SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN A PROXY STATEMENT
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 appropriate box:
X Preliminary proxy statement
Definitive proxy statement
Definitive additional materials
Solicitation material
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)
Payment of filing fee (Check the appropriate box):
X $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
$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 0-11:1
(4) Proposed maximum aggregate value of transaction:
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 number, or the form
or schedule and the date of its filing:
(1) Amount previously paid:
(2) Form, schedule or registration no.:
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(4) Date filed:
P R E L I M I N A R Y C O P Y
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
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, shares of the Fund were
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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: . As of the
-------------
same date, no officer or Director of the Fund owned more than 1% 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, as amended (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 1-800-235-4669, or send a written request to Betsy
Hamilton at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779.
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 Federated Stock and Bond Fund, Inc. (the "Fund") was incorporated under
the laws of the State of Maryland on October 31, 1934, the Fund's investment
objective, policies, and limitations were designated as fundamental
investment objective, policies, and limitations (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 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 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:
oAlthough 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 "Fixed Income Investments" for a discussion of
these types of investments and related risks.
oThe 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 for a detailed description
of this type of investment and related risks.
oIn 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 for additional information regarding these
types of investments and related risks.
oPending 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 these types of investments 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.
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:
odomestic and foreign common stocks;
odomestic or foreign corporate debt obligations (as a matter of
operating policy, the lowest rated corporate debt obligations,
including zero coupon convertible securities, in which the Fund will
invest will be rated B or better by an NRSRO, at the time of
purchase, or which are of comparable quality in the judgment of the
Fund's investment adviser. If a security loses its rating or has its
rating reduced after the Fund has purchased it, the Fund is not
required to sell or otherwise dispose of the security, but may
consider doing so;
oobligations of the United States;
onotes, 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;
otaxable 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);
oasset-backed securities;
ocommercial 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;
otime 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;
obankers' 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;
opreferred stock and other equity-related securities which generally
have bond-like attributes, including zero coupon and/or convertible
securities;
oother securities which are deemed by the Fund's investment adviser
to be consistent with the Fund's investment objective; and
orepurchase 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 B or better 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:
odirect obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
onotes, 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:
othe issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
odiscretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
othe 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:
ocollateralized 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;
ocollateralized 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
osecurities 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 these investments.
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) as 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 put and call options, 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):
othe Fund will not invest in securities issued by any other investment
company or investment trust except in regular open-market transactions
or as part or a plan or merger or consolidation. The Fund will not
invest in securities of a company for the purpose of exercising control
or management;
othe 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
othe 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:
oinvest in bankers' acceptances;
oinvest in time and savings deposits;
oinvest in taxable municipal securities;
oinvest in asset-backed and mortgage-backed securities;
oinvest in zero coupon bonds;
oinvest more than 5% of its assets in non-ADR foreign securities; and
oinvest 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 Special 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 except that where the holders of
any series of shares are to vote as a series, then the presence in person or
by proxy of the holders of a majority of the shares of such series issued and
outstanding and entitled to vote thereat shall constitute a quorum for the
transaction of such business.
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.
FEDERATED STOCK AND BOND FUND, INC.- SPECIAL MEETING OF SHAREHOLDERS-
AUGUST 26, 1996 - CUSIP NO.
-------------
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned Shareholders of
FEDERATED STOCK AND BOND FUND, INC. hereby appoint Patricia F. Conner,
Suzanne W. Land, Melissa A. Moore, Jody L. Petras, and Scott A. Tretter, 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., and at any adjournment thereof.
Discretionary authority is hereby conferred as to all other matters as may
properly come before the Special Meeting.
PROPOSAL(S)
(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.
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. PLACE THE BALLOT SO THAT THE RETURN ADDRESS, LOCATED
ON THE REVERSE SIDE OF THE MAIL-IN-STUB, APPEARS THROUGH THE WINDOW OF THE
ENVELOPE.
FEDERATED STOCK AND BOND FUND, INC. PROXY VOTING MAIL-IN STUB
RECORD DATE SHARES
Please sign EXACTLY as your name(s) appear below. 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.
PROXY VOTING MAIL-IN-STUB
PROPOSAL(S):
1) FOR AGAINST ABSTAIN
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Dated: , 19
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