STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Dear Shareholder:
The Board of Directors and management of State Bond U.S. Government and Agency
Securities Fund (the `State Bond Fund'') are pleased to submit for your vote a
proposal to transfer all of the net assets of the State Bond Fund to Federated
Fund for U.S. Government Securities, Inc. (the "Federated Fund"), a mutual fund
advised by Federated Advisers. The Federated Fund has an investment objective
similar to that of the State Bond Fund in that it seeks current income by
investing in a professionally managed diversified portfolio limited to U.S.
Government securities. As part of the transaction, holders of shares in the
State Bond Fund would receive Class A Shares of the Federated Fund equal in
value to their shares in the State Bond Fund and the State Bond Fund would be
liquidated. Shareholders receiving Class A Shares of the Federated Fund as a
result of the proposed reorganization would not have to pay a sales load upon
receiving such Shares, nor would they be subject to any contingent deferred
sales charges in connection with the exercise of exchange rights or redemptions
of such Shares.
The Board of Directors of the State Bond Fund, as well as ARM Capital Advisors,
Inc., the State Bond Fund's manager, and SBM Financial Services, Inc., the State
Bond Fund's distributor, believe the proposed agreement and plan of
reorganization is in the best interests of State Bond Fund shareholders for the
following reasons:
- -- The reorganization of the State Bond Fund into the Federated Fund may
provide operating efficiencies as a result of the size of the Federated Fund
which were not available to State Bond Fund shareholders due to the smaller size
of the State Bond Fund.
- -- The Federated Fund has an investment objective similar to that of the State
Bond Fund and offers an investment portfolio which invests in U.S. Government
securities to achieve current income.
The Federated Fund is managed by Federated Advisers, a subsidiary of Federated
Investors. Federated Investors was founded in 1955 and is located in
Pittsburgh, Pennsylvania. Federated Advisers and other subsidiaries of
Federated Investors serve as investment advisers to a number of investment
companies and private accounts. With over $90 billion invested across more than
250 funds under management and/or administration by its subsidiaries, Federated
Investors is one of the largest mutual fund investment managers in the United
States. With more than 2,000 employees, Federated continues to be led by the
management who founded the company in 1955. Federated funds are presently at
work in and through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Federated Investors also has an excellent reputation for customer servicing,
having received a #1 rating for five years in a row by Dalbar, Inc. The
shareholder services for the Federated funds include advanced technological
systems that result in quick shareholder access to a broad spectrum of
information.
We believe the transfer of the State Bond Fund's assets in this transaction
presents an exciting investment opportunity for our shareholders. Your vote on
the transaction is critical to its success. The transfer will be effected only
if approved by a majority of all of the State Bond Fund's outstanding shares on
the record date voted in person or represented by proxy. We hope you share our
enthusiasm and will participate by casting your vote in person, or by proxy if
you are unable to attend the meeting. Please read the enclosed prospectus/proxy
statement carefully before you vote.
THE BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS IN THE BEST INTERESTS OF
THE STATE BOND FUND AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR ITS APPROVAL.
Thank you for your prompt attention and participation.
Sincerely,
Dale C. Bauman
President
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO SHAREHOLDERS OF STATE BOND U.S. GOVERNMENT AND
AGENCY SECURITIES FUND:
A Special Meeting of Shareholders of State Bond U.S. Government and Agency
Securities Fund, a portfolio of State Bond Income Funds, Inc. (the `State Bond
Fund') will be held at 4:00 p.m. on December 9, 1996 at: 100 North Minnesota
Street, New Ulm, Minnesota 56073-0069, for the following purposes:
1. To approve or disapprove a proposed Agreement and Plan of Reorganization
between the State Bond Fund and Federated Fund for U.S. Government Securities,
Inc. (the "Federated Fund"), whereby the Federated Fund would acquire all of the
net assets of the State Bond Fund in exchange for the Federated Fund's Class A
Shares to be distributed pro rata by the State Bond Fund to the holders of its
shares in complete liquidation of the State Bond Fund; and
2. To transact such other business as may properly come before the meeting or
any adjournment thereof.
By Order of the Board of Directors,
Dated: November 2, 1996 Kevin L. Howard
Secretary
Shareholders of record at the close of business on October 11, 1996, are
entitled to vote at the meeting. Whether or not you plan to attend the meeting,
please sign and return the enclosed proxy card. Your vote is important.
TO SECURE THE LARGEST POSSIBLE REPRESENTATION AND TO SAVE THE EXPENSE OF FURTHER
MAILINGS, PLEASE MARK YOUR PROXY CARD, SIGN IT, AND RETURN IT IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOU MAY
REVOKE YOUR PROXY AT ANY TIME AT OR BEFORE THE MEETING OR VOTE IN PERSON IF YOU
ATTEND THE MEETING.
PROSPECTUS/PROXY STATEMENT
NOVEMBER 2, 1996
ACQUISITION OF THE ASSETS OF
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND,
A PORTFOLIO OF STATE BOND INCOME FUNDS, INC.
100 NORTH MINNESOTA STREET, P.O. BOX 69
NEW ULM, MINNESOTA 56073-0069
TELEPHONE NUMBER: 1-800-328-4735
BY AND IN EXCHANGE FOR CLASS A SHARES OF
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
TELEPHONE NUMBER: 1-800-245-5051, OPTION ONE
This Prospectus/Proxy Statement describes the proposed Agreement and Plan of
Reorganization (the "Plan") whereby Federated Fund for U.S. Government
Securities, Inc., a Maryland corporation (the "Federated Fund"), would acquire
all of the net assets of State Bond U.S. Government and Agency Securities Fund,
a portfolio of State Bond Income Funds, Inc., a Maryland corporation (the
`State Bond Fund''), in exchange for the Federated Fund's Class A Shares to be
distributed pro rata by the State Bond Fund to the holders of its shares, in
complete liquidation of the State Bond Fund. As a result of the Plan, each
shareholder of the State Bond Fund will become the owner of the Federated Fund's
Class A Shares having a total net asset value equal to the total net asset value
of his or her holdings in the State Bond Fund.
THE BOARD OF DIRECTORS OF THE STATE BOND FUND UNANIMOUSLY RECOMMENDS APPROVAL OF
THE PLAN.
The shares of each of the Federated Fund and the State Bond Fund represent
interests in separate open-end, diversified management investment companies.
The Federated Fund's investment objective is to provide current income by
investing in a professionally managed diversified portfolio limited to U.S.
Government securities. The State Bond Fund's investment objective is to
maximize current income to the extent consistent with preservation of capital by
investing primarily in obligations issued or guaranteed by the U.S. Government
or by its agencies or instrumentalities. For a comparison of the investment
policies of the Federated Fund and the State Bond Fund, see "Summary -
Investment Objectives, Policies and Limitations."
This Prospectus/Proxy Statement should be retained for future reference. It
sets forth concisely the information about the Federated Fund that a prospective
investor should know before investing. This Prospectus/Proxy Statement is
accompanied by the Prospectus of the Federated Fund dated May 31, 1996, which is
incorporated herein by reference. Statements of Additional Information for the
Federated Fund dated May 31, 1996 (relating to the Federated Fund's Prospectus
of the same date) and November 2, 1996 (relating to this Prospectus/Proxy
Statement) and the Annual Report to Shareholders dated March 31, 1996, all
containing additional information, have been filed with the Securities and
Exchange Commission and are incorporated herein by reference. Copies of the
Statements of Additional Information and the Annual Report may be obtained
without charge by writing or calling the Federated Fund at the address and
telephone number shown above.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE NO.
SUMMARY OF EXPENSES 6
SUMMARY 8
ABOUT THE PROPOSED REORGANIZATION 8
INVESTMENT OBJECTIVES, POLICIES AND LIMITATIONS 8
ADVISORY AND OTHER FEES 10
DISTRIBUTION ARRANGEMENTS 11
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES 12
DIVIDENDS 13
TAX CONSEQUENCES 13
RISK FACTORS 13
INFORMATION ABOUT THE REORGANIZATION 14
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION 14
AGREEMENT AMONG ARM, ARM CAPITAL AND FEDERATED 16
DESCRIPTION OF THE PLAN OF REORGANIZATION 16
DESCRIPTION OF FEDERATED FUND SHARES 17
FEDERAL INCOME TAX CONSEQUENCES 17
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS AND OBLIGATIONS 18
CAPITALIZATION 20
INFORMATION ABOUT THE FEDERATED FUND AND THE STATE BOND FUND 20
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC. 20
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND 20
VOTING INFORMATION 21
OUTSTANDING SHARES AND VOTING REQUIREMENTS 21
DISSENTER'S RIGHT OF APPRAISAL 22
OTHER MATTERS AND DISCRETION OF PERSONS NAMED IN THE PROXY 22
AGREEMENT AND PLAN OF REORGANIZATION -- EXHIBIT A 23
SUMMARY OF EXPENSES
FEDERATED STATE PRO
FUND BOND FORMA
(CLASS A FUND COMBINE
SHARES) D
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on
Purchases 4.50%(1) 5.00% 4.50%(1)
(as a percentage of offering
price)
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of NONE NONE NONE
offering price)
Contingent Deferred Sales Charge
(as a percentage of original
purchase 0.00%(2) 0.00% 0.00%(2)
price or redemption proceeds, as
applicable)
Redemption Fee (as a percentage of
amount redeemed, if NONE NONE NONE
applicable)(3)
Exchange Fee NONE NONE NONE
Annual Operating Expenses
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
(AFTER EXPENSE REIMBURSEMENTS OR WAIVERS)
Management Fee 0.56%(4) 0.15%(5 0.56%(4)
)
12b-1 Fee NONE 0.25% NONE
Total Other Expenses 0.39%(6) 0.60% 0.39%(6)
Total Operating 0.95% 1.00% 0.95%
Expenses(7)
(1) This sales charge would not be applicable to Class A Shares of the
Federated Fund acquired under the proposed reorganization.
(2) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales charge and
not distributed by Federated Securities Corp. may be charged a contingent
deferred sales charge of 0.50 of 1% for redemptions made within one full year of
purchase. For a more complete description, see ``ummary - Distribution
Arrangements.'' This contingent deferred sales charge would not be applicable
to Class A Shares of the Federated Fund acquired under the proposed
reorganization.
(3) Wire-transferred redemptions of Class A Shares of the Federated Fund of
less than $5,000 may be subject to additional fees. A $10.00 fee will be
charged for certain redemptions of State Bond Fund shares by wire transfer.
(4) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time in its sole discretion. The maximum management fee is 0.25% of the
first $500 million in average daily net assets, 0.225% of the second $500
million in average daily net assets, 0.20% of average daily net assets in excess
of $1 billion, plus 4.50% of the Federated Fund's annual gross income (excluding
any capital gains or losses).
(5) The management fee is net of expense reimbursements. Without such
reimbursements, the management fee would have been 0.40%.
(6) Total other expenses for the Federated Fund and the Pro Forma Combined Fund
include a shareholder services fee of 0.15%. The shareholder services fee has
been reduced to reflect the voluntary waiver of a portion of the shareholder
services fee. The shareholder service provider can terminate this voluntary
waiver at any time in its sole discretion. The maximum shareholder services fee
is 0.25%.
(7) The total operating expenses for Class A Shares of the Federated Fund are
based on expenses expected during its fiscal year ending March 31, 1997. The
total operating expenses were 0.95% for the fiscal year ended March 31, 1996,
and would have been 1.06% absent the voluntary waivers of portions of the
management fee and the shareholder services fee. The total operating expenses
for the State Bond Fund are based upon expenses incurred by the State Bond Fund
during its fiscal year ended October 31, 1995. The total operating expenses
were 1.00% for the fiscal year ended October 31, 1995, and would have been 1.25%
without expense reimbursements.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of shares of each of the Federated Fund,
the State Bond Fund and the Pro Forma Combined Fund will bear, either directly
or indirectly. For more complete descriptions of the various costs and
expenses, see "Summary - Advisory and Other Fees" and "Summary - Distribution
Arrangements."
Long-term shareholders of the State Bond Fund may pay more than the economic
equivalent of the maximum front-end sales charges permitted under the rules of
the National Association of Securities Dealers, Inc.
EXAMPLES
The Examples below are intended to assist an investor in understanding the
various costs that an investor will bear directly or indirectly. The Examples
assume payment of operating expenses at the levels set forth in the table above.
(1) This Example does not include sales charges or contingent deferred sales
charges since such sales charges are not applicable to Federated Fund Class A
Shares received as a result of the proposed reorganization.
An investor would pay the 1 3 5 10
following expenses on a $1,000 year years years years
investment, assuming (1) 5%
annual return and (2) redemption
at the end of each time period.
Expenses would be the same if
there were no redemption at the
end of each time period.
Federated Fund $10 $30 $53 $117
State Bond Fund $10 $32 $55 $122
Pro Forma Combined $10 $30 $53 $117
(2) THIS EXAMPLE INCLUDES SALES CHARGES SINCE CLASS A SHARES PURCHASED
SUBSEQUENT TO THE REORGANIZATION MAY BE SUBJECT TO SALES CHARGES. FOR A MORE
COMPLETE DESCRIPTION OF SALES CHARGES, CONTINGENT DEFERRED SALES CHARGES AND
EXEMPTIONS FROM SUCH CHARGES, REFERENCE IS HEREBY MADE TO THE PROSPECTUS OF THE
FEDERATED FUND DATED MAY 31, 1996, AND THE PROSPECTUS OF THE STATE BOND FUND
DATED MARCH 1, 1996, EACH OF WHICH IS INCORPORATED HEREIN BY REFERENCE THERETO.
An investor would pay the 1 3 5 10
following expenses on a $1,000 year years years years
investment, assuming (1) 5%
annual return and (2) redemption
at the end of each time period.
Expenses would be the same if
there were no redemption at the
end of each time period.
Federated Fund $54 $74 $95 $156
State Bond Fund $60 $80 $102 $166
Pro Forma Combined $54 $74 $95 $156
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus of the Federated Fund dated May 31, 1996, the Statement of
Additional Information of the Federated Fund dated May 31, 1996, the Prospectus
of the State Bond Fund dated March 1, 1996, the Statement of Additional
Information of the State Bond Fund dated March 1, 1996, and the Plan, a copy of
which is attached to this Prospectus/Proxy Statement as Exhibit A.
About the Proposed Reorganization
The Board of Directors of the State Bond Fund has voted to recommend to holders
of the shares of the State Bond Fund the approval of the Plan whereby the
Federated Fund would acquire all of the net assets of the State Bond Fund in
exchange for the Federated Fund's Class A Shares to be distributed pro rata by
the State Bond Fund to its shareholders in complete liquidation and dissolution
of the State Bond Fund (the "Reorganization"). As a result of the
Reorganization, each shareholder of the State Bond Fund will become the owner of
the Federated Fund's Class A Shares having a total net asset value equal to the
total net asset value of his or her holdings in the State Bond Fund on the date
of the Reorganization, i.e., the Closing Date (as hereinafter defined).
As a condition to the Reorganization transactions, the Federated Fund and the
State Bond Fund will receive an opinion of counsel that the Reorganization will
be considered a tax-free "reorganization" under applicable provisions of the
Internal Revenue Code of 1986, as amended (the `Code''), so that no gain or
loss will be recognized by either the Federated Fund or the State Bond Fund or
the shareholders of the State Bond Fund. The tax basis of the Federated Fund's
Class A Shares received by State Bond Fund shareholders will be the same as the
tax basis of their shares in the State Bond Fund. After the acquisition is
completed, the State Bond Fund will be dissolved.
Investment Objectives, Policies and Limitations
The investment objective of the Federated Fund is to provide current income by
investing in a professionally managed diversified portfolio limited to U.S.
Government securities. This investment objective may not be changed without the
affirmative vote of a majority of the outstanding voting securities of the
Federated Fund, as defined in the Investment Company Act of 1940, as amended
(the `1940 Act'').
The investment objective of the State Bond Fund is to seek to maximize current
income to the extent consistent with preservation of capital by investing at
least 75% of the value of its assets in obligations issued or guaranteed by the
U.S. Government or by its agencies or instrumentalities. This investment
objective may not be changed without the affirmative vote of a majority of the
outstanding voting securities of the State Bond Fund, as defined in the 1940
Act.
The Federated Fund invests only in securities which are primary or direct
obligations of the U.S. Government, its agencies or instrumentalities, or which
are guaranteed as to the payment of principal and interest by the U.S.
Government, its agencies, or instrumentalities, and in certain collateralized
mortgage obligations (`CMOs''). The U.S. Government securities in which the
Federated Fund invests include: direct obligations of the U.S. Treasury such as
U.S. Treasury bills, notes, and bonds; and obligations of U.S. Government
agencies or instrumentalities such as: the Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Farmers Home Administration; Federal Home Loan Banks; and Federal National
Mortgage Association (`FNMA''). The Federated Fund also invests in CMOs, which
are debt obligations collateralized by mortgage loans or mortgage pass-through
securities. The Federated Fund will invest only in CMOs which are rated AAA by
a recognized rating agency and which may be: (i) 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; (ii)
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 (iii) securities in which the proceeds of the issuance
are invested in mortgage securities and payment of the principal and interest
are supported by the credit of an agency or instrumentality of the U.S.
Government. CMOs in which the Federated Fund invests are issued by agencies or
instrumentalities of the U.S. Government. The Federated Fund may enter into
repurchase agreements, purchase securities on a when-issued or delayed delivery
basis, and lend portfolio securities. Unless otherwise designated, the
investment policies of the Federated Fund may be changed by the Board of
Directors without shareholder approval, although shareholders will be notified
before any material change becomes effective.
The State Bond Fund invests at least 75% of the value of its assets in
obligations issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities (`U.S. Government Securities''). U.S. Government Securities
in which the State Bond Fund may invest include Government National Mortgage
Association (`GNMA'') certificates, FNMA certificates, Federal Home Loan
Mortgage Corporation (`FHLMC'') certificates and U.S. Treasury notes, bills or
bonds. U.S. Government Securities may also include CMOs that are issued by an
agency or instrumentality of the U.S. Government. The State Bond Fund may enter
into repurchase agreements relating to U.S. Government Securities and privately-
issued CMOs which are collateralized by or represent an interest in U.S.
Government Securities, purchase securities on a when-issued basis, and lend
portfolio securities. Unless otherwise designated, the investment policies of
the State Bond Fund may be changed by the Board of Directors without shareholder
approval.
Both the Federated Fund and the State Bond Fund are subject to certain
investment limitations. For the Federated Fund, these include investment
limitations which prohibit it from (1) borrowing money except, under certain
circumstances, the Federated Fund may borrow up to 10% of the value of its total
assets; or (2) owning securities of open-end or closed-end investment companies,
except under certain circumstances and subject to certain limitations not
exceeding 10% of its net assets. The first investment limitation listed above
cannot be changed without shareholder approval; the other limitation may be
changed by the Board of Directors without shareholder approval, although
shareholders will be notified before any material change becomes effective.
The State Bond Fund has investment limitations which prohibit it from
(1) borrowing money, except for temporary purposes in an aggregate amount not in
excess of 10% of the value of the total assets of the State Bond Fund; provided,
that borrowings in excess of 5% of such value are permitted from banks only, and
the State Bond Fund will not purchase additional portfolio securities while its
borrowings exceed 5%; (2) purchasing securities of any issuer if immediately
thereafter more than 5% of total assets at market value would be invested in the
securities of any one issuer, except that this limitation does not apply to
obligations issued or guaranteed as to principal and interest either by the U.S.
Government or its agencies or instrumentalities; (3) making loans except that to
the extent the purchase of bills, notes, bonds or other debt obligations or the
entry into of repurchase agreements may be considered loans; provided, however,
that the State Bond Fund may lend portfolio securities to brokers or dealers if
the aggregate market value of the securities loaned does not exceed 10% of the
value of the State Bond Fund's total assets; (4) mortgaging or pledging assets,
except that up to 10% of the value of the State Bond Fund's total assets can be
used to secure borrowings; and (5) investing more than 10% of the value of the
State Bond Fund's net assets in any combination of illiquid securities,
including repurchase agreements maturing in more than seven days. The above
investment limitations of the State Bond Fund cannot be changed without
shareholder approval.
In addition to the policies and limitations set forth above, both the Federated
Fund and the State Bond Fund are subject to certain additional investment
policies and limitations, described in the Federated Fund's Statement of
Additional Information dated May 31, 1996, and the State Bond Fund's Statement
of Additional Information dated March 1, 1996. Reference is hereby made to the
Federated Fund's Prospectus and Statement of Additional Information, each dated
May 31, 1996, and to the State Bond Fund's Prospectus and Statement of
Additional Information, each dated March 1, 1996, which set forth in full the
investment objective, policies and investment limitations of each of the
Federated Fund and the State Bond Fund, all of which are incorporated herein by
reference thereto.
Advisory and Other Fees
The annual investment advisory fee for the Federated Fund is 0.25 of 1% of the
first $500 million in average daily net assets of the Federated Fund, 0.225 of
1% of the second $500 million in average daily net assets of the Federated Fund,
0.20 of 1% of average daily net assets of the Federated Fund in excess of $1
billion, plus 4.50% of the Federated Fund's gross income (excluding any capital
gains or losses). The investment adviser to the Federated Fund, Federated
Advisers ("Federated Advisers"), a subsidiary of Federated Investors, may
voluntarily choose to waive a portion of its advisory fee or reimburse the
Federated Fund for certain operating expenses. This voluntary reimbursement of
expenses may be terminated by Federated Advisers at any time in its sole
discretion. Federated Advisers has also undertaken to reimburse the Federated
Fund for operating expenses in excess of limitations established by certain
states. The maximum annual management fee for the State Bond Fund is 0.40 of 1%
of average daily net assets of the State Bond Fund. The State Bond Fund's
investment manager, ARM Capital Advisors, Inc. (`ARM Capital''), a wholly-owned
subsidiary of ARM Financial Group, Inc. (`ARM''), has voluntarily agreed to
reimburse the State Bond Fund for any expenses incurred by it in excess of 1% of
average daily net assets of the State Bond Fund. This voluntary arrangement may
be terminated by ARM Capital at any time in its sole discretion. ARM Capital
has also undertaken to reimburse the State Bond Fund for operating expenses in
excess of limitations established by certain states.
Federated Services Company, an affiliate of Federated Advisers, provides certain
administrative personnel and services necessary to operate the Federated Fund at
an annual rate based upon the average aggregate daily net assets of all funds
advised by Federated Advisers and its affiliates. The rate charged is 0.15 of
1% on the first $250 million of all such funds' average aggregate daily net
assets, 0.125 of 1% on the next $250 million, 0.10 of 1% on the next $250
million and 0.075 of 1% of all such funds' average aggregate daily net assets in
excess of $750 million, with a minimum annual fee per portfolio of $125,000 plus
$30,000 for each additional class of shares of any such portfolio. Federated
Services Company may choose voluntarily to waive a portion of its fee. The
administrative fee expense for the Federated Fund's most recent fiscal year was
$1,153,399. Administrative personnel and services necessary to operate the
State Bond Fund are currently provided by ARM Capital and are included in the
annual management fee for the State Bond Fund, as discussed above.
The Federated Fund has entered into a Shareholder Services Agreement under which
it may make payments of up to 0.25 of 1% of the average daily net asset value of
the Class A Shares to obtain certain personal services for shareholders and the
maintenance of shareholder accounts. The Shareholder Services Agreement
provides that Federated Shareholder Services ("FSS"), an affiliate of Federated
Advisers, either will perform shareholder services directly or will select
financial institutions to perform such services. Financial institutions will
receive fees based upon shares owned by their clients or customers. The
schedule of such fees and the basis upon which such fees will be paid is
determined from time to time by the Federated Fund and FSS. Other than in
connection with payments under a Rule 12b-1 plan as described below, the State
Bond Fund does not make payments to obtain similar shareholder services.
The total annual operating expenses for Class A Shares of the Federated Fund
were 0.95% of average daily net assets (after waivers) for its most recent
fiscal year. The total annual operating expenses for shares of the State Bond
Fund were 1.00% of average daily net assets (after expense reimbursements) for
its most recent fiscal year. Without such waivers or reimbursements, the
expense ratio of the Federated Fund and the State Bond Fund would be higher by
0.11% and 0.25%, respectively, of average daily net assets.
Distribution Arrangements
Federated Securities Corp. ("FSC"), an affiliate of Federated Advisers, is the
principal distributor for shares of the Federated Fund. The Federated Fund does
not have a Rule 12b-1 plan in effect with respect to its Class A Shares and,
accordingly, does not, nor does FSC, compensate brokers and dealers for sales
and administrative services performed in connection with sales of Class A Shares
of the Federated Fund pursuant to a plan of distribution adopted pursuant to
Rule 12b-1. FSC will pay financial institutions, at the time of purchase, from
its assets, an amount equal to 0.50 of 1% of the net asset value of Class A
Shares purchased by their clients or customers under certain qualified plans as
approved by FSC. (Such payments are subject to a reclaim from the financial
institution should the assets leave the program within 12 months after
purchase.) In addition, FSC, from its own assets, may pay financial
institutions supplemental fees as financial assistance for providing substantial
sales services, distribution-related support services or shareholder services
with respect to the Federated Fund. Such assistance will be predicated upon the
amount of Class A Shares the financial institution sells or may sell, and/or
upon the type and nature of sales or marketing support furnished by the
financial institution. Any payments made by FSC may be reimbursed by Federated
Advisers or its affiliates. If a financial institution elects to waive receipt
of this payment, the Federated Fund will waive any applicable contingent
deferred sales charge (such contingent deferred sales charges are discussed
below).
SBM Financial Services, Inc. (`SBMFS''), an affiliate of ARM Capital, is the
principal distributor for shares of the State Bond Fund. The State Bond Fund
has adopted a Rule 12b-1 Distribution Plan (the "Rule 12b-1 Plan") pursuant to
which the State Bond Fund pays SBMFS an amount equal to an annual rate of 0.25
of 1% of the average daily net assets of the State Bond Fund. The fee may be
used by SBMFS to (i) provide initial and ongoing sales compensation to its
investment executives and to other broker/dealers in connection with the sale of
State Bond Fund shares and to pay for other advertising and promotional expenses
in connection with the sale of State Bond Fund shares, and (ii) provide
compensation to entities in connection with the provision of certain personal
and account maintenance services to State Bond Fund shareholders including, but
not limited to, responding to shareholder inquiries and providing information on
their investments. The Federated Fund will not assume any liabilities or make
any voluntary reimbursements on account of the State Bond Fund's Rule 12b-1
Plan.
Certain costs exist with respect to the purchase and sale of Federated Fund and
State Bond Fund shares. Class A Shares of the Federated Fund and shares of the
State Bond Fund are sold at their net asset value next determined after an order
is received, plus a maximum sales charge of 4.50% and 5.00%, respectively. No
sales charge will be imposed in connection with the issuance of Federated Fund
Class A Shares to State Bond Fund shareholders as a result of the
Reorganization. Class A Shares of the Federated Fund purchased with the
proceeds of a redemption of shares of an unaffiliated investment company
purchased or redeemed with a sales charge and not distributed by FSC may be
charged a contingent deferred sales charge of 0.50 of 1% for redemptions made
within one full year of purchase. Any such charge will be imposed on the lesser
of the net asset value of the redeemed shares at the time of purchase or
redemption. The contingent deferred sales charges are not imposed in connection
with the exercise of exchange rights, nor will they be imposed on redemptions of
Federated Fund Class A Shares received by shareholders of the State Bond Fund as
a result of the Reorganization. For a complete description of sales charges,
contingent deferred sales charges and exemptions from such charges, reference is
hereby made to the Prospectus of the Federated Fund dated May 31, 1996 and the
Prospectus of the State Bond Fund dated March 1, 1996, each of which is
incorporated herein by reference thereto.
Purchase, Exchange and Redemption Procedures
The transfer agent and dividend disbursing agent for the Federated Fund is
Federated Shareholder Services Company (formerly called Federated Services
Company). The transfer agent and dividend disbursing agent for the State Bond
Fund is ARM Transfer Agency, Inc. Procedures for the purchase, exchange and
redemption of the Federated Fund's Class A Shares differ slightly from
procedures applicable to the purchase, exchange and redemption of the State Bond
Fund's shares. Any questions about such procedures may be directed to, and
assistance in effecting purchases, exchanges or redemptions of the Federated
Fund's Class A Shares or the State Bond Fund's shares may be obtained from FSC,
principal distributor for the Federated Fund, at 1-800-245-5051, option one, or
from SBMFS, principal distributor for the State Bond Fund, at 1-800-328-4735.
Reference is made to the Prospectus of the Federated Fund dated May 31, 1996,
and the Prospectus of the State Bond Fund dated March 1, 1996, for a complete
description of the purchase, exchange and redemption procedures applicable to
purchases, exchanges and redemptions of Federated Fund and State Bond Fund
shares, respectively, each of which is incorporated herein by reference thereto.
Set forth below is a brief listing of the significant purchase, exchange and
redemption procedures applicable to the Federated Fund's Class A Shares and the
State Bond Fund's shares.
Purchases of Class A Shares of the Federated Fund may be made through a
financial institution that has an agreement with FSC or, once an account has
been established, by wire or check. Purchases of shares of the State Bond Fund
may be made through SBMFS and through certain broker-dealers under contract with
SBMFS or directly by wire or check once an account has been established. The
minimum initial investment in the Federated Fund is $500, except for retirement
accounts for which the minimum is $50. Subsequent investments must be in
amounts of at least $100, except for retirement accounts for which the minimum
is $50. The minimum initial investment in the State Bond Fund is $500.
Subsequent investments must be in amounts of at least $50. The Federated Fund
and the State Bond Fund each reserves the right to reject any purchase request.
In connection with the sale of Class A Shares of the Federated Fund, FSC may
from time to time offer certain items of nominal value to any shareholder.
The purchase price of the Federated Fund's Class A Shares and the State Bond
Fund's shares is based on net asset value plus a sales charge. The net asset
value per share for each of the Federated Fund and the State Bond Fund is
calculated as of the close of trading (normally 4:00 p.m., Eastern time) on the
New York Stock Exchange, Inc. (the `NYSE'') on each day on which the Federated
Fund and the State Bond Fund compute their net asset value. Purchase and
redemption orders for the Federated Fund received from broker/dealers before
5:00 p.m. (Eastern time) and from financial institutions before 4:00 p.m.
(Eastern time) may be entered at that day's price. Purchase orders for shares
of the State Bond Fund received from authorized broker/dealers will be executed
at the offering price next determined after the receipt of the order by the
broker/dealer, provided that the broker/dealer promptly transmits the order to
SBMFS the same day. Redemption orders for shares of the State Bond Fund
received by the State Bond Fund's transfer agent from authorized dealers or
representatives of SBMFS prior to the close of the NYSE will be entered at that
day's price; such redemption orders received after the close of the NYSE will be
entered at the net asset value determined at the close of the NYSE on the next
trading day. Federated Fund purchase orders by wire are considered received
upon receipt of payment by wire. Federated Fund purchase orders received by
check are considered received after the check is converted into federal funds,
which normally occurs the business day after receipt.
Holders of Class A Shares of the Federated Fund have exchange privileges with
respect to Class A Shares in certain of the funds for which affiliates of
Federated Investors serve as investment adviser or principal underwriter
(collectively, the "Federated Funds"), each of which has different investment
objectives and policies. Class A Shares of the Federated Fund may be exchanged
for Class A Shares of certain Federated Funds at net asset value without a
contingent deferred sales charge. To the extent a shareholder exchanges Class A
Shares of the Federated Fund for Class A Shares of other Federated Funds, the
time for which the exchanged-for shares are to be held will be added to the time
for which exchanged-from shares were held for purposes of satisfying the
applicable holding period. Class A Shares to be exchanged must have a net asset
value which meets the minimum investment requirement for the fund into which the
exchange is being made. Holders of shares of the State Bond Fund have exchange
privileges with respect to shares in certain of the other funds for which ARM
Capital serves as investment manager (collectively, the `State Bond Group''),
each of which has different investment objectives and policies. Any exchange
for shares of other funds in the State Bond Group will generally be at the
respective net asset values next determined after receipt of the request for
exchange. Exercise of the exchange privilege is treated as a sale for federal
income tax purposes and, accordingly, may have tax consequences for the
shareholder. Information on share exchanges may be obtained from the Federated
Fund or the State Bond Fund, as appropriate.
Redemptions of Federated Fund Class A Shares may be made through a financial
institution, by telephone, by mailing a written request or through the Federated
Fund's Systematic Withdrawal Program. Redemptions of State Bond Fund shares may
be made through an authorized dealer or representative of SBMFS, by mailing a
written request to the State Bond Fund's transfer agent or through the State
Bond Fund's quick redemption service or check redemption service. Class A
Shares of the Federated Fund are redeemed at their net asset value, less any
applicable contingent deferred sales charge, next determined after the
redemption request is received. Shares of the State Bond Fund are redeemed at
their net asset value, determined at the close of the NYSE on the date the
redemption request is received. Proceeds will ordinarily be distributed by
check within seven days after receipt of a redemption request.
Dividends
Each of the Federated Fund's and the State Bond Fund's current policy is to pay
dividends monthly from net investment income and to make annual distributions of
net realized capital gains, if any. With respect to both the Federated Fund and
the State Bond Fund, unless a shareholder otherwise instructs, dividends and
capital gain distributions will be reinvested automatically in additional shares
at net asset value, subject to no sales charge.
Tax Consequences
As a condition to the Reorganization transactions, the Federated Fund and the
State Bond Fund will receive an opinion of counsel that the Reorganization will
be considered a tax-free "reorganization" under applicable provisions of the
Code so that no gain or loss will be recognized by either the Federated Fund or
the State Bond Fund or the shareholders of the State Bond Fund. The tax basis
of the Federated Fund shares received by State Bond Fund shareholders will be
the same as the tax basis of their shares in the State Bond Fund.
RISK FACTORS
As with other mutual funds that invest in U.S. Government securities and CMOs,
the Federated Fund is subject to market risks. Although some obligations issued
or guaranteed by agencies or instrumentalities of the U.S. Government, such as
GNMA 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. The prices of fixed-income government securities generally
fluctuate inversely in relation to the direction of interest rates. The prices
of longer term securities fluctuate more widely in response to market interest
rate changes. Furthermore, there is no limit to portfolio maturity. Generally,
the values of the securities in which the Federated Fund will invest, and
accordingly the value of the Federated Fund's shares, will fall as interest
rates rise and rise as interest rates fall. Since the State Bond Fund also
invests primarily in U.S. Government securities, in addition to investing in
CMOs, these risk factors are generally also present in an investment in the
State Bond Fund. A full discussion of the risks inherent in investment in the
Federated Fund and the State Bond Fund is set forth in the Federated Fund's
Prospectus and Statement of Additional Information, each dated May 31, 1996, and
the State Bond Fund's Prospectus and Statement of Additional Information, each
dated March 1, 1996, each of which is incorporated herein by reference thereto.
INFORMATION ABOUT THE REORGANIZATION
Background and Reasons for the Proposed Reorganization
On June 14, 1995, SBM Company, which was then the investment adviser to the
State Bond Fund, completed the sale of substantially all of its business
operations to ARM (the `1995 Transaction''). In connection with the 1995
Transaction, ARM Capital became the investment manager of the State Bond Fund.
In addition, ARM acquired all of the outstanding stock of SBMFS, the current
distributor of shares of the State Bond Fund.
Considerations of the Board of Directors of the State Bond Fund. On June 6,
1996, ARM management advised the Board of Directors of the State Bond Fund that
ARM was considering redirecting its corporate strategy away from the management
and distribution of retail mutual funds in order to concentrate more fully on
its core businesses. Moreover, ARM management stated that due to the relatively
small net assets in the State Bond Fund and the other mutual funds in the State
Bond Group, ARM and its affiliates were not in a position to provide the value-
added shareholder services, technological advancements, comprehensive
distribution networks and diversified product choices that many larger mutual
fund complexes offer. As a result, management stated that ARM was engaged in
the identification and analysis of various potential alternatives for the State
Bond Fund and the other funds in the State Bond Group.
After conducting a screening process, ARM determined that in its judgment, the
proposed Reorganization was the most desirable alternative involving the State
Bond Fund that was reasonably available and that it should be presented to the
State Bond Fund's Board of Directors for its consideration.
A meeting of the entire Board of Directors was held on August 16, 1996, at which
Federated (as defined below) presented to the Board information relating to the
overall reputation, financial strength and stability of Federated Investors, the
parent company of Federated Advisers (together with its affiliates,
`Federated''). Federated, founded in 1955, is among the seven largest mutual
fund sponsors, with over $90 billion invested across more than 250 funds under
management and/or administration by its subsidiaries, and over 2,000 employees.
Federated's management also discussed the growth of assets under management
and/or administration by Federated from approximately $35 billion in 1989 to
over $90 billion as of August 1996. Federated's management explained to the
Board that the majority of this growth came from within Federated through its
multiple distribution channels. The Board was also informed of the variety of
investment products available through Federated, including international funds
and an array of domestic funds broader than currently offered in the State Bond
Group, the exchange privileges that would be available to former State Bond Fund
shareholders if the Reorganization is consummated, and the multiple sales charge
(or `load'') structures available to prospective shareholders. The Board took
into account that if the Reorganization takes place, shareholders of the State
Bond Fund would exchange their shares for shares of the Federated Fund without
the imposition of any sales charge.
Federated's management advised the Board of its reputation for customer
servicing, noting that it has received a #1 rating for five years in a row by
Dalbar, Inc. Federated's management stated that its shareholder services
include advanced technological systems that result in quick shareholder access
to a broad spectrum of information, including: telephonic automated yield and
performance information; consolidated monthly shareholder statements; no-fee
IRAs; quarterly newsletters; year-end tax reporting information; direct deposit;
and telephonic redemption and exchange.
Federated's management also discussed comparative sales loads with the Board. In
particular, it was noted that the maximum front-end sales load of the Federated
Fund is lower than that of the State Bond Fund. Federated's management
described rights of accumulation and other programs that can reduce sales
charges with respect to the Federated Fund.
Federated's management also reviewed with the Board relative asset size and
expense ratios, including relative advisory fees. The Board discussed the fact
that the Federated Fund is larger in asset size than the State Bond Fund and
considered potential economies of scale that might be experienced by former
State Bond Fund shareholders if they were to become shareholders of a larger
fund. Federated's management discussed with the Board expense waiver and
reimbursement arrangements with respect to both the Federated Fund in particular
and to the complex generally.
The Chief Investment Officer, Fixed-Income, of Federated discussed with the
Board the investment philosophy of Federated Advisers for its funds, including
the Federated Fund. He also described the background and significant investment
experience of Federated portfolio managers and other related personnel issues.
The Board was presented with materials comparing the investment objectives and
policies of the State Bond Fund with those of the Federated Fund, and determined
that they were substantially similar. The Board was also presented with and
discussed materials comparing the performance, Morningstar ratings and relative
risks of the State Bond Fund and the Federated Fund. Federated's management
also presented biographical information about each of the Directors of the
Federated Fund and reviewed with the Board the structure of its compliance and
internal audit departments and the scope of its training programs.
The Board also considered the potential benefits to ARM if the Reorganization is
consummated. The Board discussed the fact that ARM and ARM Capital would be
compensated for selling the books, records and goodwill relating to the
management of the State Bond Group, agreeing to certain non-competition
arrangements and cooperating in assisting in the transfer of the net assets of
the State Bond Group to the Federated Funds. They also took into account the
proposed payment to SBMFS of 0.25% of the average daily net assets of the
Federated Fund attributable to shareholder accounts serviced by SBMFS, as well
as the possible compensation of SBMFS for distribution of additional Federated
financial products in the future.
The Board noted that the State Bond Fund would not bear any of the costs
involved in the Reorganization, which would be borne entirely by ARM and/or
Federated. In addition, the Board discussed the anticipated tax-free nature of
the Reorganization to the State Bond Fund and its shareholders.
In connection with their consideration of the Reorganization, the Board also
reviewed their fiduciary obligations under state and federal law. They
considered the requirements of Section 15(f) of the 1940 Act, which provides
that an investment manager to an investment company, and the affiliates of such
manager (such as ARM), may receive any amount or benefit in connection with a
sale of any interest in such investment manager which results in an assignment
of an investment management contract if (1) for a period of three years after
such assignment, at least 75% of the board of directors of the investment
company are not `interested persons'' (as defined in the 1940 Act) of the new
investment manager or its predecessor; and (2) no `unfair burden'' (as defined
in the 1940 Act) is imposed on the investment company as a result of the
assignment or any express or implied terms, conditions or understandings
applicable thereto.
With respect to the first condition of Section 15(f) relating to Board
composition, the Board was advised that the Federated Fund's Board of Directors
presently consists of thirteen (13) Directors, only three (3) of whom are
`interested persons.'' With respect to the second condition of Section 15(f),
while there is no specific definition of `unfair burden,'' it includes any
arrangement, for two years after the transaction, pursuant to which the
predecessor or successor adviser is entitled to receive compensation from any
person in connection with the mutual fund's purchase or sale of securities,
other than bona fide ordinary compensation as principal underwriter. The
definition of unfair burden also includes any payments from the fund for other
than bona fide investment advisory or other services. The Board considered the
fact that representations were made by Federated and ARM that the agreement
among Federated, ARM and ARM Capital would contain representations and covenants
that the Reorganization would not impose an unfair burden on the State Bond
Group.
After reviewing and considering all of the information provided by Federated and
ARM, including the terms of the Reorganization, the Board, including all of the
Directors who are not interested persons of the State Bond Fund or ARM Capital,
voted unanimously at a special telephonic meeting held on August 26, 1996, to
approve the Reorganization and to recommend it to the shareholders of the State
Bond Fund for their approval.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
REORGANIZATION.
Considerations of the Board of Directors of the Federated Fund. The Board of
Directors of the Federated Fund, including the independent Directors, have
unanimously concluded that consummation of the Reorganization is in the best
interests of the Federated Fund and the shareholders of the Federated Fund and
that the interests of Federated Fund shareholders would not be diluted as a
result of effecting the Reorganization and have unanimously voted to approve the
Plan.
Agreement Among ARM, ARM Capital and Federated
The Reorganization is being proposed as part of an agreement by and among
Federated, ARM and ARM Capital, pursuant to which ARM and ARM Capital would be
compensated for selling to Federated the books, records and goodwill relating to
the management of the State Bond Group and cooperating in facilitating the
transaction contemplated by the agreement. As part of that agreement, ARM
Capital and its affiliates have agreed not to compete with Federated by
providing investment advisory services to certain investment companies.
Following the Reorganization, ARM or its affiliates have agreed to provide
certain services to shareholders for which ARM or its affiliates may receive
fees paid by Federated and/or mutual funds in which the shareholders are
invested.
Description of the Plan of Reorganization
The Plan provides that the Federated Fund will acquire all of the net assets of
the State Bond Fund in exchange for the Federated Fund's Class A Shares to be
distributed pro rata by the State Bond Fund to its shareholders in complete
liquidation of the State Bond Fund on or about December 13, 1996 (the "Closing
Date"). Shareholders of the State Bond Fund will become shareholders of the
Federated Fund as of the close of business on the Closing Date, and will be
entitled to the Federated Fund's next dividend distribution.
As of or prior to the Closing Date, the State Bond Fund will declare and pay a
dividend or dividends which, together with all previous such dividends, shall
have the effect of distributing to its shareholders all taxable income for the
period ending on the Closing Date. In addition, the State Bond Fund's dividend
will include its net capital gains realized in the period ending on the Closing
Date.
Consummation of the Reorganization is subject to the conditions set forth in the
Plan, including receipt of an opinion in form and substance satisfactory to the
State Bond Fund and the Federated Fund, as described under the caption "Federal
Income Tax Consequences" below. The Plan may be terminated and the
Reorganization may be abandoned at any time before or after approval by
shareholders of the State Bond Fund prior to the Closing Date by either party if
it believes that consummation of the Reorganization would not be in the best
interests of its shareholders.
Federated Advisers is responsible for the payment of substantially all of the
expenses of the Reorganization incurred by either party, whether or not the
Reorganization is consummated. Such expenses include, but are not limited to,
registration fees, transfer taxes (if any), the fees of banks and transfer
agents and the costs of preparing, printing, copying and mailing proxy
solicitation materials to the State Bond Fund shareholders and the costs of
holding the Special Meeting (as hereinafter defined). ARM is responsible for
the payment of the legal fees of the State Bond Fund. The accountants' fees of
the State Bond Fund will be borne equally by Federated Advisers and ARM.
The foregoing description of the Plan entered into between the Federated Fund
and the State Bond Fund is qualified in its entirety by the terms and provisions
of the Plan, a copy of which is attached hereto as Exhibit A and incorporated
herein by reference thereto.
Description of Federated Fund Shares
Full and fractional Class A Shares of the Federated Fund will be issued without
the imposition of a sales charge or other fee to the shareholders of the State
Bond Fund in accordance with the procedures described above. Class A Shares of
the Federated Fund to be issued to shareholders of the State Bond Fund under the
Plan will be fully paid and nonassessable when issued and transferable without
restriction and will have no preemptive or conversion rights. Reference is
hereby made to the Prospectus of the Federated Fund dated May 31, 1996, provided
herewith for additional information about Class A Shares of the Federated Fund.
Federal Income Tax Consequences
As a condition to the Reorganization, the Federated Fund and the State Bond Fund
will receive an opinion from Dickstein Shapiro Morin & Oshinsky LLP, counsel to
the Federated Fund, to the effect that, on the basis of the existing provisions
of the Code, current administrative rules and court decisions, for federal
income tax purposes: (1) the Reorganization as set forth in the Plan will
constitute a tax-free reorganization under Section 368(a)(1)(C) of the Code;
(2) no gain or loss will be recognized by the Federated Fund upon its receipt of
the State Bond Fund's assets solely in exchange for Federated Fund Class A
Shares; (3) no gain or loss will be recognized by the State Bond Fund upon the
transfer of its assets to the Federated Fund in exchange for Federated Fund
Class A Shares or upon the distribution (whether actual or constructive) of the
Federated Fund Class A Shares to the State Bond Fund shareholders in exchange
for their shares of the State Bond Fund; (4) no gain or loss will be recognized
by shareholders of the State Bond Fund upon the exchange of their State Bond
Fund shares for Federated Fund Class A Shares; (5) the tax basis of the State
Bond Fund's assets acquired by the Federated Fund will be the same as the tax
basis of such assets to the State Bond Fund immediately prior to the
Reorganization; (6) the tax basis of Federated Fund Class A Shares received by
each shareholder of the State Bond Fund pursuant to the Plan will be the same as
the tax basis of State Bond Fund shares held by such shareholder immediately
prior to the Reorganization; (7) the holding period of the assets of the State
Bond Fund in the hands of the Federated Fund will include the period during
which those assets were held by the State Bond Fund; and (8) the holding period
of Federated Fund Class A Shares received by each shareholder of the State Bond
Fund will include the period during which the State Bond Fund shares exchanged
therefor were held by such shareholder, provided the State Bond Fund shares were
held as capital assets on the date of the Reorganization.
Shareholders should recognize that an opinion of counsel is not binding on the
Internal Revenue Service (`IRS'') or any court. The State Bond Fund does not
expect to obtain a ruling from the IRS regarding the consequences of the
Reorganization. Accordingly, if the IRS sought to challenge the tax treatment
of the Reorganization and was successful, neither of which is anticipated, the
Reorganization would be treated as a taxable sale of assets of the State Bond
Fund, followed by the taxable liquidation of the State Bond Fund.
The Federated Fund does not anticipate that taxable sales involving significant
amounts of securities of the combined portfolio will have to be made after the
Reorganization to effect a realignment with the policies and investment
practices of the Federated Fund.
Comparative Information on Shareholder Rights and Obligations
General. Both the Federated Fund and the State Bond Fund are open-end,
diversified management investment companies registered under the 1940 Act, which
continuously offer to sell shares at their current net asset value. The
Federated Fund is organized as a corporation under the laws of the State of
Maryland and is governed by its Articles of Incorporation, Bylaws and Board of
Directors, in addition to applicable state and federal law. The State Bond Fund
is organized as a separate series of State Bond Income Funds, Inc. under the
laws of the State of Maryland and is governed by its Articles of Incorporation,
Bylaws and Board of Directors, in addition to applicable state and federal law.
Set forth below is a brief summary of the significant rights of shareholders of
the Federated Fund and the State Bond Fund.
Shares of the Federated Fund and the State Bond Fund. The Federated Fund is
authorized to issue 2,000,000,000 shares of common stock, par value $0.001 per
share. The Board of Directors has established three classes of shares of the
Federated Fund, known as Class A Shares, Class B Shares and Class C Shares. The
State Bond Fund has an authorized capital of 10,000,000,000 shares of common
stock with a par value of $.00001 per share. The State Bond Fund is currently
the sole investment portfolio of State Bond Income Funds, Inc. and has only one
class of shares. Issued and outstanding shares of both the Federated Fund and
State Bond Fund are fully paid and nonassessable, and freely transferable.
Voting Rights. Neither the Federated Fund nor the State Bond Fund is required
to hold annual meetings of shareholders, except as required under the 1940 Act.
Shareholder approval is necessary only for certain changes in operations or the
election of directors under certain circumstances. The Federated Fund requires
that a special meeting of shareholders be called for any permissible purpose
upon the written request of the holders of at least 10% of the outstanding
shares of the series of the Federated Fund entitled to vote. A special meeting
of the shareholders of the State Bond Fund is required to be called upon the
written request of shareholders representing not less than 25% of the issued and
outstanding shares entitled to vote. Each share of the Federated Fund gives the
shareholder one vote in director elections and other matters submitted to
shareholders for vote. All shares of each series or class in the Federated Fund
have equal voting rights except that in matters affecting only a particular
series or class, only shares of that series or class are entitled to vote. All
shares of the State Bond Fund have equal voting rights.
Directors. The Bylaws of the Federated Fund provide that the term of office of
each Director shall be until his or her resignation or removal or until the
annual meeting next held after his or her election or until election and
qualification of his or her successor. A Director of the Federated Fund may be
removed by a vote of a majority of all shares outstanding and entitled to vote
at any special meeting of shareholders, and such shareholders may elect a
Director to replace the Director so removed to serve for the remainder of the
term and until the election and qualification of his or her successor. A
vacancy on the Board may be filled by the action of a majority of the Directors
remaining in office, and such elected Director shall hold office until the next
annual meeting of shareholders or until his or her successor is duly elected and
qualifies. Notwithstanding the foregoing, the shareholders may, at any time
during the term of such Director elected to fill a vacancy, elect some other
person to fill said vacancy and thereupon the election by the Board shall be
superseded. The Bylaws of the State Bond Fund provide that each Director holds
office from the time of his or her election until the next annual meeting of
shareholders or until his or her successor is duly elected and qualifies. No
Director of the State Bond Fund shall be qualified for election by the
shareholders if he or she has attained the age of 70. The Board of Directors of
the State Bond Fund shall call a meeting of shareholders for the purpose of
voting upon the question of removal of any Director or Directors when requested
in writing to do so by the record holders of not less than 10% of the
outstanding shares. A Director of the State Bond Fund may be removed, with or
without cause, by the affirmative vote of a majority of the votes entitled to be
cast for the election of Directors, and such shareholders may elect a qualified
person as Director to replace the Director so removed. In case of any vacancy
on the Board of Directors, a majority of the remaining Directors may elect a
successor to hold office until the next annual meeting of the shareholders and
until his or her successor is duly elected and qualifies. With respect to both
the Federated Fund and the State Bond Fund, a meeting of shareholders will be
required for the purpose of electing additional Directors whenever fewer than a
majority of the Directors then in office were elected by shareholders.
Liability of Directors and Officers. Under the Articles of Incorporation of the
Federated Fund, a Director or officer will be personally liable only for his or
her own willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. The Articles of
Incorporation further provide that Directors and officers will be indemnified by
the Federated Fund against reasonable costs and expenses incurred in connection
with any claim or litigation unless the person's conduct is determined to
constitute willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the person's office. The
Articles of Amendment and Restatement of the State Bond Fund contain a provision
eliminating liability of directors and officers to the State Bond Fund or its
shareholders to the fullest extent permitted by Maryland law. Therefore,
directors and officers of the State Bond Fund will not be liable for monetary
damages to the State Bond Fund or its shareholders for breach of the duty of
care. However, such elimination of liability regarding a director's duty of
care does not permit the elimination or limitation of liability (1) to the
extent that it is proved that the person actually received an improper benefit
or profit in money, property or services; (2) to the extent that a judgment or
other final adjudication adverse to the person is entered in a proceeding based
on a finding in the proceeding that the person's action, or failure to act, was
committed in bad faith or was the result of active and deliberate dishonesty and
was material to the cause of action adjudicated in the proceeding; or (3) for
any action or failure to act occurring prior to February 18, 1988. In addition,
due to the provisions of the 1940 Act, shareholders would still have the right
to pursue monetary claims against directors or officers for acts involving
willful malfeasance, bad faith, gross negligence or reckless disregard of their
duties as directors or officers. Under the agreement by and among Federated,
ARM and ARM Capital, Federated has agreed for a period of three (3) years
following the Closing Date to provide coverage under a directors and officers
liability insurance policy for the current Directors of the State Bond Fund.
Termination or Liquidation. In the event of the termination or liquidation of
the Federated Fund or any series or class of the Federated Fund or of the
termination or liquidation of the State Bond Fund, the shareholders of the
respective fund or class are entitled to receive, when and as declared by its
Directors, the excess of the assets belonging to the respective fund or class
over the liabilities belonging to the respective fund or class. In either case,
the assets belonging to the fund or class will be distributed among the
shareholders in proportion to the number of shares of the respective fund or
class held by them.
Capitalization
The following table sets forth the unaudited capitalization of the Class A
Shares of the Federated Fund and the shares of the State Bond Fund as of
October 11, 1996, and on a pro forma combined basis as of that date:
Federated Fund State Bond Pro Forma
(Class A Shares) Fund Combined
Net Assets $1,242,525,379 $13,289,918 $1,255,815,297
Net Asset Value Per Share $7.77 $5.05 $7.77
Shares Outstanding 159,845,383 2,629,824 161,555,072
INFORMATION ABOUT THE FEDERATED FUND
AND THE STATE BOND FUND
Federated Fund for U.S. Government Securities, Inc.
Information about the Federated Fund is contained in the Federated Fund's
current Prospectus dated May 31, 1996, a copy of which is included herewith and
incorporated herein by reference. Additional information about the Federated
Fund is included in the Federated Fund's Annual Report to Shareholders dated
March 31, 1996, the Statement of Additional Information dated May 31, 1996, and
the Statement of Additional Information dated November 2, 1996 (relating to this
Prospectus/Proxy Statement), each of which is incorporated herein by reference.
Copies of the Annual Report and Statements of Additional Information, which have
been filed with the Securities and Exchange Commission (the "SEC"), may be
obtained upon request and without charge by contacting the Federated Fund at 1-
800-245-5051, option one, or by writing the Federated Fund at Federated
Investors Tower, Pittsburgh, PA 15222-3779. The Federated Fund is subject to
the informational requirements of the Securities Act of 1933, as amended (the
`1933 Act''), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the 1940 Act and in accordance therewith files reports and other information
with the SEC. Reports, proxy and information statements, charter documents and
other information filed by the Federated Fund can be obtained by calling or
writing the Federated Fund and can also be inspected and copied by the public at
the public reference facilities maintained by the SEC in Washington, D.C.
located at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
certain of its regional offices located at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, IL 60661 and 13th Floor, Seven World
Trade Center, New York, NY 10048. Copies of such material can be obtained from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
This Prospectus/Proxy Statement, which constitutes part of a Registration
Statement filed by the Federated Fund with the SEC under the 1933 Act, omits
certain of the information contained in the Registration Statement. Reference
is hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Federated Fund and the shares offered
hereby. Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
SEC.
State Bond U.S. Government and Agency Securities Fund
Information about the State Bond Fund and State Bond Income Funds, Inc. is
contained in the State Bond Fund's current Prospectus dated March 1, 1996, the
Annual Report to Shareholders dated October 31, 1995, the Semi-Annual Report to
Shareholders dated April 30, 1996, the Statement of Additional Information dated
March 1, 1996, and the Statement of Additional Information dated November 2,
1996 (relating to this Prospectus/Proxy Statement), each of which is
incorporated herein by reference. Copies of such Prospectus, Annual Report,
Semi-Annual Report, and Statements of Additional Information, which have been
filed with the SEC, may be obtained upon request and without charge from the
State Bond Fund by calling 1-800-328-4735 or by writing to the State Bond Fund
at 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069. The
State Bond Fund is subject to the informational requirements of the 1933 Act,
the 1934 Act and the 1940 Act and in accordance therewith files reports and
other information with the SEC. Reports, proxy and information statements,
charter documents and other information filed by State Bond Income Funds, Inc.
or its portfolio, the State Bond Fund, can be obtained by calling or writing the
State Bond Fund and can also be inspected at the public reference facilities
maintained by the SEC or obtained at prescribed rates at the addresses listed in
the previous section.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of the State Bond Fund of proxies for use at the
Special Meeting of Shareholders (the "Special Meeting") to be held at 4:00 p.m.
on December 9, 1996 at: 100 North Minnesota Street, New Ulm, Minnesota 56073-
0069, and at any adjournments thereof. The proxy confers discretionary
authority on the persons designated therein to vote on other business not
currently contemplated which may properly come before the Special Meeting. A
proxy, if properly executed, duly returned and not revoked, will be voted in
accordance with the specifications thereon; if no instructions are given, such
proxy will be voted in favor of the Plan. A shareholder may revoke a proxy at
any time prior to use by filing with the Secretary of the State Bond Fund an
instrument revoking the proxy, by submitting a proxy bearing a later date or by
attending and voting at the Special Meeting.
The cost of the solicitation, including the printing and mailing of proxy
materials, will be borne by Federated Advisers. In addition to solicitations
through the mails, proxies may be solicited by officers, employees and agents of
the State Bond Fund, Federated Advisers and their respective affiliates at no
additional cost to the State Bond Fund. Such solicitations may be by telephone,
telegraph or personal contact. Federated Advisers will reimburse custodians,
nominees and fiduciaries for the reasonable costs incurred by them in connection
with forwarding solicitation materials to the beneficial owners of shares held
of record by such persons.
Outstanding Shares and Voting Requirements
The Board of Directors of the State Bond Fund has fixed the close of business on
October 11, 1996, as the record date for the determination of shareholders
entitled to notice of and to vote at the Special Meeting and any adjournments
thereof. As of the record date, there were 2,629,824 shares of the State Bond
Fund outstanding. Each of the State Bond Fund's shares is entitled to one vote
and fractional shares have proportionate voting rights. On the record date, the
Directors and officers of the State Bond Fund as a group owned less than 1% of
the outstanding shares of the State Bond Fund. To the best knowledge of ARM
Capital, as of the record date, no person owned beneficially or of record 5% or
more of the State Bond Fund's outstanding shares.
As of the record date, there were 159,845,383 Class A, 12,835,334 Class B and
8,908,147 Class C Shares of the Federated Fund outstanding. On the record date,
the Directors and officers of the Federated Fund as a group owned less than 1%
of the outstanding Class A, Class B and Class C Shares of the Federated Fund.
To the best knowledge of Federated Advisers, as of the record date, no person,
except as set forth in the table below, owned beneficially or of record 5% or
more of the Federated Fund's outstanding Class A, Class B or Class C Shares.
PERCENT OF
CLASS C NAME AND ADDRESS SHARES OUTSTANDING
SHARES OWNED SHARES
Merrill Lynch Pierce
Fenner & Smith
Jacksonville, Florida 3,040,866. 34.15%
000
Approval of the Plan requires the affirmative vote of a majority of the
outstanding shares of the State Bond Fund. The votes of shareholders of the
Federated Fund are not being solicited since their approval is not required in
order to effect the Reorganization.
One-third of the issued and outstanding shares of the State Bond Fund,
represented in person or by proxy, will be required to constitute a quorum at
the Special Meeting for the purpose of voting on the proposed Reorganization.
For purposes of determining the presence of a quorum, shares represented by
abstentions and "broker non-votes" will be counted as present, but not as votes
cast, at the Special Meeting. Because approval of the Reorganization requires
the approval of a majority of the outstanding shares of the State Bond Fund,
abstentions and "broker non-votes" will have the same effect as if they were
votes against the Reorganization.
Dissenter's Right of Appraisal
Shareholders of the State Bond Fund objecting to the Reorganization have no
appraisal rights under the State Bond Fund's Articles of Incorporation or
Maryland law. Under the Plan, if approved by State Bond Fund shareholders, each
shareholder will become the owner of Class A Shares of the Federated Fund having
a total net asset value equal to the total net asset value of his or her
holdings in the State Bond Fund at the Closing Date.
OTHER MATTERS AND DISCRETION OF PERSONS NAMED IN THE PROXY
Management of the State Bond Fund knows of no other matters that may properly
be, or which are likely to be, brought before the Special Meeting. However, if
any other business shall properly come before the Special Meeting, the persons
named in the proxy intend to vote thereon in accordance with their best
judgment.
If at the time any session of the Special Meeting is called to order, a quorum
is not present in person or by proxy, the persons named as proxies may vote
those proxies which have been received to adjourn the Special Meeting to a later
date. In the event that a quorum is present but sufficient votes in favor of
one or more of the proposals have not been received, the persons named as
proxies may propose one or more adjournments of the Special Meeting to permit
further solicitation of proxies with respect to any such proposal. All such
adjournments will require the affirmative vote of a majority of the shares
present in person or by proxy at the session of the Special Meeting to be
adjourned. The persons named as proxies will vote those proxies which they are
entitled to vote in favor of the proposal, in favor of such an adjournment, and
will vote those proxies required to be voted against the proposal, against any
such adjournment.
Whether or not shareholders expect to attend the Special Meeting, all
shareholders are urged to sign, fill in and return the enclosed proxy form
promptly.
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION dated September 23, 1996 (the "Agreement"),
between FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC., a Maryland
corporation (hereinafter called the "Acquiring Fund"), and STATE BOND INCOME
FUNDS, INC., a Maryland corporation (hereinafter called the "Corporation") on
behalf of its portfolio STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
(hereinafter called the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a)(1)(C) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the net assets of the
Acquired Fund in exchange solely for Class A Shares of the Acquiring Fund (the
"Acquiring Fund Shares") and the distribution, after the Closing Date (as
hereinafter defined), of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation of the Acquired Fund as provided herein, all upon
the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Corporation and the Acquiring Fund are registered open-end
management investment companies and the Acquired Fund owns securities in which
the Acquiring Fund is permitted to invest;
WHEREAS, both the Acquired Fund and the Acquiring Fund are authorized to issue
shares of common stock or shares of beneficial interest, as the case may be;
WHEREAS, the Board of Directors, including a majority of the directors who are
not "interested persons" (as defined under the Investment Company Act of 1940,
as amended (the "1940 Act")), of the Acquiring Fund has determined that the
exchange of all of the net assets of the Acquired Fund for Acquiring Fund Shares
is in the best interests of the Acquiring Fund shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the Board of Directors, including a majority of the directors who are
not "interested persons" (as defined under the 1940 Act), of the Corporation has
determined that the exchange of all of the net assets of the Acquired Fund for
Acquiring Fund Shares is in the best interests of the Acquired Fund
shareholders;
NOW THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR THE ACQUIRING FUND
SHARES AND LIQUIDATION OF THE ACQUIRED FUND.
1.1 Subject to the terms and conditions contained herein, the Acquired Fund
agrees to assign, transfer and convey to the Acquiring Fund all of the net
assets of the Acquired Fund, including all securities and cash, other than cash
in an amount necessary to pay any unpaid dividends and distributions as provided
in paragraph 1.5, beneficially owned by the Acquired Fund, and the Acquiring
Fund agrees in exchange therefor to deliver to the Acquired Fund the number of
Acquiring Fund Shares, including fractional Acquiring Fund Shares, determined as
set forth in paragraph 2.3. Such transaction shall take place at the closing
(the "Closing") on the closing date (the "Closing Date") provided for in
paragraph 3.1. In lieu of delivering certificates for the Acquiring Fund
Shares, the Acquiring Fund shall credit the Acquiring Fund Shares to the
Acquired Fund's account, for the benefit of its shareholders, on the stock
record books of the Acquiring Fund and shall deliver a confirmation thereof to
the Acquired Fund.
1.2 The Acquired Fund will discharge or make provision for the discharge of all
of its liabilities and obligations prior to or on the Closing Date.
1.3 Delivery of the assets of the Acquired Fund to be transferred shall be made
on the Closing Date and shall be delivered to State Street Bank and Trust
Company (hereinafter called "State Street"), Boston, Massachusetts, the
Acquiring Fund's custodian (the "Custodian"), for the account of the Acquiring
Fund, together with proper instructions and all necessary documents to transfer
to the account of the Acquiring Fund, free and clear of all liens, encumbrances,
rights, restrictions and claims created by the Acquired Fund. All cash
delivered shall be in the form of immediately available funds payable to the
order of the Custodian for the account of the Acquiring Fund.
1.4 The Acquired Fund will pay or cause to be paid to the Acquiring Fund any
dividends or interest received on or after the Closing Date with respect to
assets transferred to the Acquiring Fund thereunder. The Acquired Fund will
transfer to the Acquiring Fund any distributions, rights or other assets
received by the Acquired Fund after the Closing Date as distributions on or with
respect to the securities transferred. Such assets shall be deemed included in
assets transferred to the Acquiring Fund on the Closing Date and shall not be
separately valued.
1.5 As soon after the Closing Date as is conveniently practicable, the Acquired
Fund will liquidate and distribute pro rata to the Acquired Fund's shareholders
of record, determined as of the close of business on the Closing Date (the
"Acquired Fund Shareholders"), the Acquiring Fund Shares received by the
Acquired Fund pursuant to paragraph 1.1. In addition, each Acquired Fund
Shareholder shall have the right to receive any unpaid dividends or other
distributions which were declared before the Valuation Date (as hereinafter
defined) with respect to the shares of the Acquired Fund that are held by the
shareholder on the Valuation Date. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Acquired Fund on the books of the Acquiring Fund to open accounts
on the share record books of the Acquiring Fund in the names of the Acquired
Fund Shareholders, and representing the respective pro rata number of the
Acquiring Fund Shares due such shareholders, based on their ownership of shares
of the Acquired Fund on the Closing Date. All issued and outstanding Shares of
the Acquired Fund will simultaneously be canceled on the books of the Acquired
Fund. Share certificates representing interests in the Acquired Fund will
represent a number of Acquiring Fund Shares, after the Closing Date as
determined in accordance with paragraph 2.3. The Acquiring Fund shall not issue
certificates representing the Acquiring Fund Shares in connection with such
exchange.
1.6 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent. Shares of the Acquiring Fund will be issued in
the manner described in the Acquiring Fund's current prospectus and statement of
additional information.
1.7 Any transfer taxes payable upon issuance of the Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund shares on the books
of the Acquired Fund as of that time shall, as a condition of such issuance and
transfer, be paid by the person to whom such Acquiring Fund Shares are to be
issued and transferred.
1.8 Any reporting responsibility of the Acquired Fund is and shall remain the
responsibility of the Corporation up to and including the Closing Date and such
later dates, with respect to dissolution and deregistration of the Corporation,
on which the Corporation is dissolved and deregistered.
1.9 The Corporation shall be deregistered as an investment company under the
1940 Act and dissolved as a Maryland corporation as promptly as practicable
following the Closing Date and the making of all distributions pursuant to
paragraph 1.5.
2. VALUATION.
2.1 The value of the Acquired Fund's net assets to be acquired by the Acquiring
Fund hereunder shall be the value of such assets computed as of the close of the
New York Stock Exchange (normally 4:00 p.m. Eastern time) on the Closing Date
(such time and date being herein called the "Valuation Date"), using the
valuation procedures set forth in the Acquiring Fund's then-current prospectus
or statement of additional information.
2.2 The net asset value of each Acquiring Fund Share shall be the net asset
value per share computed as of the close of the New York Stock Exchange
(normally 4:00 p.m. Eastern time) on the Valuation Date, using the valuation
procedures set forth in the Acquiring Fund's then-current prospectus or
statement of additional information.
2.3 The number of the Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Acquired Fund's net assets shall be
determined by dividing the value of the net assets of the Acquired Fund
determined using the same valuation procedures referred to in paragraph 2.1, by
the net asset value of one Acquiring Fund Share determined in accordance with
paragraph 2.2.
2.4 All computations of value shall be made in accordance with the regular
practices of the Acquiring Fund.
3. CLOSING AND CLOSING DATE.
3.1 The Closing Date shall be December 13, 1996 or such later date as the
parties may mutually agree. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be held at 4:00 p.m. (Eastern
time) at the offices of the Acquiring Fund, Federated Investors Tower,
Pittsburgh, PA 15222-3779, or such other time and/or place as the parties may
mutually agree.
3.2 If on the Valuation Date (a) the primary trading market for portfolio
securities of the Acquiring Fund or the Acquired Fund shall be closed to trading
or trading thereon shall be restricted; or (b) trading or the reporting of
trading shall be disrupted so that accurate appraisal of the value of the net
assets of the Acquiring Fund or the Acquired Fund is impracticable, the Closing
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.3 ARM Transfer Agency, Inc., as transfer agent for the Acquired Fund, shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Acquired Fund Shareholders and
the number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue
and deliver a confirmation evidencing the Acquiring Fund Shares to be credited
on the Closing Date to the Secretary of the Acquired Fund, or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, assumption agreements, share certificates, if any, receipts or
other documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES.
4.1 The Corporation represents and warrants to the Acquiring Fund as follows:
(a) The Corporation is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland and has power to own all
of its properties and assets and to carry out this Agreement.
(b) The Corporation is registered under the 1940 Act, as an open-end,
management investment company, and such registration has not been revoked or
rescinded and is in full force and effect.
(c) The Corporation is not, and the execution, delivery and performance of this
Agreement will not result, in material violation of the Corporation's Articles
of Incorporation or Bylaws or of any agreement, indenture, instrument, contract,
lease or other undertaking to which the Acquired Fund is a party or by which it
is bound.
(d) The Acquired Fund has no material contracts or other commitments
outstanding (other than this Agreement) which will result in liability to it
after the Closing Date.
(e) No litigation or administrative proceeding or investigation of or before
any court or governmental body is currently pending or to its knowledge
threatened against the Acquired Fund or any of its properties or assets which,
if adversely determined, would materially and adversely affect its financial
condition or the conduct of its business. The Acquired Fund knows of no facts
which might form the basis for the institution of such proceedings, and is not a
party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its business
or its ability to consummate the transactions herein contemplated.
(f) The current prospectus and statement of additional information of the
Acquired Fund conform in all material respects to the applicable requirements of
the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act and
the rules and regulations of the Securities and Exchange Commission (the
"Commission") thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(g) The Statement of Assets and Liabilities of the Acquired Fund at October 31,
1994 has been audited by independent auditors and at October 31, 1995 has been
audited by Ernst & Young LLP, independent auditors, and have been prepared in
accordance with generally accepted accounting principles, consistently applied,
and such statements (copies of which have been furnished to the Acquiring Fund)
fairly reflect the financial condition of the Acquired Fund as of such dates,
and there are no known contingent liabilities of the Acquired Fund as of such
dates not disclosed therein.
(h) The unaudited Statement of Assets and Liabilities of the Acquired Fund at
April 30, 1996 has been prepared in accordance with generally accepted
accounting principles, consistently applied, although subject to year-end
adjustments, and on a basis consistent with the Statement of Assets and
Liabilities of the Acquired Fund at October 31, 1995 which has been audited by
Ernst & Young LLP, independent auditors, and such statement (copies of which
have been furnished to the Acquiring Fund) fairly reflects the financial
condition of the Acquired Fund as of such date, and there are no known
liabilities of the Acquired Fund, contingent or otherwise, as of such date not
disclosed therein.
(i) Since April 30, 1996, there has not been any material adverse change in the
Acquired Fund's financial condition, assets, liabilities or business other than
changes occurring in the ordinary course of business, or any incurrence by the
Acquired Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund.
(j) At the Closing Date, all federal and other tax returns and reports of the
Acquired Fund required by law to have been filed by such date shall have been
filed or an appropriate extension obtained, and all federal and other taxes
shall have been paid so far as due, or provision shall have been made for the
payment thereof or contest in good faith, and to the best of the Acquired Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to such returns.
(k) For each fiscal year of its operation, subject to applicable statute of
limitation periods, the Acquired Fund has met the requirements of Subchapter M
of the Code for qualification and treatment as a regulated investment company.
(l) All issued and outstanding shares of the Acquired Fund are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable. All of the issued and outstanding shares of the Acquired Fund
will, at the time of the Closing, be held by the persons and in the amounts set
forth in the records of the transfer agent as provided in paragraph 3.3. The
Acquired Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the Acquired Fund shares, nor is there
outstanding any security convertible into any of the Acquired Fund shares.
(m) On the Closing Date, the Acquired Fund will have full right, power and
authority to sell, assign, transfer and deliver the assets to be transferred by
it hereunder.
(n) The execution, delivery and performance of this Agreement will have been
duly authorized prior to the Closing Date by all necessary action on the part of
the Corporation and, subject to the approval of the Acquired Fund Shareholders,
this Agreement constitutes the valid and legally binding obligation of the
Acquired Fund enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto, and to general principles of equity and
the discretion of the court (regardless of whether the enforceability is
considered in a proceeding in equity or at law).
(o) The prospectus/proxy statement of the Acquired Fund (the "Prospectus/Proxy
Statement") to be included in the Registration Statement referred to in
paragraph 5.5 (only insofar as it relates to the Acquired Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading.
4.2 The Acquiring Fund represents and warrants to the Corporation as follows:
(a) The Acquiring Fund is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland and has the power to carry
on its business as it is now being conducted and to carry out this Agreement.
(b) The Acquiring Fund is registered under the 1940 Act as an open-end,
diversified, management investment company, and such registration has not been
revoked or rescinded and is in full force and effect.
(c) The Acquiring Fund is not, and the execution, delivery and performance of
this Agreement will not result, in material violation of the Acquiring Fund's
Articles of Incorporation or Bylaws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquiring Fund is a party or
by which it is bound.
(d) No litigation or administrative proceeding or investigation of or before
any court or governmental body is currently pending or to its knowledge
threatened against the Acquiring Fund or any of its properties or assets which,
if adversely determined, would materially and adversely affect its financial
condition or the conduct of its business. The Acquiring Fund knows of no facts
which might form the basis for the institution of such proceedings, and is not a
party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its business
or its ability to consummate the transactions contemplated herein.
(e) The current prospectus and statement of additional information of the
Acquiring Fund conform in all material respects to the applicable requirements
of the 1933 Act and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(f) The Statement of Assets and Liabilities of the Acquiring Fund at March 31,
1995 and 1996, have been audited by Deloitte & Touche LLP, independent auditors,
and have been prepared in accordance with generally accepted accounting
principles, and such statements (copies of which have been furnished to the
Acquired Fund) fairly reflect the financial condition of the Acquiring Fund as
of such dates, and there are no known contingent liabilities of the Acquiring
Fund as of such dates not disclosed therein.
(g) Since March 31, 1996, there has not been any material adverse change in the
Acquiring Fund's financial condition, assets, liabilities or business other than
changes occurring in the ordinary course of business, or any incurrence by the
Acquiring Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as disclosed to and accepted by the Acquired
Fund.
(h) At the Closing Date, all federal and other tax returns and reports of the
Acquiring Fund required by law to have been filed or an appropriate extension
obtained, by such date shall have been filed, and all federal and other taxes
shall have been paid so far as due, or provision shall have been made for the
payment thereof or contest in good faith, and to the best of the Acquiring
Fund's knowledge no such return is currently under audit and no assessment has
been asserted with respect to such returns.
(i) For each fiscal year of its operation, subject to applicable statute of
limitation periods, the Acquiring Fund has met the requirements of Subchapter M
of the Code for qualification and treatment as a regulated investment company.
(j) All issued and outstanding Acquiring Fund Shares are, and at the Closing
Date will be, duly and validly issued and outstanding, fully paid and non-
assessable. The Acquiring Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of the Acquiring Fund Shares,
nor is there outstanding any security convertible into any Acquiring Fund
Shares.
(k) The execution, delivery and performance of this Agreement has been duly
authorized by all necessary action on the part of the Acquiring Fund, and this
Agreement constitutes the valid and legally binding obligation of the Acquiring
Fund enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto, and to general principles of equity and
the discretion of the court (regardless of whether the enforceability is
considered in a proceeding in equity or at law).
(l) The Prospectus/Proxy Statement to be included in the Registration Statement
(only insofar as it relates to the Acquiring Fund) will, on the effective date
of the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND.
5.1 The Acquiring Fund and the Acquired Fund each will operate its business in
the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include customary
dividends and distributions.
5.2 The Corporation will call a meeting of the Acquired Fund Shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
5.3 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.
5.4 As promptly as practicable, but in any case within sixty days after the
Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in such form
as is reasonably satisfactory to the Acquiring Fund, a statement of the earnings
and profits of the Acquired Fund for federal income tax purposes which will be
carried over to the Acquiring Fund as a result of Section 381 of the Code and
which will be certified by the Corporation's President and its Treasurer.
5.5 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of the Prospectus/Proxy Statement,
referred to in paragraph 4.1(o), all to be included in a Registration Statement
on Form N-14 of the Acquiring Fund (the "Registration Statement"), in compliance
with the 1933 Act, the Securities Exchange Act of 1934, as amended, and the 1940
Act in connection with the meeting of the Acquired Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
5.6 The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state Blue Sky or securities laws as it may deem appropriate in order to
continue its operations after the Closing Date.
5.7 Prior to the Valuation Date, the Acquired Fund shall have declared a
dividend or dividends, with a record date and ex-dividend date prior to the
Valuation Date, which, together with all previous dividends, shall have the
effect of distributing to its shareholders all of its investment company taxable
income, if any, plus the excess of its interest income, if any, excludable from
gross income under Section 103(a) of the Code over its deductions disallowed
under Sections 265 and 171(a)(2) of the Code for the taxable periods or years
ended on or before October 31, 1995 and for the period from said date to and
including the Closing Date (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized in taxable
periods or years ended on or before October 31, 1995 and in the period from said
date to and including the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund to complete the transactions provided for
herein shall be subject, at its election, to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of the Corporation contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 The Acquired Fund shall have delivered to the Acquiring Fund a statement of
the Acquired Fund's assets, together with a list of the Acquired Fund's
portfolio securities showing the tax costs of such securities by lot and the
holding periods of such securities, as of the Closing Date, certified by the
Treasurer of the Acquired Fund.
6.3 The Acquired Fund shall have delivered to the Acquiring Fund on the Closing
Date a certificate executed in its name by its President or Vice President and
its Treasurer, in form and substance satisfactory to the Acquiring Fund, to the
effect that the representations and warranties of the Corporation made in this
Agreement are true and correct in all material respects at and as of the Closing
Date, except as they may be affected by the transactions contemplated by this
Agreement, and as to such other matters as the Acquiring Fund shall reasonably
request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund to consummate the transactions provided
herein shall be subject, at its election, to the performance by the Acquiring
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Acquiring Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 The Acquiring Fund shall have delivered to the Acquired Fund on the Closing
Date a certificate executed in its name by its President or Vice President and
its Treasurer, in form and substance satisfactory to the Acquired Fund, to the
effect that the representations and warranties of the Acquiring Fund made in
this Agreement are true and correct in all material respects at and as of the
Closing Date, except as they may be affected by the transactions contemplated by
this Agreement, and as to such other matters as the Acquired Fund shall
reasonably request.
7.3 There shall not have been any material adverse change in the Acquiring
Fund's financial condition, assets, liabilities or business since the date
hereof other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of any indebtedness, except as otherwise
disclosed to and accepted by the Acquired Fund.
8. FURTHER CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE ACQUIRING FUND AND
THE ACQUIRED FUND.
If any of the conditions set forth below do not exist on or before the Closing
Date with respect to the Acquired Fund or the Acquiring Fund, either party to
this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement.
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of the Corporation's Articles of
Incorporation and the 1940 Act.
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.3 All consents of other parties and all other consents, orders and permits of
federal, state and local regulatory authorities (including those of the
Commission and of state Blue Sky and securities authorities) deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933 Act
and no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
8.5 The Acquiring Fund and the Corporation shall have received an opinion of
Dickstein Shapiro Morin & Oshinsky LLP substantially to the effect that for
federal income tax purposes:
(a) The transfer of all of the Acquired Fund net assets in exchange for the
Acquiring Fund Shares and the distribution of the Acquiring Fund Shares to the
Acquired Fund Shareholders in liquidation of the Acquired Fund will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code; (b) No
gain or loss will be recognized by the Acquiring Fund upon the receipt of the
assets of the Acquired Fund solely in exchange for the Acquiring Fund Shares;
(c) No gain or loss will be recognized by the Acquired Fund upon the transfer of
the Acquired Fund assets to the Acquiring Fund in exchange for the Acquiring
Fund Shares or upon the distribution (whether actual or constructive) of the
Acquiring Fund Shares to Acquired Fund Shareholders in exchange for their shares
of the Acquired Fund; (d) No gain or loss will be recognized by the Acquired
Fund Shareholders upon the exchange of their Acquired Fund shares for the
Acquiring Fund Shares; (e) The tax basis of the Acquired Fund assets acquired by
the Acquiring Fund will be the same as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization; (f) The tax basis of the
Acquiring Fund Shares received by each of the Acquired Fund Shareholders
pursuant to the Reorganization will be the same as the tax basis of the Acquired
Fund shares held by such shareholder immediately prior to the Reorganization;
(g) The holding period of the assets of the Acquired Fund in the hands of the
Acquiring Fund will include the period during which those assets were held by
the Acquired Fund; and (h) The holding period of the Acquiring Fund Shares to be
received by each Acquired Fund Shareholder will include the period during which
the Acquired Fund shares exchanged therefor were held by such shareholder
(provided the Acquired Fund shares were held as capital assets on the date of
the Reorganization).
9. TERMINATION OF AGREEMENT.
9.1 This Agreement and the transactions contemplated hereby may be terminated
and abandoned by resolution of the Board of Directors of the Corporation or the
Board of Directors of the Acquiring Fund at any time prior to the Closing Date
(and notwithstanding any vote of the Acquired Fund Shareholders) if
circumstances should develop that, in the opinion of either of the parties'
Board, make proceeding with this Agreement inadvisable.
9.2 If this Agreement is terminated and the exchange contemplated hereby is
abandoned pursuant to the provisions of this Section 9, this Agreement shall
become void and have no effect, without any liability on the part of any party
hereto or the directors or officers of the Corporation or the Acquiring Fund or
the shareholders of the Acquiring Fund or of the Acquired Fund, in respect of
this Agreement.
10. WAIVER.
At any time prior to the Closing Date, any of the foregoing conditions may be
waived by the Board of Directors of the Acquiring Fund or the Board of Directors
of the Corporation, if, in the judgment of either, such waiver will not have a
material adverse effect on the benefits intended under this Agreement to the
shareholders of the Acquiring Fund or of the Acquired Fund, as the case may be.
11. MISCELLANEOUS.
11.1 None of the representations and warranties included or provided for herein
shall survive consummation of the transactions contemplated hereby.
11.2 This Agreement contains the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof, and merges and
supersedes all prior discussions, agreements and understandings of every kind
and nature between them relating to the subject matter hereof. Neither party
shall be bound by any condition, definition, warranty or representation, other
than as set forth or provided in this Agreement or as may be set forth in a
later writing signed by the party to be bound thereby.
11.3 This Agreement shall be governed and construed in accordance with the
internal laws of the State of New York, without giving effect to principles of
conflicts of laws.
11.4 This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original.
11.5 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof of any rights or obligations hereunder shall be made by any party without
the written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation, other than the parties hereto and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
11.6 An agreement has been entered into under which Federated Advisers will
assume substantially all of the expenses of the reorganization including
registration fees, transfer taxes (if any), the fees of banks and transfer
agents and the costs of preparing, printing, copying and mailing proxy
solicitation materials to the Acquired Fund Shareholders and the costs of
holding the special meeting of shareholders. ARM Financial Group, Inc. will
assume the legal fees of the Acquired Fund. The accountants' fees of the
Acquired Fund will be borne equally by Federated Advisers and ARM Financial
Group, Inc.
IN WITNESS WHEREOF, the Acquired Fund and the Acquiring Fund have each
caused this Agreement and Plan of Reorganization to be executed and attested on
its behalf by its duly authorized representatives as of the date first above
written.
Acquired Fund:
STATE BOND INCOME FUNDS, INC.,
on behalf of its portfolio,
Attest: STATE BOND U.S. GOVERNMENT AND
AGENCY SECURITIES FUND
/s/ Sheri Bean By: /s/ Kevin L. Howard
Name: Sheri Bean Name: Kevin L. Howard
Title: Assistant Secretary Title: Vice President and Secretary
Acquiring Fund:
Attest: FEDERATED FUND FOR U.S. GOVERNMENT
SECURITIES, INC.
/s/ S. Elliott Cohan By: /s/ J. Christopher
Donahue
Name: S. Elliott Cohan Name: J. Christopher Donahue
Title: Assistant Secretary Title: President
G01866-05
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 2, 1996
Acquisition of the Assets of
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND,
a Portfolio of
STATE BOND INCOME FUNDS, INC.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Telephone Number: 1-800-328-4735
By and in exchange for Class A Shares of
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Telephone Number: 1-800-245-5051, option one
This Statement of Additional Information dated November 2, 1996 is not a
prospectus. A Prospectus/Proxy Statement dated November 2, 1996 related to the
above-referenced matter may be obtained from Federated Fund for U.S. Government
Securities, Inc., Federated Investors Tower, Pittsburgh, Pennsylvania 15222-
3779. This Statement of Additional Information should be read in conjunction
with such Prospectus/Proxy Statement.
TABLE OF CONTENTS
1. Statement of Additional Information of Federated Fund for U.S. Government
Securities, Inc., dated May 31, 1996.
2. Statement of Additional Information of State Bond U.S. Government and
Agency Securities Fund, a portfolio of State Bond Income Funds, Inc., dated
March 1, 1996.
3. Financial Statements of Federated Fund for U.S. Government Securities,
Inc., dated March 31, 1996.
4. Financial Statements of State Bond U.S. Government and Agency Securities
Fund, a portfolio of State Bond Income Funds, Inc., dated October 31, 1995.
5. Financial Statements (unaudited) of State Bond U.S. Government and Agency
Securities Fund, a portfolio of State Bond Income Funds, Inc., dated April 30,
1996.
The Statement of Additional Information of Federated Fund for U.S. Government
Securities, Inc. (the "Federated Fund"), dated May 31, 1996, is incorporated
herein by reference to Post-Effective Amendment No. 65 to the Federated Fund's
Registration Statement on Form N-1A (File Nos. 2-33490 and 811-1890) which was
filed with the Securities and Exchange Commission on or about May 24, 1996. A
copy may be obtained, upon request and without charge, from the Federated Fund
at Federated Investors Tower, Pittsburgh, PA 15222-3279; telephone number: 1-
800-245-5051, option one.
The Statement of Additional Information of State Bond U.S. Government and Agency
Securities Fund (the "State Bond Fund"), a portfolio of State Bond Income Funds,
Inc. (the "Corporation"), dated March 1, 1996, is incorporated herein by
reference to Post-Effective Amendment No. 11 to the Corporation's Registration
Statement on Form N-1A (File Nos. 33-1176 and 811-4445) which was filed with the
Securities and Exchange Commission on or about December 29, 1995. A copy may be
obtained, upon request and without charge, from the State Bond Fund at 100 North
Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069; telephone number:
1-800-328-4735.
The audited financial statements of the Federated Fund, dated March 31, 1996,
are incorporated herein by reference to the Federated Fund's Annual Report to
Shareholders dated March 31, 1996 which was filed with the Securities and
Exchange Commission. A copy may be obtained, upon request and without charge,
from the Federated Fund at Federated Investors Tower, Pittsburgh, PA 15222-3279;
telephone number: 1-800-245-5051, option one.
The audited financial statements of the State Bond Fund, dated October 31, 1995,
are incorporated herein by reference to the State Bond Fund's Annual Report to
Shareholders dated October 31, 1995, which was filed with the Securities and
Exchange Commission. A copy may be obtained, upon request and without charge,
from the State Bond Fund at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069; telephone number 1-800-328-4735.
The unaudited financial statements of the State Bond Fund, dated April 30, 1996,
are incorporated herein by reference to the State Bond Fund's Semi-Annual Report
to Shareholders, dated April 30, 1996, which was filed with the Securities and
Exchange Commission. A copy may be obtained, upon request and without charge,
from the State Bond Fund at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069; telephone number: 1-800-328-4735.
Pro forma financial statements are not included herein as the total net assets
of the State Bond Fund do not exceed 10% of the total assets of the Federated
Fund. At October 11, 1996, the total net assets of the State Bond Fund were
$13,289,918 and the total net assets of the Federated Fund were $1,411,488,640.
G01866-11
SBM Financial Services
Proxy Services
P.O. Box 9156
Farmingdale, NY 11735
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND,
a Portfolio of
STATE BOND INCOME FUNDS, INC.,
SPECIAL MEETING OF SHAREHOLDERS
December 9, 1996
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND,
a Portfolio of
STATE BOND INCOME FUNDS, INC.
The undersigned shareholder(s) of State Bond U.S. Government and Agency
Securities Fund, a portfolio of State Bond Income Funds, Inc. (the `State Bond
Fund'), hereby appoint(s) Kevin L. Howard, Keith O. Martens and Dale C. Bauman,
or any of them true and lawful proxies, with power of substitution of each, to
vote all shares of the State Bond Fund which the undersigned is entitled to
vote, at the Special Meeting of Shareholders to be held on December 9, 1996, at
100 North Minnesota Street, New Ulm, Minnesota 56073-0069, at 4:00 p.m. (local
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 proxies named
will vote the shares represented by this proxy in accordance with the choice
made on this ballot. IF NO CHOICE IS INDICATED, THIS PROXY WILL BE VOTED
AFFIRMATIVELY ON THAT MATTER.
The Board Of Directors unanimously recommends a vote FOR the proposal below.
Please sign EXACTLY as your name(s)
appear(s) 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 owners should sign.
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
KEEP THIS PORTION FOR YOUR RECORDS.
DETACH AND RETURN THIS PORTION ONLY.
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
RECORD DATE SHARES:
-----------------
Vote on Proposal
TO APPROVE OR DISAPPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN THE
STATE BOND FUND AND FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
FOR AGAINST ABSTAIN
- -----------------------------------
Signature
Signature (Joint Owners)
Date:
---------------------------------
