporate 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. Bonds rated "BBB" by S&P
or
Fitch, or "Baa" by Moody's, have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a
weakened
capacity to make principal and interest payments than higher rated bonds.
The prices of fixed income securities generally fluctuate inversely to
the
direction of interest rates.
Subsequent to Shareholder approval of Proposal 1, the high yield
portion of
the Fund's portfolio would be managed by Mark Durbiano. Mr. Durbiano joined
Federated Investors in 1982 and has been a Senior Vice President of the
Fund's
investment adviser since January 1996. From 1989 through 1995, Mr. Durbiano
was
a Vice President of the Fund's investment adviser.
Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in
Finance
from the University of Pittsburgh.
The Fund's investment adviser believes that the risks of investing in
lower-rated securities can be reduced. The professional portfolio
management
techniques that would be used by the Fund to attempt to reduce these risks
include:
CREDIT RESEARCH. The Fund's investment adviser would perform its own
credit
analysis in addition to using nationally recognized statistical rating
organizations and other sources, including discussions with the
issuer's
management, the judgment of other investment analysts, and its own
informed
judgment. The Fund's investment adviser's credit analysis will
consider the
issuer's financial soundness, its responsiveness to changes in
interest
rates and business conditions, and its anticipated cash flow, interest
or
dividend coverage and earnings. In evaluating an issuer, the Fund's
investment adviser places special emphasis on the estimated current
value
of the issuer's assets rather than historical costs.
DIVERSIFICATION. The Fund would invest in securities of many different
issuers and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS. The Fund's investment adviser will analyze current
developments and trends in the economy and in the financial markets.
When
investing in lower-rated securities, timing and selection are
critical, and
analysis of the business cycle can be important.
U.S. GOVERNMENT OBLIGATIONS. The U.S. government obligations in which
the
Fund will continue to invest are either issued or guaranteed by the U.S.
government, its agencies, or instrumentalities. These securities include,
but
are not limited to:
direct obligations of the U.S. Treasury, such as U.S. Treasury
bills,
notes, and bonds; and
notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the Federal Farm Credit System (including
the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives), Federal Home Loan Banks System, Federal National
Mortgage
Association, Government National Mortgage Association, Student Loan
Marketing Association, and Federal Home Loan Mortgage Corporation.
Some obligations issued or guaranteed by agencies or instrumentalities
of
the U.S. government, such as Government National Mortgage Association
participation certificates, are backed by the full faith and credit of the
U.S.
Treasury. No assurances can be given that the U.S. government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These agencies and instrumentalities are supported by:
the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
MUNICIPAL SECURITIES. The municipal securities in which the Fund may
invest
as a result of Shareholder approval of Proposal 1 are generally issued to
finance public works such as airports, bridges, highways, housing,
hospitals,
mass transportation projects, schools, streets, and water and
sewer works. They are also issued to repay outstanding obligations, to
raise
funds for general operating expenses, and to make loans to other public
institutions and facilities. The municipal securities in which the Fund may
invest as a result of Shareholder approval of Proposal 1 also include
industrial
development bonds issued by or on behalf of public authorities to provide
financing aid to acquire sites or construct and equip facilities for
privately
or publicly owned corporations. The availability of this financing
encourages
these corporations to locate within the sponsoring communities and thereby
increases local employment.
ASSET-BACKED SECURITIES. The asset-backed securities in which the Fund
may
invest as a result of Shareholder approval of Proposal 1 are created by the
grouping of certain governmental, government related and private loans,
receivables and other lender assets, including vehicle installment purchase
obligations and credit card receivables, into pools. Interests in these
pools
are sold as individual securities and are not backed or guaranteed by the
U.S.
government and may not be secured. Payments from the asset pools may be
divided
into several different tranches of debt securities, with some tranches
entitled
to receive regular installments of principal and interest, other tranches
entitled to receive regular installments of interest, with principal
payable at
maturity or upon specified call dates, and other tranches only entitled to
receive payments of principal and accrued interest at maturity or upon
specified
call dates. Different tranches of securities will bear different interest
rates,
which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on
mortgage securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Depending upon market conditions,
the
yield that the Fund receives from the reinvestment of such prepayments, or
any
scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective
means of "locking in" interest rates than other types of debt securities
having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized
mortgage
obligations, prepayments may be allocated to one tranch of securities ahead
of
other tranches, in order to reduce the risk of prepayment for the other
tranches.
Prepayments may result in a capital loss to the Fund to the extent
that the
prepaid mortgage securities were purchased at a market premium over their
stated
amount. Conversely, the prepayment of mortgage securities purchased at a
market
discount from their stated principal amount will accelerate the recognition
of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The credit
quality
of most asset-backed securities depends primarily upon the credit quality
of the
assets underlying such securities, how well the entity issuing the
securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The non-mortgage related
asset-backed securities in which the Fund may invest as a result of
Shareholder
approval of Proposal 1 include, but are not limited to, interests in pools
of
receivables, such as credit card and accounts receivable and motor vehicle
and
other installment purchase obligations and leases. These securities may be
in
the form of pass-through instruments or asset-backed obligations. The
securities, all of which are issued by non-governmental entities and carry
no
direct or indirect government guarantee, are structurally similar to
collateralized mortgage obligations and mortgage pass-through securities,
which
are described below.
MORTGAGE RELATED ASSET-BACKED SECURITIES. As a result of Shareholder
approval of Proposal 1, the Fund may also invest in various mortgage
related
asset-backed securities. These types of investments may include adjustable
rate
mortgage securities, collateralized mortgage obligations, real estate
mortgage
investment conduits, or other securities collateralized by or representing
an
interest in real estate mortgages (collectively, "mortgage securities").
Many
mortgage securities are issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). The ARMs in which the
Fund
may invest as a result of Shareholder approval of Proposal 1 are pass-
through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. They are issued by the Government National
Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"),
and
the Federal Home Loan Mortgage Corporation ("FHLMC") and are actively
traded.
The underlying mortgages which collateralize ARMs issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration ("VA"), while those collateralizing ARMs issued by FHLMC or
FNMA
are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The CMOs in which the
Fund
may invest as a result of Shareholder approval of Proposal 1 are bonds
issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to
the construction industry. CMOs that may be purchased by the Fund as a
result of
Shareholder approval of Proposal 1 may be:
collateralized by pools of mortgages in which each mortgage is
guaranteed
as to payment of principal and interest by an agency or
instrumentality
of the U.S. government;
collateralized by pools of mortgages in which payment of principal
and
interest is guaranteed by the issuer and such guarantee is
collateralized
by U.S. government securities; or
securities in which the proceeds of the issuance are invested in
mortgage
securities and payment of the principal and interest is supported by
the
credit of an agency or instrumentality of the U.S. government.
All CMOs that would be purchased by the Fund are investment grade, as
rated
by a NRSRO.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). The REMICs in
which
the Fund may invest as a result of Shareholder approval of Proposal 1 are
offerings of multiple class real estate mortgage-backed securities which
qualify
and elect treatment as such under provisions of the Internal Revenue Code
(the
"Code"). Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages.
Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed
to
the person or persons who hold interests in the REMIC. A REMIC interest
must
consist of one or more classes of "regular interests," some of which may
offer
adjustable rates of interest, and a single class of "residual interests."
To
qualify as a REMIC, substantially all the assets of the entity must be in
assets
directly or indirectly secured principally by real property.
ADDITIONAL CHARACTERISTICS OF ARMS, CMOS, AND REMICS
RESETS OF INTEREST. The interest rates paid on the ARMs, CMOs, and
REMICs
in which the Fund may invest as a result of Shareholder approval of
Proposal 1 generally are readjusted at intervals of one year or less
to an
increment over some predetermined interest rate index. There are two
main
categories of indices: those based on U.S. Treasury securities and
those
derived from a calculated measure, such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include
the
one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates
on
longer-term Treasury securities, the National Median Cost of Funds,
the
one-month or three-month London Interbank Offered Rate (LIBOR), the
prime
rate of a specific bank, or commercial paper rates. Some indices, such
as
the one-year constant maturity Treasury Note rate, closely mirror
changes
in market interest rate levels. Others tend to lag changes in market
rate
levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes
in
market rates should experience greater price volatility than
adjustable
rate mortgage securities that closely mirror the market. Certain
residual
interest tranches of CMOs may have adjustable interest rates that
deviate
significantly from prevailing market rates, even after the interest
rate is
reset, and are subject to correspondingly increased price volatility.
In
the event the Fund purchases such residual interest mortgage
securities, it
will factor in the increased interest and price volatility of such
securities when determining its dollar-weighted average duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the
ARMs,
CMOs, and REMICs in which the Fund may invest as a result of
Shareholder
approval of Proposal 1 will frequently have caps and floors which
limit the
maximum amount by which the loan rate to the residential borrower may
change up or down: (1) per reset or adjustment interval; and (2) over
the
life of the loan. Some residential mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly principal
and
interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization. The value of
mortgage securities in which the Fund invests may be affected if
market
interest rates rise or fall faster and farther than the allowable caps
or
floors on the underlying residential mortgage loans. Additionally,
even though the interest rates on the underlying residential mortgages
are
adjustable, amortization and prepayments may occur, thereby causing
the
effective maturities of the mortgage securities in which the Fund
invests
to be shorter than the maturities stated in the underlying mortgages.
ZERO COUPON CONVERTIBLE SECURITIES. The zero coupon convertible
securities
in which the Fund may invest as a result Shareholder approval of Proposal 1
are
debt 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 sell 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.
RESTRICTED AND ILLIQUID SECURITIES. Subsequent to Shareholder approval
of
Proposal 1, the Fund intends to continue investing in restricted securities
in
the same proportions as is currently permitted. Restricted securities are
any
securities in which the Fund may otherwise invest pursuant to its
investment
objective and policies, but which are subject to restriction on resale
under
federal securities law. The Fund will continue to limit investments in
illiquid
securities, including certain restricted securities determined by the
Directors
of the Fund to be illiquid, non-negotiable time deposits, unlisted options,
and
repurchase agreements providing for settlement in more than seven days
after
notice, to 15% of its net assets.
The Fund may continue to invest in commercial paper issued in reliance
on
the exemption from registration afforded by Section 4(2) of the Securities
Act
of 1933. The Fund believes that Section 4(2) commercial paper, and possibly
certain other restricted securities which meet the criteria for liquidity
established by the Directors, are quite liquid. The Fund intends,
therefore, to
treat the restricted securities which meet the criteria for liquidity
established by the Directors, including Section 4(2) commercial paper, as
determined by the Fund's investment adviser, as liquid and not subject to
the
investment limitations applicable to illiquid securities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. Subsequent to
Shareholder approval of Proposal 1, the Fund may continue to invest in the
securities of other investment companies. As is currently the case, the
Fund
would not own more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment
companies in general.
FOREIGN INVESTMENTS
FOREIGN SECURITIES AND INVESTMENT RISKS. Subsequent to Shareholder
approval
of Proposal 1, the Fund may continue to invest in American Depositary
Receipts
("ADRs"), and may, as a result of Shareholder approval of Proposal 1,
invest
more than 5% of its assets in non-ADR foreign securities.
Investments in foreign securities, particularly those of non-
governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic issuers. These considerations include the
possibility of
expropriation, the unavailability of financial information or the
difficulty of
interpreting financial information prepared under foreign accounting
standards,
less liquidity and more volatility in foreign securities markets, the
impact of
political, social, or diplomatic developments, and the difficulty of
assessing
economic trends in foreign countries. It may also be more difficult to
enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Fund's adviser would consider these and other
factors before investing in foreign securities and would not make such
investments unless, in its opinion, such investments would meet the Fund's
standards and objectives.
With respect to foreign governmental securities, the Fund would
reserve the
right to invest up to 25% of its total assets in fixed income securities of
foreign governmental units located within an individual foreign nation and
to
purchase or sell various currencies on either a spot or forward basis in
connection with investments. This would enable the Fund to concentrate its
investments in the securities of a foreign government which would have the
effect of magnifying some of the investment risks described above.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may, as a result of Shareholder approval of Proposal 1, enter
into
forward foreign currency exchange contracts in order to protect itself
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
Fund's 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 would not
speculate in
foreign currency exchange.
There would be no limitation as to the percentage of the Fund's assets
that
may be committed to such contracts.
The Fund does not intend to enter into forward foreign currency
exchange
contracts or maintain a net exposure in such contracts when the Fund would
be
obligated to deliver an amount of foreign currency in excess of the value
of the
Fund's 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
Fund's investment adviser believes will tend to be closely correlated with
the
currency with regard to price movements. Generally, the Fund does not
intend to
enter into a forward foreign currency exchange contract with a term longer
than
one year.
FOREIGN CURRENCY OPTIONS
As a result of Shareholder approval of Proposal 1, the Fund may
purchase
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 falls 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 were 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 additional 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 Fund's 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.
SHORT-TERM INVESTMENTS
TEMPORARY INVESTMENTS. Subsequent to Shareholder approval of Proposal
1,
the Fund may continue to invest temporarily in cash and cash items during
times
of unusual market conditions for defensive purposes and to maintain
liquidity.
BANK INSTRUMENTS. Subsequent to Shareholder approval of Proposal 1,
the
Fund would have the ability to invest in bank instruments either issued by
an
institution having capital, surplus and undivided profits over $100 million
or
insured by BIF or SAIF. Bank instruments may include Eurodollar
Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and
Eurodollar
Time Deposits ("ETDs"). Due to the fact that institutions issuing such
instruments are not necessarily subject to the same regulatory requirements
that
apply to domestic banks, such as the reserve requirements, loan
limitations,
examination, accounting, auditing, recordkeeping, and the public
availability of
information, these investments may present additional risks to investors.
INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS. Subsequent to Shareholder approval of Proposal
1,
the Fund would continue to invest in repurchase agreements. These are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or certificates of deposit to
the
Fund and agree at the time of sale to repurchase them at a mutually agreed
upon
time and price.
REVERSE REPURCHASE AGREEMENTS. Subsequent to Shareholder approval of
Proposal 1, the Fund may also continue to 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.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. Subsequent to
Shareholder
approval of Proposal 1, the Fund may continue to 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 Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, the Fund may
enter in transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to
purchase
similar securities at later dates. The Fund may realize short-term profits
or
losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. Subsequent to Shareholder approval of
Proposal 1, in order to generate additional income, the Fund may continue
to
lend portfolio securities on a short-term or long-term basis up to one-
third of
the value of its total assets 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 Fund's investment
adviser
has determined are creditworthy under guidelines established by the
Directors
and will receive collateral in the form of cash or U.S. government
securities
equal to at least 100% of the value of the securities loaned.
PUT AND CALL OPTIONS
As a result of Shareholder approval of Proposal 1, the Fund may
purchase
put options on financial futures contracts, purchase put options on
portfolio
securities, and write covered call options on portfolio securities.
Financial
futures may include index futures.
OVER-THE-COUNTER PUT OPTIONS
The Fund would generally purchase over-the-counter put options on
portfolio
securities in negotiated transactions with the writers of the options
since
options on the portfolio securities held by the Fund are typically not
traded on an exchange. The Fund would purchase options only from
investment
dealers and other financial associations (such as commercial banks or
savings and loan institutions) deemed creditworthy by the Fund's
investment
adviser.
In general, over-the-counter put options differ from exchange traded
put
options in the following respects. Over-the-counter put options are
two
party contracts with price and terms negotiated between buyer and
seller,
and such options are endorsed and/or guaranteed by third parties (such
as a
New York Stock Exchange member). Additionally, over-the-counter strike
prices are adjusted to reflect dividend payments, initial strike
prices are
generally set at market, and option premiums (which are all time
premiums)
are amortized on a straight line basis over the life of the option. In
contrast, exchange traded options are third-party contracts with
standardized strike prices and expiration dates and are purchased from
the
Clearing Corporation. Strike prices are not adjusted for dividends,
and
options are marked to market, thereby obviating the need to amortize
the
time premium. Exchange traded options have a continuous liquid market
while
over-the-counter options do not.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the
contract ("going short") and the buyer who agrees to take delivery of
the
security ("going long") at a certain time in the future.
In the fixed income securities market, price generally moves inversely
to
interest rates. Thus, 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 Fund 's anticipated holding period. The Fund would "go
long"
(agree to purchase securities in the future at a predetermined price)
to
hedge against a decline in market interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price,
the purchase of a put option on a futures contract entitles (but does
not
obligate) its purchaser to decide on or before a future date whether
to
assume a short position at the specified price.
PURCHASING PUT OPTIONS ON FUND SECURITIES
The Fund would have the ability to purchase put options on
portfolio
securities to protect against price movements in particular securities
in
its portfolio. A put option would give 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.
The Fund would have the ability to purchase put options on futures
contracts to protect portfolio securities against decreases in value
resulting from an anticipated increase in market interest rates.
Generally,
if the hedged portfolio securities decrease in value during the term
of an
option, the related futures contracts will also decrease in value and
the
option will increase in value. In such an event, the Fund would
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 would be large enough to offset both the premium paid by the
Fund
for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do so, it
would
simultaneously enter into a futures contract of the type underlying
the
option (for a price less than the strike price of the option) and
exercise
the option. The Fund would then deliver the futures contract in return
for
payment of the strike price. If the Fund neither closes out nor
exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.
For the immediate future, the Fund would enter into futures contracts
directly only when it desired to exercise a financial futures put
option in
its portfolio rather than either closing out
the option or allowing it to expire. The Fund would only purchase puts
on
financial futures contracts which are traded on a nationally
recognized
exchange.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES. The Fund would
have
the ability to write call options on all or any portion of its
portfolio in
an effort to generate income for the Fund. As writer of a call option,
the
Fund would have the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the
exercise price.
The Fund would write call options on securities either held in its
portfolio or which it has the right to obtain without payment of
further
consideration or for which it has segregated cash in the amount of any
additional consideration. The call options which the Fund would have
the
ability to write and sell must be listed on a recognized options
exchange.
Although the Fund would reserve the right to write covered call
options on
its entire portfolio, it would not write such options on more than 25%
of
its total assets unless a higher limit is authorized by the Directors.
The
Fund would have the ability to attempt to hedge the portfolio by
entering
into financial futures contracts and to write calls on financial
futures
contracts.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund would have
the
ability to write listed call options on futures contracts to hedge its
portfolio against an increase in market interest rates. If the Fund
were to
write a call option on a futures contract, it would be undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise,
causing
the prices of futures to go down, the Fund's obligation under a call
option
on a future (to sell a futures contract) would cost 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 would keep the premium received for the option. This premium
can
offset the drop in value of the Fund's fixed income portfolio which is
occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of
it by
the buyer, the Fund would have the ability to close out the option by
buying an identical option. If the hedge is successful, the cost of
the
second option would be less than the premium received by the Fund for
the
initial option. The net premium income of the Fund would then offset
the
decrease in value of the hedged securities.
The Fund does not intend to 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) would
exceed
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the
futures
contracts. If this limitation were to be exceeded at any time, the
Fund
would 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 would not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the
Fund would be required to deposit an amount of "initial margin" in
cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that
futures
contract initial margin does not involve the borrowing of funds by the
Fund
to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is
returned to
the Fund upon termination of the futures contract, assuming all
contractual
obligations have been satisfied.
A futures contract held by the Fund would be valued daily at the
official
settlement price of the exchange on which it is traded. Each day the
Fund
would pay or receive 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 were to expire.
In
computing its daily net asset value, the Fund would mark-to-market its
open
futures positions.
The Fund would also be required to deposit and maintain margin when it
writes call options on futures contracts.
RISKS. If the Fund were to write a call option, the Fund would risk
not
participating in any rise in the value of the underlying security. In
addition, if the Fund were to purchase puts on financial futures
contracts
to protect against declines in prices of portfolio securities, there
would
be 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 of investments. This may cause the futures
contract
and its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Fund's investment
adviser
could be incorrect in its expectations about the direction or extent
of
market factors such as interest rate movements. In such an event, the
Fund
may lose the purchase price of the put option. Finally, it is not
certain
that a secondary market for options will exist at all times. Although
the
Fund's investment adviser will consider liquidity before entering into
option transactions, there is no assurance that a liquid secondary
market
on an exchange will exist for any particular option or at any
particular
time. The Fund's ability to establish and close out option positions
depends on this secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
As a result of Shareholder approval of Proposal 1, the Fund would
have the
ability to invest in certain derivative securities. To the extent that the
Fund
would invest in securities that could be characterized as derivatives, such
as
asset-backed securities and mortgage-backed securities, including ARMs,
CMOs,
and REMICs, it would only do so in a manner consistent with its investment
objectives, policies and limitations as authorized by Shareholder approval
of
Proposal 1.
The term "derivative" has traditionally been applied to certain
contracts
(including, futures, forward, option and swap contracts) that "derive"
their
value from changes in the value of an
underlying security, currency, commodity or index. Certain types of
securities
that incorporate the performance characteristics of these contracts are
also
referred to as "derivatives." The term has also been applied to securities
"derived" from the cash flows from underlying securities, mortgages or
other
obligations.
Derivative contracts and securities can be used to reduce or increase
the
volatility of an investment portfolio's total performance. While the
response of
certain derivative contracts and securities to market changes may differ
from
traditional investments, such as put and call options, stock and bonds,
derivatives do not necessarily present greater market risks than
traditional
investments. The Fund would only use derivative contracts for the purposes
disclosed in the applicable sections above.
INVESTMENT LIMITATIONS
The following are currently fundamental investment limitations of the
Fund
(i.e., they cannot be changed without the approval of the Fund's
shareholders):
the Fund will not invest in securities issued by any other
investment
company or investment trust except in regular open-market
transactions or
as part of a plan or merger or consolidation. The Fund will not
invest in
securities of a company for the purpose of exercising control or
management;
the Fund will not invest more than 5% of the value of its total
assets in
securities of issuers which have records of less than three years of
continuous operation; and
the Fund will not invest more than 5% of its assets in warrants,
including those acquired in units or attached to other securities.
For
purposes of this investment restriction, warrants acquired by the
Fund in
units or attached to securities may be deemed to be without value.
These investment limitations, which were established as fundamental
investment limitations when the Fund was incorporated in 1934, are no
longer
required by the Securities and Exchange Commission to be fundamental.
At a meeting on April 2, 1996, the Directors approved, and recommend
to
Shareholders the approval of Proposal 1, which entails changing the
above-referenced investment limitations of the Fund to non-fundamental
investment limitations (i.e., investment limitations that may be changed
without
Shareholder approval). Only Director approval would be required to change
these
investment limitations, and Shareholders would be notified before any
material
change becomes effective.
Although Shareholder approval of Proposal 1 would have the effect of
making
the above-referenced investment limitations non-fundamental, Shareholder
approval of Proposal 1 would not authorize any current revisions to these
limitations.
SUMMARY
If approved, Proposal 1 will result in changing all of the Fund's
fundamental investment policies and certain of the Fund's fundamental
investment
limitations to non-fundamental investment policies and limitations.
The ability of the Directors to make future revisions to the Fund's
investment policies and certain of the Fund's limitations would eliminate
the
need to hold Shareholder meetings (but not the need for Shareholder
notification) to effect changes in the Fund's investment policies or
limitations
whenever the Directors believe that such changes would enhance the Fund's
ability to pursue its investment objectives. This flexibility would enable
the
Fund to remain competitive in a changing market environment and should
decrease
the Fund's expenses.
Shareholder approval of Proposal 1 would also authorize the Fund to:
invest in bankers' acceptances;
invest in time and savings deposits;
invest in taxable municipal securities;
invest in asset-backed and mortgage-backed securities;
invest in zero coupon bonds;
invest more than 5% of its assets in non-ADR foreign securities; and
invest up to, but not including, 35% of its assets in below
investment
grade bonds.
The Directors believe that these revisions to the Fund's investment
policies will enhance the Fund's ability to diversify its portfolio
holdings
while attempting to give the bond portion of the Fund a higher total
return, and
minimize the market volatility of the Fund's portfolio relative to bond
indices.
Because significantly different asset classes are not as likely to go up
and
down in price together, the Directors believe that these changes should
result
in the Fund's net asset value, on average, being somewhat less volatile
than the
new individual component asset classes that would comprise the Fund's
portfolio.
The Fund's ability to invest in non-ADR foreign securities will also
give
the Fund the ability to weight its assets in domestic and foreign markets
as
conditions dictate. The Fund will also be able to invest in put and call
options
on its portfolio securities and on financial futures contracts to hedge
against
interest rate risk.
The Directors believe that the additional diversification provided by
these
types of investments, the anticipated effect that these revisions will have
on
the Fund's total return and overall performance, and the ability to make
sector
calls outweigh the additional credit and currency risks that these changes
entail.
BOARD OF DIRECTORS' RECOMMENDATION
Based on their consideration, analysis and evaluation of the above
factors
and other information deemed by them to be relevant to Proposal 1, the
Directors
(including the Directors who are not
"interested persons" as defined in the Investment Company Act of 1940)
have
concluded that it would be in the best interests of the Fund and its
Shareholders to approve Proposal 1. Approval requires the affirmative vote
of:
(a) 67% or more of the shares of the Fund present at the Meeting, if the
holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy; or (b) more than 50% of the outstanding shares of the
Fund, whichever is less.
In the event the Fund's Shareholders fail to approve Proposal 1, the
Fund
will continue to operate under the present investment policies and
limitations.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE CHANGING THE
FUND'S
FUNDAMENTAL INVESTMENT POLICIES AND CERTAIN OF THE FUND'S FUNDAMENTAL
INVESTMENT
LIMITATIONS TO NON-FUNDAMENTAL INVESTMENT POLICIES AND NON-FUNDAMENTAL
INVESTMENT LIMITATIONS AS DESCRIBED IN THE PROXY STATEMENT.
------------------------
SERVICE PROVIDERS
Federated Services Company is the Fund's administrator (the
"Administrator"). The Administrator is a subsidiary of Federated Investors,
and
is located at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 1522-3779.
Federated Management is the Fund's investment adviser. Federated
Management
is also a subsidiary of Federated Investors, and has the same address as
the
Administrator.
Federated Securities Corp. is the Fund's principal distributor.
Federated
Securities Corp. is a subsidiary of Federated Investors, and also has the
same
address as the Administrator.
ADDITIONAL INFORMATION
The Fund is not required, and does not intend, to hold annual meetings
of
shareholders. Shareholders wishing to submit proposals for consideration
for
inclusion in a proxy statement for the next meeting of shareholders should
send
their written proposals to Federated Stock and Bond Fund, Inc., Federated
Investors Tower, Pittsburgh, PA 15222-3779, so that they are received
within a
reasonable time before any such meeting.
No business other than the matters described above is expected to come
before the Meeting, but should any other matter requiring a vote of
shareholders
arise, including any question as to an adjournment or postponement of the
Meeting, the persons named on the enclosed proxy card will vote on such
matters
according to their best judgment in the interests of the Fund.
PROXIES, QUORUM AND VOTING AT THE MEETING
Any person giving a proxy has the power to revoke it any time prior to
its
exercise by executing a superseding proxy or by submitting a written notice
of
revocation to the Secretary of the Fund. In addition, although mere
attendance
at the Meeting will not revoke a proxy, a shareholder present at the
Meeting may
withdraw his or her proxy and vote in person. All properly executed
and unrevoked proxies received in time for the Meeting will be voted in
accordance with the instructions contained in the proxies. If no
instruction is
given, the persons named as proxies will vote the shares represented
thereby in
favor of the matters set forth in the attached Notice.
In the event that, at the time any session of the Meeting is called to
order, a quorum is not present at the Meeting, or in the event that a
quorum is
present at the Meeting but sufficient votes to approve any of the proposals
are
not received, the persons named as proxies may propose one or more
adjournments
of the Meeting (with respect to all or some of the proposals) to permit
further
solicitation of proxies. Any such adjournment will require the affirmative
vote
of a majority of those shares affected by the adjournment represented at
the
Meeting in person or by proxy. If a quorum is present, the persons named as
proxies will vote those proxies which they are entitled to vote
FOR all such proposals in favor of such an adjournment, and will vote those
proxies required to be voted AGAINST any such proposal against any
adjournment.
A shareholder vote may be taken on one or more of the proposals in this
Proxy
Statement prior to any such adjournment if sufficient votes have been
received
for approval. Under the Articles of Incorporation of the Fund, a quorum is
constituted by the presence in person or by proxy of the holders of a
majority
of the issued and outstanding shares of the Fund entitled to vote at the
Meeting.
Shares of the Fund (including shares which abstain or do not vote
with
respect to any of the proposals presented for shareholder approval) will be
counted for purposes of determining whether a quorum is present at the
Meeting.
Abstentions from voting will be treated as shares that are present and
entitled to vote for purposes of determining the number of shares that are
present and entitled to vote with respect to a proposal, but will not be
counted
as a vote in favor of that proposal. Accordingly, an abstention from voting
has
the same effect as a vote against a proposal.
SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED
PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE
IF MAILED IN THE UNITED STATES.
-----------------------------
Cusip 313911109
G01407-04 (7/96)
FEDERATED STOCK AND BOND FUND, INC.- SPECIAL MEETING OF SHAREHOLDERS-
AUGUST 26, 1996
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned Shareholders of
FEDERATED STOCK AND BOND FUND, INC. hereby appoint Patricia F. Conner,
Stephen R. Newcamp, Melissa A. Moore, Jody L. Petras, and Daniel J. Damico,
or any one of them, true and lawful attorneys, with the power of
substitution of each, to vote all Shares of FEDERATED STOCK AND BOND FUND,
INC., which the undersigned is entitled to vote at the Special Meeting of
Shareholders to be held on August 26, 1996, at Federated Investors Tower,
Pittsburgh, Pennsylvania, at 2:00 p.m. (Eastern time), and at any
adjournment thereof.
Discretionary authority is hereby conferred as to all other matters as may
properly come before the Special Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The attorneys
named will vote the shares represented by this proxy in accordance with the
choices made on this ballot. IF NO CHOICE IS INDICATED AS TO ANY ITEM,
THIS PROXY WILL BE VOTED AFFIRMATIVELY ON THAT MATTER. The approval of
each proposal is not contingent on the approval of any other matter.
PLEASE RETURN BOTTOM PORTION WITH YOUR VOTE IN THE ENCLOSED ENVELOPE AND
RETAIN THE TOP PORTION.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS X
FEDERATED STOCK AND BOND FUND, INC.
KEEP THIS PORTION FOR YOUR RECORDS
DETACH AND RETURN THIS PORTION ONLY
Vote on Proposal
FOR AGN ABS
1. TO APPROVE OR DISAPPROVE CHANGING THE FUND'S FUNDAMENTAL INVESTMENT
POLICIES AND CERTAIN OF THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS TO
NON-FUNDAMENTAL INVESTMENT POLICIES AND NON-FUNDAMENTAL INVESTMENT
LIMITATIONS AS DESCRIBED IN THE PROXY STATEMENT; AND
2. OTHER BUSINESS.
Please sign EXACTLY as your name(s) appear above. When signing as
attorney, executor, administrator, guardian, trustee, custodian, etc.,
please give your full title as such. If a corporation or partnership,
please sign the full name by an authorized officer or partner. If stock is
owned jointly, all parties should sign.
Signature Signature (joint owners) Date
