1933 Act File No. 33-3164
1940 Act File No. 811-4577
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ____X___
Pre-Effective Amendment No.
Post-Effective Amendment No. 20 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 16 X
FEDERATED INCOME SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on _________________ pursuant to paragraph (b)
X in sixty days, pursuant to paragraph (a) of Rule 485.
Registrant has filed with the Securities and Exchange
Commission a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940, and:
filed the Notice required by that Rule on
_________________; or
X intends to file the Notice required by that Rule on or
about June 15, 1994; or
during the most recent fiscal year did not sell any
securities pursuant to Rule 24f-2 under the Investment
Company Act of 1940, and, pursuant to Rule 24f-2(b)(2), need
not file the Notice.
Copies to:
Thomas J. Donnelly, Esquire Charles H. Morin, Esquire
Houston, Houston & Donnelly Dickstein, Shapiro & Morin
2510 Centre City Tower 2101 L Street, N.W.
650 Smithfield Street Washington, D.C. 20037
Pittsburgh, Pennsylvania 15222
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED
INCOME SECURITIES TRUST, relates to one of its two
portfolios , Federated Short-Term Income Fund and is
comprised of two portfolios, (1) Federated Short-Term Income
Fund, which has two classes of shares, (a) Institutional
Shares and (b) Institutional Service Shares, and (2)
Intermediate Income Fund, which has two classes of shares, (a)
Institutional Shares and (b) Institutional Service Shares.
The portfolios are comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page (1-2) Cover Page.
Item 2. Synopsis (1)Summary of (Institutional or
Institutional Service Shares)
Expenses.
Item 3. Condensed Financial
Information (1)Financial Highlights
Item 4. General Description of
Registrant (1-2) General Information;(1-2)
Investment Information; (1-2)
Investment Objective; (1-2)
Investment Policies; (1-2)
Interest Rate Swaps;(1-2)
Restricted Securities;(1-2)
Temporary Investments; (1-2)
Lending of Portfolio
Securities; (1-2) When-Issued
and Delayed Delivery
Transactions; (1-2) Portfolio
Turnover; (1-2) Investment
Limitations; (1-2) Other
Classes of Shares; (1-2)
Performance Information.
Item 5. Management of the Fund (1-2) Trust Information; (1-2)
Management of the Trust; (1-2)
Distribution of (Institutional
or Institutional Service)
Shares; (1(b),2(b))
Distribution Plan; (1-2)
Administration of the Fund; (1-
2) Expenses of the Fund and
(Institutional or Institutional
Service) Shares.
Item 6. Capital Stock and Other
Securities (1-2) Dividends; (1-2) Capital
Gains; (1-2) Shareholder
Information; (1-2) Voting
Rights; (1-2) Massachusetts
Partnership Law; (1-2) Tax
Information; (1-2) Federal
Income Tax; (1-2) Pennsylvania
Corporate and Personal Property
Taxes.
Item 7. Purchase of Securities Being
Offered (1-2) Net Asset Value; (1-2)
Investing in (Institutional or
Institutional Service) Shares;
(1-2) Share Purchases; (1-2)
Minimum Investment Required; (1-
2) What Shares Cost; (1-2)
Subaccounting Services; (1-2)
Certificates and Confirmations.
Item 8. Redemption or Repurchase (1-2) Redeeming (Institutional
or Institutional Service)
Shares; (1-2) Telephone
Redemption; (1-2) Written
Requests; (1-2) Redemption
Before Purchase Instruments
Clear; (1-2) Accounts With Low
Balances; (1) Redemption in
Kind.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL
INFORMATION.
Item 10. Cover Page (1-2) Cover Page.
Item 11. Table of Contents (1-2) Table of Contents.
Item 12. General Information and
History (1-2) General Information About
the Fund.
Item 13. Investment Objectives and
Policies (1-2) Investment Objective and
Policies.
Item 14. Management of the Fund (1-2) Trust Management.
Item 15. Control Persons and Principal
Holders of Securities (1-2) Fund Ownership.
Item 16. Investment Advisory and Other
Services (1(b),2(b)) Distribution Plan;
(1-2) Investment Advisory
Services; (1-2) Administrative
Services.
Item 17. Brokerage Allocation (1-2) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered (1-2) Purchasing (Institutional
or Institutional Service)
Shares; (1-2) Determining Net
Asset Value; (1-2) Redeeming
(Institutional or Institutional
Service) Shares; (2) Redemption
in Kind.
Item 20. Tax Status (1-2) Tax Status.
Item 21. Underwriters (1-2) Not applicable.
Item 22. Calculation of Performance
Data (1-2) Total Return; (1-2)
Yield; (1-2) Performance
Comparisons.
Item 23. Financial Statements (1) Filed in Part A, (2) to be
filed by amendment.
Part A and Part B are incorporated by reference to Registrant's
Post-Effective Amendment No. 17 on Form N-1A filed
October 8, 1993 (File Nos. 33-3164 and 811-4577).
Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
Prospectus
The Institutional Shares of Federated Short-Term Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio in Federated Income Securities Trust
(the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to seek to provide current income.
The shares offered by this prospectus are not deposits nor obligations of any
bank, are not endorsed nor guaranteed by any bank, and are not insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in these shares involves investment risks,
including the possible loss of principal.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information for Institutional
Shares dated June 30, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference in this prospectus. You may request a copy of the Statement of
Additional Information free of charge by calling 1-800-235-4669. To obtain other
information, or make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus.
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated June 30, 1994
Table of Contents
- --------------------------------------------------------------------------------
Summary of Fund Expenses 1
- ------------------------------------------------------
General Information 2
- ------------------------------------------------------
Investment Information 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Acceptable Investments 2
Variable Rate Demand Notes 3
Asset-Backed Securities 3
Mortgage-Related Asset-Backed
Securities 4
Adjustable Rate Mortgage Securities
("ARMS") 4
Collateralized Mortgage Obligations
("CMOs") 5
Real Estate Mortgage Investment
Conduits ("REMICs") 6
Resets of Interest 6
Caps and Floors 6
Non-Mortgage Related Asset-Backed
Securities 7
Bank Instruments 8
Credit Facilities 8
Interest Rate Swaps, Caps and Floors 8
Auction Rate Securities 10
Average Portfolio Maturity and Duration 10
Credit Enhancement 10
Auction Rate Securities 10
Demand Features 10
Restricted and Illiquid Securities 11
Repurchase Agreements 11
Reverse Repurchase Agreements 11
Lending of Portfolio Securities 12
When-Issued and Delayed
Delivery Transactions 12
Portfolio Turnover 12
Investment Limitations 13
Trust Information 13
- ------------------------------------------------------
Management of the Trust 13
Board of Trustees 13
Investment Adviser 14
Advisory Fees 14
Adviser's Background 14
Other Payments to Financial Institutions 14
Distribution of Institutional Shares 15
Administration of the Fund 15
Administrative Services 15
Shareholder Services Plan 15
Custodian 15
Transfer Agent and Dividend
Disbursing Agent 15
Legal Counsel 15
Independent Auditors 15
Expenses of the Fund
and Institutional Shares 16
Net Asset Value 16
- ------------------------------------------------------
Investing in Institutional Shares 16
- ------------------------------------------------------
Share Purchases 16
By Wire 17
By Mail 17
Minimum Investment Required 17
What Shares Cost 17
Subaccounting Services 17
Certificates and Confirmations 18
Dividends 18
Capital Gains 18
Redeeming Institutional Shares 18
- ------------------------------------------------------
Telephone Redemption 18
Written Requests 19
Signatures 19
Receiving Payment 19
Accounts with Low Balances 19
Redemption in Kind 19
Shareholder Information 20
- ------------------------------------------------------
Voting Rights 20
Massachusetts Partnership Law 20
Tax Information 20
- ------------------------------------------------------
Federal Income Tax 20
Pennsylvania Corporate and
Personal Property Taxes 21
Performance Information 21
- ------------------------------------------------------
Other Classes of Shares 21
- ------------------------------------------------------
Addresses Inside Back Cover
- ------------------------------------------------------
Summary of Fund Expenses
Institutional Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................... None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds as applicable).................................................. None
Redemption Fee (as a percentage of amount
redeemed, if applicable).............................................................................. None
Exchange Fee............................................................................................ None
Annual Institutional Shares Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver) (1)....................................................................... --
12b-1 Fees.............................................................................................. --
Other Operating Expenses (after expense reimbursement).................................................. --
Total Institutional Shares Operating Expenses (2).............................................. --
</TABLE>
- ---------
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is .40%.
(2) The total Institutional Shares operating expenses would have been %
absent the voluntary waiver of the management fee and reimbursement of
certain other operating expenses by the Fund's adviser.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Trust Information" and "Investing in
Institutional Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period. As noted in the table above, the Fund charges no redemption
fee for Institutional Shares.......................................... $-- $-- $-- $--
</TABLE>
The above example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The information set forth in the foregoing table and example relates only to
Institutional Shares of the Fund. The Fund also offers another class of shares
called Institutional Service Shares. Institutional Shares and Institutional
Service Shares are subject to certain of the same expenses; however,
Institutional Service Shares are subject to a 12b-1 fee of 0.25 of 1%. See
"Other Classes of Shares."
General Information
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus the Board of Trustees ("Trustees") have
established two classes of shares, Institutional Shares and Institutional
Service Shares. This prospectus relates only to Institutional Shares ("Shares")
of the Fund. A minimum initial investment of $25,000 over a 90-day period is
required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.
Investment Information
- --------------------------------------------------------------------------------
Investment Objective
The investment objective of the Fund is to seek to provide current income. This
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
Investment Policies
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies regarding
the Fund's average dollar-weighted portfolio maturity and duration. This
investment policy may not be changed without the prior approval of the Fund's
shareholders. Unless indicated otherwise, the other investment policies
described in this prospectus may be changed by the Trustees without the approval
of the Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.
Acceptable Investments. The high grade debt securities in which the Fund
invests include medium and long-term instruments rated by one or more nationally
recognized statistical rating organizations ("NRSROs") in one of their three
highest rating categories (e.g., AAA, AA or A by Standard & Poor's Corporation
("S&P") or Fitch Investors Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's
Investors Service, Inc. ("Moody's") ) and short-term instruments rated by one or
more NRSROs in one of their two highest categories (e.g., A-1 or A-2 by S&P,
Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). The Fund may also invest
in unrated debt securities that are determined by the Fund's investment adviser
to be of comparable quality to instruments having such ratings. Downgraded
securities will be evaluated on a case by case basis by the adviser. The adviser
will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold.
Acceptable investments currently include the following:
.corporate debt obligations, including medium-term notes and variable rate
demand notes;
.asset-backed securities;
.commercial paper (including Canadian Commercial Paper and Europaper);
.certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and
other deposit institutions ("Bank Instruments");
.interest rate swaps, caps and floors;
.medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
.auction rate securities (see below);
.obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
.other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
Variable Rate Demand Notes. Variable rate demand notes are long-term corporate
debt instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear interest
at a rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on published interest rate or interest rate
index. Many variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features."
Asset-Backed Securities. Asset-backed securities are created by the grouping of
certain governmental, government related, private loans, receivables or other
lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled payments on their mortgages. All
asset-backed securities are subject to similar prepayment risks, although they
may be more or less sensitive to certain factors. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original asset-backed security. As a consequence, mortgage securities may be
a less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset
pools, such as collateralized mortgage obligations, prepayments may be allocated
to one tranche of securities ahead of other tranches, in order to reduce the
risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
Mortgage-Related Asset-Backed Securities. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Mortgage securities are
(i)issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities; (iii) those issued by private
issuers that represent an interest in or are collateralized by whole loans
or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are 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.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and/or principal. The interest portion
of these payments will be distributed by the Fund as income, and the
capital portion will be reinvested.
Adjustable Rate Mortgage Securities ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than
fixed interest rate mortgages. Typically, the ARMS in which the Fund
invests are issued by GNMA, FNMA, and FHLMC and are actively traded.
ARMS may be collateralized by whole loans or private pass through
securities. The underlying mortgages which collateralize ARMS issued by
GNMA are fully guaranteed by the Federal Housing Administration ("FHA")
or Veterans Administration ("VA"), while those collateralizing ARMS
issued by FHLMC or FNMA are typically conventional residential
mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the
Fund, would receive monthly scheduled payments of principal and/or
interest and may receive unscheduled principal payments representing
payments on the underlying mortgages. At the time that a holder of the
ARMS reinvests the payments and any unscheduled prepayments of
principal that it receives, the holder may receive a rate of interest
which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of fixed-income
securities.
Not unlike other fixed-income securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus,
the market value of ARMS generally declines when interest rates rise
and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.
Collateralized Mortgage Obligations ("CMOs"). CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but may be collateralized by whole loans or private
pass-through securities.
The CMOs in which the Fund invests may be: (a) 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; (b) 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 (c)
collateralized by pools of mortgages without a government guarantee as
to payment of principal and interest, but which have some form of
credit enhancement.
The following example illustrates how mortgage cash flows are
prioritized in the case of CMOs. Most of the CMOs in which the Fund
invests use the same basic structure.
(1) Several classes of securities are issued against a pool of
mortgage collateral. The most common structure contains four
tranches of securities: The first three (A, B, and C bonds) pay
interest at their stated rates beginning with the issue date; the
final tranche (Z bond) typically receives any excess income from
the underlying investments after payments are made to the other
tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all
remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to
pay interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all
principal payments are then directed to the next-shortest-maturity
security tranche (or B bond.) This process continues until all of
the tranches have been completely retired.
Because the cash flow is distributed sequentially instead of pro rata,
as with pass-through securities, the cash flows and average lives of
CMOs are more predictable, and there is a period of time during which
the investors in the longer-maturity classes receive no principal
paydowns. One or more of the tranches often bear interest at an
adjustable rate. The interest portion of these payments is distributed
by the Fund as income, and the principal portion is reinvested.
Real Estate Mortgage Investment Conduits ("REMICs"). REMICs are
offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the
Internal Revenue Code. Issuers of REMICs may take several forms, such
as trusts, partnerships, corporations, associations, or segregated
pools of mortgages. Once REMIC status is elected and obtained, the
entity is not subject to federal income taxation. Instead, income is
passed through the entity and is taxed to the person or persons who
hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable
rates of interest, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be
in assets directly or indirectly secured principally by real property.
Resets of Interest. The interest rates paid on some of the ARMS, CMOs,
and REMICs in which the Fund invests will be readjusted at intervals of
one year or less to an increment over some predetermined interest rate
index. There are two main categories of indices: those based on U.S.
Treasury securities and those derived from a calculated measure, such
as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant
maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities,
the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market interest
rate levels. Others tend to lag changes in market rate levels and tend
to have somewhat less volatile interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, adjustable rate mortgage securities which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Certain residual interest tranches of CMO's may have adjustable
interest rates
that deviate significantly from prevailing market rates, even after the
interest rate is reset, and are subject to correspondingly increased
price volatility. In the event that the Fund purchases such residual
interest mortgage securities, it will factor in the increased interest
and price volatility of such securities when determining its
dollar-weighted average portfolio maturity and duration.
Caps and Floors. The underlying mortgages which collateralize the
ARMS, CMOs, and REMICs in which the Fund invests will frequently have
caps and floors which limit the maximum amount by which the loan rate
to the residential borrower may change up or down: (1) per reset or
adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
Non-Mortgage Related Asset-Backed Securities. The Fund may invest in
non-mortgage related asset-backed securities, including interests in pools
of receivables, such as credit card and accounts receivable and motor
vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are structured similarly to collateralized
mortgage obligations and mortgage pass-through securities, which are
described above. Also, these securities may be issued either by non-
governmental entities and carry no direct or indirect governmental
guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage related asset-backed securities have structural
characteristics similar to mortgage-related asset-backed securities but
have underlying assets that are not mortgage loans or interests in mortgage
loans. The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities are issued by non-governmental entities
and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Although
non-mortgage related asset-backed securities generally are less likely to
experience substantial prepayments than are mortgage-related asset-backed
securities, certain of the factors that affect the rate of prepayments
on mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then reregistered because the owner and obligor moves to another
state, such reregistration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Bank Instruments. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"). Bank Instruments may include Eurodollar Certificates of Deposit
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time
Deposits ("ETDs").
Credit Facilities. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment. Revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term. As
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the facility. The Fund generally acquires a
participation interest in a revolving credit facility from a bank or other
financial institution. The terms of the participation requires the Fund to make
a pro rata share of all loans extended to the borrower and entitles the Fund to
a pro rata share of all payments made by the borrower. Demand notes and
revolving facilities usually provide for floating or variable rates of interest.
Interest Rate Swaps, Caps and Floors. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed-rate payments) on a notional principal amount. The
principal amount of an interest rate swap is notional in that it only provides
the basis for determining the amount of interest payments under the swap
agreement, and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer
Rate on $10 million principal amount in exchange for the right to receive the
equivalent of a fixed rate of interest on $10 million principal amount. Neither
party to the swap would actually advance $10 million to the other.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
the amount of excess interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of the amount of the interest shortfall on a
notional principal amount from the party selling the interest rate floor.
The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest based
on a market index. Interest accrued on the hedged note would then equal or
exceed the Fund's obligations under the swap, while changes in the market value
of the swap would largely offset any changes in the market value of the note.
The Fund may also enter into swaps and caps to preserve or enhance a return or
spread on a portfolio security. The Fund does not intend to use these
transactions in a speculative manner.
The Fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and the Fund will
segregate liquid assets in an aggregate net asset value at least equal to the
accrued excess, if any, on each business day. If the Fund enters into an
interest rate swap on other than a net basis, the Fund will segregate liquid
assets in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps, caps or floors are determined by the investment
adviser to be illiquid, they will be included in the Fund's limitation on
investments in illiquid securities. To the extent the Fund sells caps and
floors, it will maintain in a segregated account cash and/or U.S. Government
Securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps or floors.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Fund's investment adviser is incorrect
in its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover, even
if the Fund's investment adviser
is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the portfolio security being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to a default on an interest rate swap is limited to the net
asset value of the swap together with the net amount of interest payments owed
to the Fund by the defaulting party. A default on a portfolio security hedged by
an interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other portfolio securities.
The Fund may purchase and sell caps and floors without limitation, subject to
the segregated account requirement described above.
Auction Rate Securities. The Fund may invest in auction rate municipal
securities and auction rate preferred securities issued by closed-end investment
companies (collectively, "auction rate securities"). The Fund does not intend to
invest more than 10% of its total assets in auction rate securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The interest rate or dividend is reset by "Dutch" auction in which
bids are made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The interest rate or dividend rate set
by the auction is the lowest interest or dividend rate that covers all
securities offered for sale. While this process is designed to permit auction
rate securities to be traded at par value, there is some risk that an auction
will fail due to insufficient demand for the securities. If so, the securities
may become illiquid and subject to the Fund's 15% limitation on illiquid
securities.
The Fund's investments in auction rate preferred securities of closed-end funds
are subject to the limitations prescribed by the Investment Company Act of 1940
and certain state securities regulations. These limitations include a
prohibition against acquiring more than 3% of the voting securities of any other
investment company, and investing more than 5% of the Fund's assets in
securities of any one investment company or more than 10% of its assets in
securities of all investment companies. It should be noted that investment
companies incur certain expenses such as management fees, and therefore, any
investment by a Fund in shares of another investment company would be subject to
such duplicate expenses, particularly transfer agent and custodian fees. The
investment adviser will waive its investment advisory fee on Fund assets
invested in securities of open-end investment companies.
Average Portfolio Maturity and Duration. Although the Fund will not maintain a
stable net asset value, the adviser will seek to limit, to the extent consistent
with the Fund's investment objective of current income, the magnitude of
fluctuations in the Fund's net asset value by limiting the dollar-weighted
average maturity and duration of the Fund's portfolio. Securities with shorter
maturities and durations generally have less volatile prices than securities of
comparable quality with longer maturities or durations. The Fund should be
expected to maintain a higher average maturity and duration during periods of
lower expected market volatility, and a lower average maturity and duration
during periods of higher expected market volatility. In any event, the Fund's
dollar-weighted average maturity will not exceed 3 years, and its
dollar-weighted average duration will not exceed 3 years.
Credit Enhancement. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the
credit enhancement (the "credit enhancer"), rather than the issuer. Generally,
the Fund will not treat credit enhanced securities as having been issued by the
credit enhancer for diversification purposes. However, under certain
circumstances applicable regulations may require the Fund to treat the
securities as having been issued by both the issuer and the credit enhancer. The
bankruptcy, receivership or default of the credit enhancer will adversely affect
the quality and marketability of the underlying security.
Demand Features. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
Restricted and Illiquid Securities. The Fund intends to invest in restricted
and illiquid securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies but
which are subject to restriction on resale under federal securities law. The
Fund will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
Repurchase Agreements. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities in which the
Fund may invest to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. This policy may not be changed without the approval of the Fund's
shareholders.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, or both, up to one-third of the value of its
total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will limit the amount of portfolio securities it may lend
to not more than one-third of its total assets. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral equal to at least 100% of the value
of the securities loaned. This policy may not be changed without the approval of
the Fund's shareholders.
When-Issued and Delayed Delivery Transactions
The Fund may purchase securities on a when-issued or delayed delivery basis. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous. The Fund
will limit its purchase of securities on a when-issued or delayed delivery basis
to no more than 20% of the value of its total assets. This policy may not be
changed without the approval of the Fund's shareholders.
Portfolio Turnover
While the Fund does not intend to engage in substantial short-term trading, from
time to time it may sell portfolio securities for investment reasons without
considering how long they have been held. For example, the Fund would do this:
.to take advantage of short-term differentials in yields or market values;
.to take advantage of new investment opportunities;
.to respond to changes in the creditworthiness of an issuer; or
.to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective.
As a result of the change in its investment policies, which required the Fund to
dispose of all of its lower rated securities, the Fund's portfolio turnover rate
exceeded 100% last year. This turnover rate did not result in any material tax
or brokerage consequences. The Fund does not anticipate that its portfolio
turnover will remain at this level, although it may not return to historical
levels due to the short-term nature of the Fund's investments.
Investment Limitations
The Fund will not:
.borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of its total assets to secure such borrowings;
.lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
.sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value of
its net assets is held as collateral for those positions;
.underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations;
.invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
.with respect to 75% of its assets, invest more than 5% of the value
of its total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer. For these purposes the Fund takes all common
stock and all preferred stock of an issuer each as a single class,
regardless of priorities, series, designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
if this limitation becomes effective.
The Fund will not:
.invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.
Trust Information
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Management of the Trust
Board of Trustees. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
Investment Adviser. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
Advisory Fees. The Fund's Adviser receives an annual investment advisory
fee equal to .40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, theAdviser may voluntarily reimburse some of
the operating expenses of the Fund. The Adviser can terminate this
voluntary reimbursement of expenses at any time in its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
Adviser's Background. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Deborah A. Cunningham has been the Fund's co-portfolio manager since July
1991. Ms. Cunningham joined Federated Investors in 1981 and has been a Vice
President of the Fund's investment adviser since 1993. Ms. Cunningham
served as an Assistant Vice President of the investment adviser from 1989
until 1992, and from 1986 until 1989 she acted as an investment analyst.
Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A.
in Finance from Robert Morris College.
Randall S. Bauer has been the Fund's co-portfolio manager since March 1992.
Mr. Bauer joined Federated Investors in 1989 as an Assistant Vice President
of the Fund's investment adviser. Mr. Bauer was an Assistant Vice President
of the International Banking Division at Pittsburgh National Bank from 1982
until 1989. Mr. Bauer is a Chartered Financial Analyst and received his
M.B.A. in Finance from Pennsylvania State University.
Other Payments to Financial Institutions. In addition to periodic payments
to financial institutions under the Shareholder Services Plan described
below, certain financial institutions may be compensated by the Adviser or
its affiliates for the continuing investment of customers' assets in
certain funds, including the Fund, advised by those entities. These
payments will be made directly by the distributor or adviser from their
assets, and will not be made from the assets of the Fund or by the
assessment of a sales charge on Shares.
Distribution of Institutional Shares
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
Administration of the Fund
Administrative Services. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
Average Aggregate Daily Net Assets
Maximum Administrative Fee of the Federated Funds
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
Shareholder Services Plan. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Fund to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
Custodian. State Street Bank and Trust Company ("State Street Bank"), Boston,
MA, is custodian for the securities and cash of the Fund.
Transfer Agent and Dividend Disbursing Agent. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund, and
dividend disbursing agent for the Fund.
Legal Counsel. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, PA, and Dickstein, Shapiro & Morin, Washington, D.C.
Independent Auditors. The independent auditors for the Fund are Ernst & Young,
One Oxford Centre, Pittsburgh, PA 15219.
Expenses of the Fund and Institutional Shares
The Fund pays all of its own expenses.
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence: registering the Trust with federal and state securities
authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues; and such non-recurring and
extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise.
In addition, the Trustees reserve the right to allocate certain other expenses
to holders of Shares as they deem appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of Shares; distribution fees; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Trustees' fees incurred as a result of
issues relating solely to Shares.
Net Asset Value
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The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Shares will exceed that of Institutional Service Shares due to the variance in
daily net income realized by each class as a result of different distribution
charges incurred by the classes. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
Investing in Institutional Shares
- --------------------------------------------------------------------------------
Share Purchases
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
By Wire. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Boston time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Boston time) on the next business day following the order. Federal funds should
be wired as follows: State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Federated Short-Term Income
Fund--Institutional Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; and ABA Number 011000028.
By Mail. To purchase Shares of the Fund by mail, send a check made payable to
Federated Short-Term Income Fund--Institutional Shares to Federated Services
Company, c/o State Street Bank and Trust Company, P.O. Box 8602, Boston,
Massachusetts 02266-8602. Orders by mail are considered received after payment
by check is converted by State Street Bank into federal funds. This is normally
the next business day after State Street Bank receives the check.
Minimum Investment Required
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
What Shares Cost
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined at 4:00 p.m. (Boston time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Subaccounting Services
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions holding
Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or agency
account fees. They may also charge fees for other services provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
Certificates and Confirmations
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
Dividends
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted by the Transfer Agent
into federal funds. Dividends are automatically reinvested on payment dates in
additional Shares of the Fund unless cash payments are requested by contacting
the Fund.
Capital Gains
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
Redeeming Institutional Shares
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
Telephone Redemption
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Boston time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve
System. If at any time the Fund shall determine it is necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
Written Requests
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his name, the Fund name and class name, his
account number, and the share or dollar amount requested. If Share certificates
have been issued, they must be properly endorsed and should be sent by
registered or certified mail with the written request.
Signatures. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
.a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
.a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
.a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is adminstered by the FDIC; or
.any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Receiving Payment. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
Accounts with Low Balances
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
Redemption in Kind
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way that net asset value is determined. The portfolio instruments
will be selected in a manner that the Trustees deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Shareholder Information
- --------------------------------------------------------------------------------
Voting Rights
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by a two-thirds vote of the
number of Trustees or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all portfolios entitled to vote.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Information
- --------------------------------------------------------------------------------
Federal Income Tax
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. Information on
the tax status of dividends and distributions is provided annually.
Pennsylvania Corporate and Personal Property Taxes
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
.The Fund is not subject to Pennsylvania corporate or personal property
taxes; and
.Fund shares may be subject to personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania to the
extent that the portfolio securities in the Fund would be subject to
such taxes if owned directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
Performance Information
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield for
Institutional Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Institutional Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Institutional Shares over a thirty-day period by the net asset value per
share of Institutional Shares on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by Institutional Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The Institutional Shares are sold without any sales load or other similar
non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares. Because Institutional Service Shares are
subject to 12b-1 fees, total return and yield of Institutional Shares, for the
same period, will exceed that of Institutional Service Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
Other Classes of Shares
- --------------------------------------------------------------------------------
Institutional Service Shares are sold primarily to banks and other institutions
that hold assets in an agency capacity. Institutional Service Shares are sold at
net asset value. Investments in Institutional Service Shares are subject to a
minimum initial investment of $25,000.
Institutional Service Shares are distributed pursuant to a 12b-1 Plan adopted by
the Trust whereby the distributor is paid a fee of .25 of 1% of the
Institutional Service Shares' average net assets.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares than from
another class of shares.
The amount of dividends payable to Institutional Shares will exceed that of
Institutional Service Shares by the difference between Class Expenses and
distribution and shareholder service expenses borne by shares of each respective
class.
The stated advisory fee is the same for both classes of the Fund.
Addresses
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Short-Term Income Fund Federated Investors Tower
Institutional Shares Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent & Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Federated
Short-Term
Income Fund
Institutional Shares
Prospectus
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1994
[LOGO]
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
1111903A-IS (6/94)
Federated Short-Term Income Fund
Institutional Shares
(A Portfolio of Federated Income Securities Trust)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Federated Short-Term Income Fund (the "Fund") dated
June 30, 1994. This Statement is not a prospectus itself. To receive a
copy of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated June 30, 1994
[LOGO]
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
Table of Contents
- --------------------------------------------------------------------------------
General Information About the Fund 1
- ---------------------------------------------------------------
Investment Objective and Policies 1
- ---------------------------------------------------------------
U.S. Government Securities 1
Weighted Average Portfolio Maturity 1
Weighted Average Portfolio Duration 1
When-Issued and Delayed Delivery
Transactions 2
Auction Rate Securities 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 3
Privately Issued Mortgage-Related Securities 3
Portfolio Turnover 3
Foreign Investments 3
Investment Limitations 3
Trust Management 5
- ---------------------------------------------------------------
Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 7
Investment Advisory Services 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
Other Advisory Services 8
Other Related Services 8
Administrative Services 8
- ---------------------------------------------------------------
Shareholder Services Plan 9
- ---------------------------------------------------------------
Brokerage Transactions 9
- ---------------------------------------------------------------
Purchasing Institutional Shares 9
- ---------------------------------------------------------------
Conversion to Federal Funds 9
Determining Net Asset Value 9
- ---------------------------------------------------------------
Determining Value of Securities 10
Redeeming Institutional Shares 10
- ---------------------------------------------------------------
Redemption in Kind 10
Tax Status 10
- ---------------------------------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 10
Total Return 11
- ---------------------------------------------------------------
Yield 11
- ---------------------------------------------------------------
Performance Comparisons 11
- ---------------------------------------------------------------
Appendix 13
- ---------------------------------------------------------------
General Information About the Fund
- --------------------------------------------------------------------------------
The Fund is a portfolio of Federated Income Securities Trust (the "Trust"),
which was established as a Massachusetts business trust under a Declaration of
Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer one or more separate series and classes of shares and
to change the name of the Trust from "Federated Floating Rate Trust" to
"Federated Income Securities Trust.".
Shares of the Fund are offered in two classes, Institutional Shares and
Institutional Service Shares. This statement of additional information relates
to Institutional Shares ("Shares") of the Fund.
Investment Objective and Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is to seek to provide current income. The Fund
will pursue this objective by investing primarily in a diversified portfolio of
short and medium-term high grade debt securities. The foregoing investment
objective and policy may not be changed without the prior approval of the Fund's
shareholders.
U.S. Government Securities
The types of U.S. government obligations in which the Fund may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities may be backed by:
.the full faith and credit of the U.S. Treasury;
.the issuer's right to borrow from the U.S. Treasury;
.the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
.the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
.Federal Farm Credit Banks;
.Federal Home Loan Banks;
.Student Loan Marketing Association;
.Federal Home Loan Mortgage Corporation; and
.Federal National Mortgage Association.
Weighted Average Portfolio Maturity
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity of each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) treat
asset-backed securities as having a maturity equal to their estimated
weighted-average maturity and (b) variable and floating rate instruments as
having a remaining maturity commensurate with the period remaining until the
next scheduled adjustment to the instrument's interest rate. The average
maturity of asset-backed securities will be calculated based upon assumptions
established by the investment adviser as to the probable amount of the principal
prepayments weighted by the period until such prepayments are expected to be
received.
Fixed rate securities hedged with interest rate swaps or caps will be treated as
floating or variable rate securities based upon the interest rate index of the
swap or cap; floating and variable rate securities hedged with interest rate
swaps or floors will be treated as having a maturity equal to the term of the
swap or floor. In the event that the Fund holds an interest rate swap, cap or
floor that is not hedging another portfolio security, the swap, cap or floor
will be treated as having a maturity equal to its term and a weight equal to its
notional principal amount for such term.
Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a
remaining duration commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as to the probable amount
and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.
When-Issued and Delayed Delivery Transactions
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the total value of its assets.
Auction Rate Securites
Dividends on auction rate preferred securities issued by a closed-end fund may
be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the closed-end fund on the securities in
its portfolio and distributed to holders of the preferred securities, provided
that the preferred securities are treated as equity securities for federal
income tax purposes and the closed-end fund complies with certain tests under
the Internal Revenue Code. Auction rate preferred securities will be treated as
taxable securities unless substantially all of the dividends on such securities
is expected to be exempt from regular federal income taxes.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees").
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
Reverse Repurchase Agreements
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid.
Portfolio Turnover
For the fiscal years ended April 30, 1993 and 1992, the portfolio turnover rates
were 62% and 114%, respectively.
Foreign Investments
ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions in the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund.
Investment Limitations
Concentration of Investments
The Fund will not purchase securities if as a result of such purchase 25%
or more of the value of its total assets would be invested in any one
industry.
Investing in Commodities
The Fund will not purchase or sell commodities or commodity contracts,
including futures contracts.
Investing in Real Estate
The Fund will not purchase or sell real estate including limited
partnership interests in real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or
interests in real estate.
Buying on Margin
The Fund will not purchase any securities on margin but may obtain such
short-term credits as are necessary for the clearance of transactions.
Selling Short
The Fund will not sell securities short unless:
.during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and
.not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while any borrowings, other than reverse
repurchase agreements, are outstanding.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates
of indebtedness or other debt securities of an issuer, repurchase
agreements or other transactions which are permitted by the Fund's
investment objective and policies or its Declaration of Trust.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and limitations.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets in
securities of companies, including their predecessors, that have been in
operation for less than three years. With respect to asset-backed
securities, the Fund will treat the originator of the asset pool as the
company issuing the security for purposes of determining compliance with
this limitation.
Investing in Issuers Whose Securities Are Owned By Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Diversification of Investments
The Fund will not, with respect to 75% of its assets, invest more than 5%
of the value of its total assets in securities of one issuer (except U.S.
government obligations), or purchase more than 10% of the outstanding
voting securities in any one issuer.
Acquiring Securities
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
Investing in Illiquid Securities
The Fund will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, interest rate swaps, caps and floors
determined by the investment adviser to be illiquid, and repurchase
agreements providing for settlement in more than seven days after notice,
to 15% of its net assets.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund does not intend to borrow money, invest in reverse repurchase
agreements, or sell securities short during the coming year.
To comply with restrictions in certain states, the Fund will limit its
investment in restricted securities not determined by the Trustees to be liquid
to 10% of its net assets. (If state requirements change, this restriction may be
revised without shareholder notification.)
Trust Management
- --------------------------------------------------------------------------------
Officers and Trustees
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Management,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Inc., and the Funds (as defined below).
<TABLE>
<CAPTION>
Positions with Principal Occupations
Name and Address the Trust During Past Five Years
<S> <C> <C>
John F. Donahue* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, tna Life and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, Vice President of the Trust.
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate
Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in Southwest Florida; Director, Trustee, or
Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management Inc.
Naples, FL
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly,
23rd Floor Building Vice Chairman and Director, PNC Bank, N.A. and PNC Bank Corp. and
Pittsburgh, PA Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.;
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the
Pittsburgh, PA Funds.
Edward L. Flaherty, Jr. Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare,
5916 Penn Mall Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice Chairman,
Horizon Financial, F.A.
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Learning Endowment for International Peace, RAND Corporation, Online Computer
Pittsburgh, PA Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho
Slovak Management Center; Director, Trustee or Managing General
Partner of the Funds; President, Emeritus University of Pittsburgh;
formerly Chairman National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
John A. Staley, IV* Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower and Trustee President, Federated Securities Corp.; President and Trustee,
Pittsburgh, PA Federated Advisers, Federated Management, and Federated Research; Vice
President of the Funds; Director, Trustee, or Managing General Partner
of some of the Funds; formerly, Vice President, The Standard Fire
Insurance Company and President of its Federated Research Division.
Glen R. Johnson President Trustee, Federated Investors; President and/or Trustee of some of the
Federated Investors Tower Funds; staff member, Federated Securities Corp. and Federated
Pittsburgh, PA Administrative Services.
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated
Federated Investors Tower Advisers, Federated Management, and Federated Research; Trustee,
Pittsburgh, PA Federated Administrative Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee
of the Trust.
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman
Federated Investors Tower and Director, Federated Securities Corp.; President or Vice President
Pittsburgh, PA of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice
Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the
Funds; Vice President and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice
President, Secretary, and Trustee, Federated Administrative Services,
Inc.; Director and Executive Vice President, Federated Securities
Corp.; Vice President and Secretary of the Funds.
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
Members of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between meetings
of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series Inc.; Cash Trust Series II; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated
Intermediate Municipal Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series Funds, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust,
Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Trademark
Funds; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations and
World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee
of Federated Management, is Chairman and Trustee of Federated Investors and
Chairman and Trustee of the Trust. John A. Staley, IV, President and Trustee of
Federated Management, is Vice President and Trustee of Federated Investors,
Executive Vice President of Federated Securities Corp., and Vice President and
Trustee of the Trust. J. Christopher Donahue, Trustee of Federated Management,
is President and Trustee of Federated Investors, Trustee of Federated
Administrative Services, and Vice President of the Trust. John W. McGonigle,
Vice President, Secretary and Trustee of Federated Management, is Trustee, Vice
President, Secretary, and General Counsel of Federated Investors, Director,
Executive Vice President, and Secretary of Federated Administrative Services,
Director and Executive Vice President of Federated Securities Corp., and Vice
President and Secretary of the Trust.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended April 30,
1994, 1993, and 1992, the Fund's Adviser earned $________, $395,758, and
$266,945, respectively, all of which were waived because of undertakings to
limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Other Advisory Services
Federated Research Corp. receives fees from certain depository institutions for
providing consulting and portfolio advisory services relating to each
institution's program of asset management. Federated Research Corp. may advise
such clients to purchase or redeem shares of investment companies, such as the
Fund, which are managed, for a fee, by Federated Research Corp. or other
affiliates of Federated Investors, such as the Adviser, and may advise such
clients to purchase and sell securities in the direct markets. Further,
Federated Research Corp., and other affiliates of the Adviser, may, from time to
time, provide certain consulting services and equipment to depository
institutions in order to facilitate the purchase of shares of funds offered by
Federated Securities Corp.
Other Related Services
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the fiscal years ended April 30, 1994, 1993, and 1992, Federated
Administrative Services, Inc., the Fund's former administrator, earned $ ,
$292,200, and $166,568, respectively. John A. Staley, IV, an officer of the
Trust and Dr. Henry J. Gailliot, an officer of Federated Management, the adviser
to the Fund, each hold approximately 15% and 20%, respectively, of the
outstanding common stock and serve as directors of Commercial Data Services,
Inc., a company which provides computer
processing services to Federated Administrative Services, Inc., and Federated
Administrative Services. For the fiscal years ended April 30, 1994, 1993, and
1992, Federated Administrative Services, Inc. paid approximately $ ,
$177,832, and $204,755, respectively, for services provided by Commercial Data
Services, Inc. to the Fund.
Shareholder Services Plan
- --------------------------------------------------------------------------------
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to financial institutions to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may include,
but are not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses. For
the fiscal period ended April 30, 1994, no payments were made pursuant to the
Shareholder Services Plan.
Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
.advice as to the advisability of investing in securities;
.security analysis and reports;
.economic studies;
.industry studies;
.receipt of quotations for portfolio evaluations; and
.similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
Purchasing Institutional Shares
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days on which
the New York Stock Exchange is open for business. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "Investing in
Institutional Shares."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. State Street Bank and Trust
Company ("State Street Bank") acts as the shareholder's agent in depositing
checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
- --------------------------------------------------------------------------------
Determining Value of Securities
The values of the Fund's portfolio securities are determined as follows:
according to prices provided by independent pricing services, which may be
determined without exclusive reliance on quoted prices from dealers but which
use market prices when most representative, and which may take into account
appropriate factors such as yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data employed in determining
valuations for such securities; or
for short-term obligations with remaining maturities of less than 60 days at
the time of purchase, at amortized cost unless the Trustees determines that
particular circumstances of the security indicate otherwise.
Redeeming Institutional Shares
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Institutional Shares." Although State Street Bank
does not charge for telephone redemptions, it reserves the right to charge a fee
for the cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from gains on the sale of securities
held less than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during
the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. No portion of any income dividend paid by
the Fund is expected to be eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
Capital Gains
Fixed income securities offering the current income sought by the Fund
are often purchased at a discount from par value. Because the total yield
on such securities when held to maturity and retired may include an
element of capital gain, the Fund may achieve capital gains. However, the
Fund will not hold securities to maturity for the purpose of realizing
capital gains unless current yields on those securities remain
attractive.
Capital gains or losses may also be realized on the sale of securities.
Sales would generally be made because of:
.the availability of higher relative yields;
.differentials in market values;
.new investment opportunities;
.changes in creditworthiness of an issuer; or
.an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
Total Return
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the one-year and five-year periods
ended April 30, 1994, and for the period from July 1, 1986 (effective date of
the Trust's initial registration statement) to April 30, 1994, were ____%, %,
and ____%, respectively, for Institutional Shares. Cumulative total return
reflects the Fund's total performance over a specific period of time. The Fund's
average annual total return for the period ended April 30, 1994 and its
cumulative total return from January 21, 1992 (the effective date of the Fund's
registration statement adding the Institutional Service Shares) to April 30,
1994 was ____% for Institutional Service Shares and ____% for the Institutional
Shares.
The average annual total return for both classes of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the maximum offering price per share at the end of the
period. The number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with $1,000, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended April 30, 1994, was ____% and
____% for Institutional Shares and Institutional Service Shares, respectively.
The yield for both classes of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
maximum offering price per share of either class of shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, performance will be reduced for those shareholders paying those
fees.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of both classes of shares depends upon such variables as:
.portfolio quality;
.average portfolio maturity;
.type of instruments in which the portfolio is invested;
.changes in interest rates and market value of portfolio securities;
.changes in the Fund's or either class of share's expenses; and
.various other factors.
Either class of share's performance fluctuates on a daily basis largely because
net earnings and the maximum offering price per share fluctuate daily. Both net
earnings and net asset value per share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
.Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "short-term
investment grade debt funds" category in advertising and sales literature.
.Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rate more than 1,000
NASDQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in the
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
Appendix
- --------------------------------------------------------------------------------
Standard & Poor's Corporation Corporate Bond Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Moody's Investors Service, Inc. Corporate Bond Rating Definitions
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and
AAcategories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-1--Issuers (or related supporting institutions) rated Prime-1 have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
Conservative capitalization structures with moderate reliance on debt and ample
asset protection; Broad margins in earning coverage of fixed financial charges
and high internal cash generation; Well established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers (or related supporting institutions) rated Prime-2 have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, which sound, will be more subject to
variation. Capitalization characteristics, while sound appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch Investors Service, Inc. Commercial Paper Ratings Definitions
Fitch-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
Fitch-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
1111903B-IS (6/94)
Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Service Shares
Prospectus
The Institutional Service Shares of Federated Short>-Term Income Fund (the
"Fund") offered by this prospectus represent interests in a diversified
portfolio of securities which is an investment portfolio in Federated Income
Securities Trust (the "Trust"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek to provide current income.
The shares offered by this prospectus are not deposits or obligations of any
bank, are not endorsed or guaranteed by any bank, and are not insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in these shares involves investment risks,
including the possible loss of principal.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information for Institutional
Service Shares dated June 30, 1994, with the Securities and Exchange Commission.
The information contained in the Statement of Additional Information is
incorporated by reference in this prospectus. You may request a copy of the
Statement of Additional Information free of charge by calling 1-800-235-4669. To
obtain other information, or make inquiries about the Fund, contact the Fund at
the address listed in the back of this prospectus.
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated June 30, 1994
Table of Contents
- --------------------------------------------------------------------------------
Summary of Fund Expenses 1
- ------------------------------------------------------
General Information 2
- ------------------------------------------------------
Investment Information 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Acceptable Investments 2
Variable Rate Demand Notes 3
Asset-Backed Securities 3
Mortgage-Related Asset-Backed
Securities 4
Adjustable Rate Mortgage Securities
("ARMS") 4
Collateralized Mortgage Obligations
("CMOs") 5
Real Estate Mortgage Investment
Conduits ("REMICs") 6
Resets of Interest 6
Caps and Floors 6
Non-Mortgage Related Asset-Backed
Securities 7
Bank Instruments 8
Credit Facilities 8
Interest Rate Swaps, Caps and Floors 8
Auction Rate Securities 10
Average Portfolio Maturity and
Duration 10
Credit Enhancement 10
Demand Features 11
Restricted and Illiquid Securities 11
Repurchase Agreements 11
Reverse Repurchase Agreements 11
Lending of Portfolio Securities 12
When-Issued and Delayed
Delivery Transactions 12
Portfolio Turnover 12
Investment Limitations 13
Trust Information 13
- ------------------------------------------------------
Management of the Trust 13
Board of Trustees 13
Investment Adviser 13
Advisory Fees 14
Adviser's Background 14
Other Payments to Financial Institutions 14
Distribution of Institutional Service Shares 15
Distribution and Shareholder
Services Plans 15
Administration of the Fund 15
Administrative Services 15
Custodian 16
Transfer Agent and
Dividend Disbursing Agent 16
Legal Counsel 16
Independent Auditors 16
Expenses of the Fund
and Institutional Service Shares 16
Net Asset Value 17
- ------------------------------------------------------
Investing in Institutional Service Shares 17
- ------------------------------------------------------
Share Purchases 17
By Wire 17
By Mail 17
Minimum Investment Required 17
What Shares Cost 18
Subaccounting Services 18
Certificates and Confirmations 18
Dividends 18
Capital Gains 18
Redeeming Institutional Service Shares 19
- ------------------------------------------------------
Telephone Redemption 19
Written Requests 19
Signatures 19
Receiving Payment 20
Accounts with Low Balances 20
Redemption in Kind 20
Shareholder Information 20
- ------------------------------------------------------
Voting Rights 20
Massachusetts Partnership Law 21
Tax Information 21
- ------------------------------------------------------
Federal Income Tax 21
Pennsylvania Corporate and
Personal Property Taxes 21
Performance Information 22
- ------------------------------------------------------
Other Classes of Shares 22
- ------------------------------------------------------
Addresses Inside Back Cover
- ------------------------------------------------------
Summary of Fund Expenses
Institutional Service Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
]Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................. None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................. None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds as applicable).................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................ None
Annual Institutional Service Shares Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver) (1)....................................................................... --
12b-1 Fees.............................................................................................. --
Other Operating Expenses (after expense reimbursement).................................................. --
Total Institutional Service Shares Operating Expenses (2)...................................... --
</TABLE>
- ---------
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is .40%.
(2) The total Institutional Service Shares operating expenses would have been
% absent the voluntary waiver of the management fee and reimbursement of
certain other operating expenses by the Fund's adviser.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Service Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Trust Information" and "Investing in
Institutional Service Shares." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period. As
noted in the table above, the Fund charges no redemption fees for
Institutional Service Shares............................................. $-- $-- $-- $--
</TABLE>
The above example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The information set forth in the foregoing table and example relates only to
Institutional Service Shares of the Fund. The Fund also offers another class of
shares called Institutional Shares. Institutional Shares and Institutional
Service Shares are subject to certain of the same expenses; however,
Institutional Shares are not subject to a 12b-1 fee. See "Other Classes of
Shares."
General Information
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus the Board of Trustees ("Trustees") have
established two classes of shares, Institutional Service Shares and
Institutional Shares. This prospectus relates only to Institutional Service
Shares ("Shares") of the Fund. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.
Investment Information
- --------------------------------------------------------------------------------
Investment Objective
The investment objective of the Fund is to seek to provide current income. This
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
Investment Policies
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies regarding
the Fund's average dollar-weighted portfolio maturity and duration. This
investment policy may not be changed without the prior approval of the Fund's
shareholders. Unless indicated otherwise, the other investment policies
described in this prospectus may be changed by the Trustees without the approval
of the Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.
Acceptable Investments. The high grade debt securities in which the Fund
invests include medium and long-term instruments rated by one or more nationally
recognized statistical rating organizations ("NRSROs") in one of their three
highest rating categories (e.g., AAA, AA or A by Standard & Poor's Corporation
("S&P") or Fitch Investors Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's
Investors Service, Inc. ("Moody's") ) and short-term instruments rated by one or
more NRSROs in one of their two highest categories (e.g., A-1 or A-2 by S&P,
Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). The Fund may also invest
in unrated debt securities that are determined by the Fund's investment adviser
to be of comparable quality to instruments having such ratings. Downgraded
securities will be evaluated on a case by case basis by the adviser. The adviser
will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold.
Acceptable investments currently include the following:
.corporate debt obligations, including medium-term notes and variable rate
demand notes;
.asset-backed securities;
.commercial paper (including Canadian Commercial Paper and Europaper);
.certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and
other deposit institutions ("Bank Instruments");
.medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
.interest rate swaps, caps and floors;
.auction rate securities (see below);
.obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
.other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
Variable Rate Demand Notes. Variable rate demand notes are long-term corporate
debt instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear interest
at a rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on a published interest rate or interest rate
index. Many variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features."
Asset-Backed Securities. Asset-backed securities are created by the grouping of
certain governmental, government related, private loans, receivables or other
lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled payments on their mortgages. All
asset-backed securities are subject to similar prepayment risks, although they
may be more or less sensitive to certain factors. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original asset-backed security. As a consequence, mortgage securities may be
a less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset
pools, such as collateralized mortgage obligations, prepayments may be allocated
to one tranche of securities ahead of other tranches, in order to reduce the
risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement provided to such
securities.
Mortgage-Related Asset-Backed Securities. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Mortgage securities are:
(i) issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities; (iii) those issued by private
issuers that represent an interest in or are collateralized by whole loans
or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are 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.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and principal. The interest portion of
these payments will be distributed by the Fund as income, and the capital
portion will be reinvested.
Adjustable Rate Mortgage Securities ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. Typically, the ARMS in which the Fund invests are
issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be
collateralized by whole loans or private pass-through securities. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration ("VA"), while those collateralizing ARMS issued by FHLMC or
FNMA are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled
payments of principal and/or interest and may receive unscheduled principal
payments representing payments on the underlying mortgages. At the time
that a holder of the ARMS reinvests the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of
"locking in" long-term interest rates than other types of fixed-income
securities.
Not unlike other fixed-income securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus, the
market value of ARMS generally declines when interest rates rise and
generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but
may be collateralized by whole loans or private pass-through securities.
The CMOs in which the Fund invests may be: (a) 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; (b)
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 (c) collateralized by pools of mortgages
without a government guarantee as to payment of principal and interest, but
which have some form of credit enhancement.
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs. Most of the CMOs in which the Fund invests use the
same basic structure.
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: The first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final tranche (Z bond)
typically receives any excess income from the underlying investments
after payments are made to the other tranches and receives no
principal or interest payments until the shorter maturity tranches
have been retired, but then receives all remaining principal and
interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all
principal payments are then directed to the next-shortest-maturity
security tranche (or B bond.) This process continues until all of the
tranches have been completely retired.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
Real Estate Mortgage Investment Conduits ("REMICs"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC
status is elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to the
person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest, and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the
entity must be in assets directly or indirectly secured principally by real
property.
Resets of Interest. The interest rates paid on some of the ARMS, CMOs, and
REMICs in which the Fund invests will be readjusted at intervals of one
year or less to an increment over some predetermined interest rate index.
There are two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury Note
rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate,
rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to have somewhat less volatile
interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual
interest tranches of CMO's may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In
the event that the Fund purchases such residual interest mortgage
securities, it will factor in the increased interest and price volatility
of such securities when determining its dollar-weighted average portfolio
maturity and duration.
Caps and Floors. The underlying mortgages which collateralize the ARMS,
CMOs, and REMICs in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset
or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
]The value of mortgage securities in which the Fund invests may be affected
if market interest rates rise or fall faster and farther than the allowable
caps or floors on the underlying residential mortgage loans. Additionally,
even though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests
to be shorter than the maturities stated in the underlying mortgages.
Non-Mortgage Related Asset-Backed Securities. The Fund may invest in
non-mortgage related asset-backed securities, including interests in pools
of receivables, such as credit card and accounts receivable and motor
vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are structured similarly to collateralized
mortgage obligations and mortgage pass-through securities, which are
described above. Also, these securities may be issued either by
non-governmental entities and carry no direct or indirect governmental
guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage related asset backed securities have structural
characteristics similar to mortgage-related asset-backed securities but
have underlying assets that are not mortgage loans or interests in mortgage
loans. The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities are issued by non-governmental entities
and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Although
non-mortgage related asset-backed securities generally are less likely to
experience substantial prepayments than are mortgage-related asset-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of
the underlying obligations. If the servicer sells these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities.
Further, if a vehicle is registered in one state and is then reregistered
because the owner and obligor moves to another state, such registration
could defeat the original security interest in the vehicle in certain
cases. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile receivables
may not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
Bank Instruments. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"). Bank Instruments may include Eurodollar Certificates of Deposit
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time
Deposits ("ETDs").
Credit Facilities. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment. Revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term. As
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the facility. The Fund generally acquires a
participation interest in a revolving credit facility from a bank or other
financial institution. The terms of the participation requires the Fund to make
a pro rata share of all loans extended to the borrower and entitles the Fund to
a pro rata share of all payments made by the borrower. Demand notes and
revolving facilities usually provide for floating or variable rates of interest.
Interest Rate Swaps, Caps and Floors. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed-rate payments) on a notional principal amount. The
principal amount of an interest rate swap is notional in that it only provides
the basis for determining the amount of interest payments under the swap
agreement, and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate on $10 million principal amount in exchange for the right to receive
the equivalent of a fixed rate of interest on $10 million principal amount.
Neither party to the swap would actually advance $10 million to the other.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
the amount of excess interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of the amount of the interest shortfall on a
notional principal amount from the party selling the interest rate floor.
The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest based
on a market index. Interest accrued on the hedged note would then equal or
exceed the Fund's obligations under the swap, while changes in the market value
of the swap would largely offset any changes in the market value of the note.
The Fund may also enter into swaps and caps to preserve or enhance a return or
spread on a portfolio security. The Fund does not intend to use these
transactions in a speculative manner.
The Fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and the Fund will
segregate liquid assets in an aggregate net asset value at least equal to the
accrued excess, if any, on each business day. If the Fund enters into an
interest rate swap on other than a net basis, the Fund will segregate liquid
assets in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps, caps or floors are determined by the investment
adviser to be illiquid, they will be included in the Fund's limitation on
investments in illiquid securities. To the extent the Fund sells caps and
floors, it will maintain in a segregated account cash and/or U.S. government
securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps or floors.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Fund's investment adviser is incorrect
in its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover, even
if the Fund's investment adviser is correct in its forecasts, there is a risk
that the swap position may correlate imperfectly with the price of the portfolio
security being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to a default on an interest rate swap is limited to the net
asset value of the swap together with the net amount of interest payments owed
to the Fund by the defaulting party. A default on a portfolio security hedged by
an interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other
portfolio securities. The Fund may purchase and sell caps and floors without
limitation, subject to the segregated account requirement described above.
Auction Rate Securities. The Fund may invest in auction rate municipal
securities and auction rate preferred securities issued by closed-end investment
companies (collectively, "auction rate securities"). The Fund does not intend to
invest more than 10% of its total assets in auction rate securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The interest rate or dividend is reset by "Dutch" auction in which
bids are made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The interest rate or dividend rate set
by the auction is the lowest interest or dividend rate that covers all
securities offered for sale. While this process is designed to permit auction
rate securities to be traded at par value, there is some risk that an auction
will fail due to insufficient demand for the securities. If so, the securities
may become illiquid and subject to the Fund's 15% limitation on illiquid
securities.
The Fund's investments in auction rate preferred securities of closed-end funds
are subject to the limitations prescribed by the Investment Company Act of 1940
and certain state securities regulations. These limitations include a
prohibition against acquiring more than 3% of the voting securities of any other
investment company, and investing more than 5% of the Fund's assets in
securities of any one investment company or more than 10% of its assets in
securities of all investment companies. It should be noted that investment
companies incur certain expenses such as management fees, and therefore, any
investment by a Fund in shares of another investment company would be subject to
such duplicate expenses, particularly transfer agent and custodian fees. The
investment adviser will waive its investment advisory fee on Fund assets
invested in securities of open-end investment companies.
Average Portfolio Maturity and Duration. Although the Fund will not maintain a
stable net asset value, the adviser will seek to limit, to the extent consistent
with the Fund's investment objective of current income, the magnitude of
fluctuations in the Fund's net asset value by limiting the dollar-weighted
average maturity and duration of the Fund's portfolio. Securities with shorter
maturities and durations generally have less volatile prices than securities of
comparable quality with longer maturities or durations. The Fund should be
expected to maintain a higher average maturity and duration during periods of
lower expected market volatility, and a lower average maturity and duration
during periods of higher expected market volatility. In any event, the Fund's
dollar-weighted average maturity will not exceed 3 years, and its
dollar-weighted average duration will not exceed 3 years.
Credit Enhancement. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
Demand Features. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
Restricted and Illiquid Securities. The Fund intends to invest in restricted
and illiquid securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies but
which are subject to restriction on resale under federal securities law. The
Fund will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
Repurchase Agreements. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities in which the
Fund may invest to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. This policy may not be changed without the approval of the Fund's
shareholders.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, or both, up to one-third of the value of its
total assets, to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will limit the amount of portfolio securities it may lend
to not more than one-third of its total assets. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral equal to at least 100% of the value
of the securities loaned. This policy may not be changed without the approval of
the Fund's shareholders.
When-Issued and Delayed Delivery Transactions
The Fund may purchase securities on a when-issued or delayed delivery basis. In
when-issued and delayed delivery transactions, the Fund relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous. The Fund
will limit its purchase of securities on a when-issued or delayed delivery basis
to no more than 20% of the value of its total assets. This policy may not be
changed without the approval of the Fund's shareholders.
Portfolio Turnover
While the Fund does not intend to engage in substantial short-term trading, from
time to time it may sell portfolio securities for investment reasons without
considering how long they have been held. For example, the Fund would do this:
to take advantage of short-term differentials in yields or market values;
to take advantage of new investment opportunities;
to respond to changes in the creditworthiness of an issuer; or
to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective.
As a result of the change in its investment policies, which required the Fund to
dispose of all of its lower rated securities, the Fund's portfolio turnover rate
exceeded 100% last year. This turnover rate did not result in any material tax
or brokerage consequences. The Fund does not anticipate that its
portfolio turnover will remain at this level, although it may not return to
historical levels due to the short-term nature of the Fund's investments.
Investment Limitations
The Fund will not:
borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of its total assets to secure such borrowings;
lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value of
its net assets is held as collateral for those positions;
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations;
invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or
with respect to 75% of its assets, invest more than 5% of the value of its
total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer. For these purposes the Fund takes all common
stock and all preferred stock of an issuer each as a single class,
regardless of priorities, series, designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.
Trust Information
- --------------------------------------------------------------------------------
Management of the Trust
Board of Trustees. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
Investment Adviser. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"),
subject to direction by the Trustees. The Adviser continually conducts
investment research and supervision for the Fund and is responsible for the
purchase or sale of portfolio instruments, for which it receives an annual fee
from the Fund.
Advisory Fees. The Fund's Adviser receives an annual investment advisory
fee equal to .40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser may voluntarily reimburse some of
the operating expenses of the Fund. The Adviser can terminate this
voluntary reimbursement of expenses at any time in its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
Adviser's Background. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.
Deborah A. Cunningham has been the Fund's co-portfolio manager since July
1991. Ms. Cunningham joined Federated Investors in 1981 and has been a Vice
President of the Fund's investment adviser since 1993. Ms. Cunningham
served as an Assistant Vice President of the investment adviser from 1989
until 1992, and from 1986 until 1989 she acted as an investment analyst.
Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A.
in Finance from Robert Morris College.
Randall S. Bauer has been the Fund's co-portfolio manager since March 1992.
Mr. Bauer joined Federated Investors in 1989 as an Assistant Vice President
of the Fund's investment adviser.
Mr. Bauer was an Assistant Vice President of the International Banking
Division at Pittsburgh National Bank from 1982 until 1989. Mr. Bauer is a
Chartered Financial Analyst and received his M.B.A. in Finance from
Pennsylvania State University.
Other Payments to Financial Institutions. In addition to periodic payments
to financial institutions under the Shareholder Services Plan described
below, certain financial institutions may be compensated by the Adviser or
its affiliates for the continuing investment of customers' assets in
certain funds, including the Fund, advised by those entities. These
payments will be made directly by the distributor or Adviser from their
assets, and will not be made from the assets of the Fund or by the
assessment of a sales charge on Shares.
Distribution of Institutional Service Shares
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
Distribution and Shareholder Services Plan. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of
0.25 of 1% of the average daily net asset value of the Fund to finance any
activity which is principally intended to result in the sale of shares of
subject to the Distribution Plan. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales support services as agents for
their clients or customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of the Fund to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Trust
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Trust and Federated Shareholder Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
Administration of the Fund
Administrative Services. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate
which relates to the average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
Average Aggregate Daily Net Assets
Maximum Administrative Fee of the Federated Funds
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
Custodian. State Street Bank and Trust Company ("State Street Bank"), Boston,
MA, is custodian for the securities and cash of the Fund.
Transfer Agent and Dividend Disbursing Agent. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund.
Legal Counsel. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, PA, and Dickstein, Shapiro & Morin, Washington, D.C.
Independent Auditors. The independent auditors for the Fund are Ernst & Young,
One Oxford Centre Building, Pittsburgh, PA 15219.
Expenses of the Fund and Institutional Service Shares
The Fund pays all of its own expenses.
Holders of Shares pay their allocable portion of Fund and Trust expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust with federal and state securities
authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues; and such non-recurring and
extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as may
arise.
In addition, the Trustees reserve the right to allocate certain other expenses
to holders of Shares as they deem appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of Shares; distribution fees; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange
Commission and registration fees paid to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Trustees' fees incurred as
a result of issues relating solely to Shares.
Net Asset Value
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Institutional Shares will exceed that of Shares due to the variance in daily net
income realized by each class as a result of different distribution charges
incurred by the classes. Such variance will reflect only accrued net income to
which the shareholders of a particular class are entitled.
Investing in Institutional Service Shares
- --------------------------------------------------------------------------------
Share Purchases
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
By Wire. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Boston time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Boston time) on the next business day following the order. Federal funds should
be wired as follows: State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Federated Short-Term Income
Fund--Institutional Service Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; and ABA Number 011000028.
By Mail. To purchase Shares of the Fund by mail, send a check made payable to
Federated Short-Term Income Fund--Institutional Service Shares to Federated
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8602,
Boston, Massachusetts 02266-8602. Orders by mail are considered received after
payment by check is converted by State Street Bank into federal funds. This is
normally the next business day after State Street Bank receives the check.
Minimum Investment Required
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
What Shares Cost
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined at 4:00 p.m. (Boston time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Subaccounting Services
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions holding
Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or agency
account fees. They may also charge fees for other services provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
Certificates and Confirmations
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
Dividends
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted by the Transfer Agent
into federal funds. Dividends are automatically reinvested on payment dates in
additional Shares of the Fund unless cash payments are requested by contacting
the Fund.
Capital Gains
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
Redeeming Institutional Service Shares
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
Telephone Redemption
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Boston time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fradulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
Written Requests
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his name, the Fund name and class name, his
account number, and the share or dollar amount requested. If Share certificates
have been issued, they must be properly endorsed and should be sent by
registered or certified mail with the written request.
Signatures. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions
that are members of a signature guarantee program. The Fund and its transfer
agent reserve the right to amend these standards at any time without notice.
Receiving Payment. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
Accounts with Low Balances
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
Redemption in Kind
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way that net asset value is determined. The portfolio instruments
will be selected in a manner that the Trustees deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Shareholder Information
- --------------------------------------------------------------------------------
Voting Rights
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in the Trust have equal voting rights, except that, in matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by a two-thirds vote of the
number of Trustees or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all portfolios entitled to vote.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
Tax Information
- --------------------------------------------------------------------------------
Federal Income Tax
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. Information on
the tax status of dividends and distributions is provided annually.
Pennsylvania Corporate and Personal Property Taxes
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
The Fund is not subject to Pennsylvania corporate or personal property
taxes; and
Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that
the portfolio securities in the Fund would be subject to such taxes if
owned directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
Performance Information
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield for
Institutional Service Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Service Shares after reinvesting all
income and capital gains distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of Institutional Service Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Institutional Service Shares over a thirty-day period by
the net asset value per share of Institutional Service Shares on the last day of
the period. This number is then annualized using semi-annual compounding. The
yield does not necessarily reflect income actually earned by Institutional
Service Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The Institutional Service Shares are sold without any sales load or other
similar non-recurring charges other than a Rule 12b-1 fee.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares. Because Institutional Service Shares are
subject to 12b-1 fees, total return and yield of Institutional Shares, for the
same period, will exceed that of Institutional Service Shares.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
Other Classes of Shares
- --------------------------------------------------------------------------------
Institutional Shares are sold to banks and other institutions that hold assets
as principals or in a fiduciary capacity for individuals, trusts, estates or
partnerships and are subject to a minimum initial investment of $25,000.
Institutional Shares are sold at net asset value and are distributed without a
Rule 12b-1 Plan.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation from one class of shares than from
another class of shares.
The amount of dividends payable to Institutional Shares will be greater than
those payable to Institutional Service Shares by the difference between Class
Expenses and distribution and shareholder service expenses borne by shares of
each respective class.
The stated advisory fee is the same for both classes of the Fund.
Addresses
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Short-Term Income Fund Federated Investors Tower
Institutional Service Shares Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Federated
Short-Term
Income Fund
Institutional Service Shares
Prospectus
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1994
[LOGO]
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
1111903A-ISS (6/94)
Federated Short-Term Income Fund
Institutional Service Shares
(A Portfolio of Federated Income Securities Trust)
Statement of Additional Information
This Statement of Additional Information should be read with the
prospectus of the Federated Short-Term Income Fund (the "Fund") dated
June 30, 1994. This Statement is not a prospectus itself. To receive a
copy of the prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated June 30, 1994
[LOGO]
FEDERATED SECURITIES CORP.
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Distributor
A subsidiary of FEDERATED INVESTORS
Table of Contents
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General Information About the Fund 1
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Investment Objective and Policies 1
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U.S. Government Securities 1
Weighted Average Portfolio Maturity 1
Weighted Average Portfolio Duration 1
When-Issued and Delayed Delivery
Transactions 2
Auction Rate Securities 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 3
Privately Issued Mortgage-Related Securities 3
Portfolio Turnover 3
Foreign Investments 3
Investment Limitations 3
Trust Management 5
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Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 7
Investment Advisory Services 8
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Adviser to the Fund 8
Advisory Fees 8
Other Advisory Services 8
Other Related Services 8
Administrative Services 8
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Brokerage Transactions 9
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Purchasing Institutional Service Shares 9
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Distribution and Shareholder Services Plans 9
Conversion to Federal Funds 10
Determining Net Asset Value 10
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Determining Value of Securities 10
Redeeming Institutional Service Shares 10
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Redemption in Kind 10
Tax Status 10
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The Fund's Tax Status 10
Shareholders' Tax Status 10
Total Return 11
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Yield 11
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Performance Comparisons 11
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Appendix 13
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General Information About the Fund
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The Fund is a portfolio of Federated Income Securities Trust (the "Trust"),
which was established as a Massachusetts business trust under a Declaration of
Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer one or more separate series and classes of shares and
to change the name of the Trust from "Federated Floating Rate Trust" to
"Federated Income Securities Trust."
Shares of the Fund are offered in two classes, Institutional Service Shares and
Institutional Shares. This statement of additional information relates to
Institutional Service Shares ("Shares") of the Fund.
Investment Objective and Policies
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The Fund's investment objective is to seek to provide current income. The Fund
will pursue this objective by investing primarily in a diversified portfolio of
short and medium-term high grade debt securities. The foregoing investment
objective and policy may not be changed without the prior approval of the Fund's
shareholders.
U.S. Government Securities
The types of U.S. government obligations in which the Fund may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities may be backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Student Loan Marketing Association;
Federal Home Loan Mortgage Corporation; and
Federal National Mortgage Association.
Weighted Average Portfolio Maturity
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity of each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will (a) treat asset-backed
securities as having a maturity equal to their estimated weighted-average
maturity and (b) treat variable and floating rate instruments as having a
remaining maturity commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of principal prepayments
weighted by the period until such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be treated as
floating or variable rate securities based upon the interest rate index of the
swap or cap; floating and variable rate securities hedged with interest rate
swaps or floors will be treated as having a maturity equal to the term of the
swap or floor. In the event that the Fund holds an interest rate swap, cap or
floor that is not hedging another portfolio security, the swap, cap or floor
will be treated as having a maturity equal to its term and a weight equal to its
notional principal amount for such term.
Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a
remaining duration commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as to the probable amount
and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.
When-Issued and Delayed Delivery Transactions
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. The Fund may
engage in these transactions to an extent that would cause the segregation of an
amount up to 20% of the total value of its assets.
Auction Rate Securities
Dividends on auction rate preferred securities issued by a closed-end fund may
be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the closed-end fund on the securities in
its portfolio and distributed to holders of the preferred securities, provided
that the preferred securities are treated as equity securities for federal
income tax purposes and the closed-end fund complies with certain tests under
the Internal Revenue Code. Auction rate preferred securities will be treated as
taxable securities unless substantially all of the dividends on such securities
is expected to be exempt from regular federal income taxes.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees").
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
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Reverse Repurchase Agreements
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid.
Portfolio Turnover
For the fiscal years ended April 30, 1993 and 1992, the portfolio turnover rates
were 62% and 114%, respectively.
Foreign Investments
ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are
subject to somewhat different risks than domestic obligations of domestic
issuers. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign
withholdings or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact
of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the
banks issuing these instruments, or their domestic or foreign branches,
are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
Investment Limitations
Concentration of Investments
The Fund will not purchase securities if as a result of such purchase 25%
or more of the value of its total assets would be invested in any one
industry.
Investing in Commodities
The Fund will not purchase or sell commodities or commodity contracts,
including futures contracts.
Investing in Real Estate
The Fund will not purchase or sell real estate including limited
partnership interests in real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or
interests in real estate.
Buying on Margin
The Fund will not purchase any securities on margin but may obtain such
short-term credits as are necessary for the clearance of transactions.
Selling Short
The Fund will not sell securities short unless:
during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and
not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.
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Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while any borrowings, other than reverse
repurchase agreements, are outstanding.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates
of indebtedness or other debt securities of an issuer, repurchase
agreements or other transactions which are permitted by the Fund's
investment objective and policies or its Declaration of Trust.
Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and limitations.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets in
securities of companies, including their predecessors, that have been in
operation for less than three years. With respect to asset-backed
securities, the Fund will treat the originator of the asset pool as the
company issuing the security for purposes of determining compliance with
this limitation.
Investing in Issuers Whose Securities Are Owned By Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Diversification of Investments
The Fund will not, with respect to 75% of its assets, invest more than 5%
of the value of its total assets in securities of one issuer (except U.S.
government obligations), or purchase more than 10% of the outstanding
voting securities in any one issuer.
Acquiring Securities
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation become effective.
Investing in Illiquid Securities
The Fund will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, interest rate swaps, caps and floors
determined by the investment adviser to be illiquid, and repurchase
agreements providing for settlement in more then seven days after notice,
to 15% of its net assets.
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Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund does not intend to borrow money, invest in reverse repurchase
agreements, or sell securities short during the coming year.
To comply with restrictions in certain states, the Fund will limit its
investment in restricted securities not determined by the Trustees to be liquid
to 10% of its net assets. (If state requirements change, this restriction may be
revised without shareholder notification).
Trust Management
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Officers and Trustees
Officers and Trustees are listed with their addresses, principal occupations,
and present positions, including any affiliation with Federated Management,
Federated Investors, Federated Securities Corp., Federated Administrative
Services, Inc., and the Funds (as defined below).
<TABLE>
<CAPTION>
Positions with Principal Occupations
Name and Address the Trust During Past Five Years
<S> <C> <C>
John F. Donahue* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee,
Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research;
Pittsburgh, PA Director, tnaLife and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the Funds; formerly,
Director, The Standard Fire Insurance Company. Mr. Donahue is the father
of J. Christopher Donahue, Vice President of the Trust.
John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President,
Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate
Department Village Development Corporation; General Partner or Trustee in private
John R. Wood and real estate ventures in southwest Florida; Director, Trustee, or
Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples
3255 Tamiami Trail North Property Management, Inc.
Naples, FL
William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.;
One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly,
23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Pittsburgh, PA Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director,
Concord, MA Blue Cross of Massachusetts, Inc.;
Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of
Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds.
Pittsburgh, PA
Edward L. Flaherty, Jr. Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park
5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts;
225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly,
Boston, MA President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
5916 Penn Mall Director Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing
Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
1202 Cathedral of Learning Endowment for International Peace, RAND Corporation, Online Computer
Pittsburgh, PA Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.
Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing
4905 Bayard Street General Partner of the Funds.
Pittsburgh, PA
John A. Staley, IV* Vice President Vice President and Trustee, Federated Investors; Executive Vice
Federated Investors Tower and Trustee President, Federated Securities Corp.; President and Trustee, Federated
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Vice President
of the Funds; Director, Trustee, or Managing General Partner of some of
the Funds; formerly, Vice President, The Standard Fire Insurance Com-
pany and President of its Federated Research Division.
Glen R. Johnson President Trustee, Federated Investors; President and/or Trustee of some of the
Federated Investors Tower Funds; staff member, Federated Securities Corp. and Federated
Pittsburgh, PA Administrative Services.
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers,
Federated Investors Tower Federated Management, and Federated Research; Trustee, Federated
Pittsburgh, PA Administrative Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr.
Donahue is the son of John F. Donahue, Chairman and Trustee of the
Trust.
Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director, Federated Securities Corp.; President or Vice President of the
Pittsburgh, PA Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice
Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated
Federated Investors Tower and Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Director and
Executive Vice President, Federated Securities Corp.; Vice President and
Secretary of the Funds.
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
Members of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between meetings
of the Board.
The Funds
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series, Inc.; Cash Trust Series II; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated
Intermediate Municipal Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated
U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities,
Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight
Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal
Trust; International Series Funds, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income
Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust,
Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund,
Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations and
World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
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Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee
of Federated Management, is Chairman and Trustee of Federated Investors and
Chairman and Trustee of the Trust. John A. Staley, IV, President and Trustee of
Federated Management, is Vice President and Trustee of Federated Investors,
Executive Vice President of Federated Securities Corp., and Vice President and
Trustee of the Trust. J. Christopher Donahue, Trustee of Federated Management,
is Vice President and Trustee of Federated Investors, Trustee of Federated
Administrative Services, and Vice President of the Trust. John W. McGonigle,
Vice President, Secretary and Trustee of Federated Management, is Trustee, Vice
President, Secretary, and General Counsel of Federated Investors, Director,
Executive Vice President, and Secretary of Federated Administrative Services,
Director and Executive Vice President of Federated Securities Corp., and Vice
President and Secretary of the Trust.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended April 30,
1994, 1993, and 1992, the Fund's Adviser earned $ , $395,758, and
$266,945, respectively, all of which were waived because of undertakings to
limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Other Advisory Services
Federated Research Corp. receives fees from certain depository institutions for
providing consulting and portfolio advisory services relating to each
institution's program of asset management. Federated Research Corp. may advise
such clients to purchase or redeem shares of investment companies, such as the
Fund, which are managed, for a fee, by Federated Research Corp. or other
affiliates of Federated Investors, such as the Adviser, and may advise such
clients to purchase and sell securities in the direct markets. Further,
Federated Research Corp., and other affiliates of the Adviser, may, from time to
time, provide certain consulting services and equipment to depository
institutions in order to facilitate the purchase of shares of funds offered by
Federated Securities Corp.
Other Related Services
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
Administrative Services
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the fiscal years ended April 30, 1994, 1993, and 1992, Federated
Administrative Services, Inc., the Fund's former administrator, earned
$ , $292,200, and $166,568, respectively. John A. Staley, IV, an officer
of the Trust and Dr. Henry J. Gailliot, an officer of Federated Management, the
adviser to the Fund, each hold approximately 15% and 20%, respectively, of the
outstanding common stock and serve as directors of Commercial Data Services,
Inc., a company which provides computer
processing services to Federated Administrative Services, Inc., and Federated
Administrative Services. For the fiscal years ended April 30, 1994, 1993, and
1992, Federated Administrative Services, Inc., paid approximately $ ,
$177,832, and $204,755, respectively, for services provided by Commercial Data
Services, Inc. to the Fund.
Brokerage Transactions
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When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
Purchasing Institutional Service Shares
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days on which
the New York Stock Exchange is open for business. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "Investing in
Institutional Service Shares."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Board of Trustees expects that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's objectives,
and properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal period ended April 30, 1994, no payments were made pursuant to
the Distribution Plan.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow the Fund to achieve economic
viability. It is also anticipated that an increase in the size of the Fund will
facilitate more efficient portfolio management and assist the Fund in seeking to
achieve its investment objective.
- --------------------------------------------------------------------------------
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. State Street Bank and Trust
Company ("State Street Bank") acts as the shareholder's agent in depositing
checks and converting them to federal funds.
Determining Net Asset Value
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
Determining Value of Securities
The values of the Fund's portfolio securities are determined as follows:
according to prices provided by independent pricing services, which may be
determined without exclusive reliance on quoted prices from dealers but which
use market prices when most representative, and which may take into account
appropriate factors such as yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data employed in determining
valuations for such securities; or
for short-term obligations with remaining maturities of less than 60 days, at
the time of purchase, at amortized cost unless the Trustees determines that
particular circumstances of the security indicate otherwise.
Redeeming Institutional Service Shares
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Institutional Service Shares." Although State Street
Bank does not charge for telephone redemptions, it reserves the right to charge
a fee for the cost of wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
Tax Status
- --------------------------------------------------------------------------------
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
derive less than 30% of its gross income from gains on the sale of securities
held less than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. No portion of any income dividend paid by
the Fund is expected to be eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
- --------------------------------------------------------------------------------
Capital Gains
Fixed income securities offering the current income sought by the Fund
are often purchased at a discount from par value. Because the total yield
on such securities when held to maturity and retired may include an
element of capital gain, the Fund may achieve capital gains. However, the
Fund will not hold securities to maturity for the purpose of realizing
capital gains unless current yields on those securities remain
attractive.
Capital gains or losses may also be realized on the sale of securities.
Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
Total Return
- --------------------------------------------------------------------------------
The Fund's average annualized cumulative total return from January 21, 1992
(effective date of the Fund's registration statement adding the Institutional
Service Shares) to April 30, 1994 was % for Institutional Service Shares.
Cumulative total return reflects the Fund's total performance over a specific
period of time. The Fund's average annual total returns for the one-year and
five-year periods ended April 30, 1994, and for the period from July 1, 1986
(effective date of the Trust's initial registration statement) to April 30, 1994
were % , %, and %, respectively, for the Institutional Shares.
The average annual total return for both classes of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the maximum offering price per share at the end of the
period. The number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with $1,000, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended April 30, 1994, was % and %
for Institutional Service Shares and Institutional Shares, respectively.
The yield for both classes of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
maximum offering price per share of either class of shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, performance will be reduced for those shareholders paying those
fees.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of both classes of shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or either class of share's expenses; and
various other factors.
Either class of share's performance fluctuates on a daily basis largely because
net earnings and the maximum offering price per share fluctuate daily. Both net
earnings and net asset value per share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "short-term
investment grade debt funds" category in advertising and sales literature.
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-listed mutual funds of all types according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in the
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
Appendix
- --------------------------------------------------------------------------------
Standard & Poor's Corporation Corporate Bond Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Moody's Investors Service, Inc. Corporate Bond Rating Definitions
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-1--Issuers (or related supporting institutions) rated Prime-1 have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
Conservative capitalization structures with moderate reliance on debt and ample
asset protection; Broad margins in earning coverage of fixed financial charges
and high internal cash generation; Well established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers (or related supporting institutions) rated Prime-2 have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch Investors Service, Inc. Commercial Paper Ratings Definitions
Fitch-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
Fitch-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
1111903A-ISS (6/94)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Portfolio 1) Filed in Part
A, (Portfolio 2) to be filed by amendment.
(b) Exhibits:
(1) Copy of the Declaration of Trust of the
Registrant (1.);
(i) Conformed copy of Amendment
No. 2. to the Declaration of Trust
(5.);
(ii) Conformed copy of Form of
Amendment No. 3. to the Declaration of
Trust ; +
(2) Copy of Amended and Restated By-Laws of the
Registrant as of December 31, 1991 (5.);
(3) Not applicable;
(4) Copy of Specimen Certificate of Shares of
Beneficial Interest of the Registrant (1.);
(5) (i)Copy of the Investment Advisory
Contract of the Registrant (4.);
(ii) Conformed copy of Form of
Exhibit B to the Investment Advisory
Contract of the Registrant ;
+
(6) (i)Copy of the Distributor's
Contract of the Registrant (3.);
(ii) Conformed copy of Form of
Exhibit C Distributor's Contract of the
Registrant; +
(iii) Conformed copy of Exhibit D
to the Distributor's Contract of the
Registrant; +
(7) Not applicable;
(8) (i)Conformed copy of the Custodian
Agreement of the Registrant (5.);
(9) Conformed copy of the Transfer Agency and
Service Agreement of the Registrant (5)
(10) Not applicable;
(11) Not applicable;
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i)Copy of Distribution Plan of the
Registrant (4.);
(ii) Rule 12b-1 Agreement of the
Registrant (4.);
(iii) Not applicable;
(iv) Not applicable;
(16) Schedule for Computation of Trust
Performance Data (2.);
(17) Power of Attorney (4);
(18) Not applicable.
+ All exhibits have been filed electronically.
1. Response is incorporated by reference to Registrant's
Initial Registration Statement on Form N-1A filed February
6, 1986. (File No. 33-3164)
2. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 3 on Form N-1A filed May 31, 1988.
(File No. 33-3164)
3. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 7 on Form N-1A filed April 25, 1990.
(File No. 33-3164)
4. Response is incorporated by reference to Registrant's Post-
Effective Amendment No.12 on Form N-1A filed December 9,
1991. (File No. 33-3164)
5. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed April 30,
1993. (File No. 33-3164)
6. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 17 on Form N-1A filed October 8,
1993. (File No. 33-3164)
Item 25. Persons Controlled by or Under Common Control with
Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of June ----, 1994
Shares of Beneficial Interest
(no par value)
Federated Short-Term Income Fund
Institutional Shares ----
Institutional Service Shares ----
Intermediate Income Fund
Institutional Shares ----
Institutional Service Shares ----
Item 27. Indemnification: (1.)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of
the investment adviser, see the section entitled
"Trust Information - Management of the Trust" in
Part A. The affiliations with the Registrant of
four of the Trustees and one of the Officers of the
investment adviser are included in Part B of this
Registration Statement under "Trust Management -
Officers and Trustees." The remaining Trustee of
the investment adviser, his position with the
investment adviser, and his principal occupation
is: Mark D. Olson, Partner, Wilson, Halbrook &
Bayard, 107 W. Market Street, Georgetown, Delaware
19947.
The remaining Officers of the investment adviser
are: William D. Dawson, III, J. Thomas Madden,
and Mark L. Mallon, Executive Vice Presidents;
Henry J. Gailliot, Senior Vice President-Economist;
Peter R. Anderson, Gary Madich, and J. Alan
Minteer, Senior Vice Presidents; Randall A.Bauer,
Jonathan C. Conley, Deborah A. Cunningham, Mark
Durbiano, Roger Early, Kathleen M. Foody-Malus,
David C. Francis, Thomas M. Franks, Edward C.
Gonzales, Jeff A. Kozemchak, John W. McGonigle,
Gregory M. Melvin, Susan M. Nason, Mary Jo Ochson,
Robert J. Ostrowski, and Christopher H. Wiles, Vice
Presidents; Edward C. Gonzales, Treasurer; and
John W. McGonigle, Secretary. The business address
of each of the Officers of the investment adviser
is Federated Investors Tower, Pittsburgh, PA 15222-
3779. These individuals are also officers of a
majority of the investment advisers to the Funds
listed in Part B of this Registration Statement
under "The Funds."
1. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 11 on Form N-1A filed June 25, 1991.
(File No. 33-3164)
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor
for shares of the Registrant, also acts as
principal underwriter for the following open-end
investment companies: Alexander Hamilton Funds;
American Leaders Fund, Inc.; Annuity Management
Series; Automated Cash Management Trust; Automated
Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; California
Municipal Cash Trust; Cambridge Series Trust; Cash
Trust Series, Inc.; Cash Trust Series II; DG
Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; FT Series, Inc.; Federated
ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated
Intermediate Government Trust; Federated Master
Trust; Federated Municipal Trust; Federated Short-
Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government
Bond Fund; Financial Reserves Fund; First Priority
Funds; First Union Funds; Fixed Income Securities,
Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fountain Square Funds;
Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash
Trust; Independence One Mutual Funds; Insight
Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; Investment
Series Funds, Inc.; Investment Series Trust;
Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty U.S. Government
Money Market Trust; Liberty Utility Fund, Inc.;
Liquid Cash Trust; Managed Series Trust; Mark Twain
Funds; Marshall Funds, Inc.; Money Market
Management, Inc.; Money Market Obligations Trust;
Money Market Trust; The Monitor Funds; Municipal
Securities Income Trust; New York Municipal Cash
Trust; 111 Corcoran Funds; Peachtree Funds; The
Planters Funds; Portage Funds; RIMCO Monument
Funds; The Shawmut Funds; Short-Term Municipal
Trust; Signet Select Funds; SouthTrust Vulcan
Funds; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Tower Mutual Funds; Trademark
Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury
Obligations; Vision Fiduciary Funds, Inc.; Vision
Group of Funds, Inc.; and World Investment Series,
Inc.
Federated Securities Corp. also acts as principal
underwriter for the following closed-end investment
company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Vice President and
Federated Investors Tower President, and Treasurer, Treasurer
Pittsburgh, PA 15222-3779 Federated Securities
Corp.
John W. McGonigle Director, Executive Vice Vice President and
Federated Investors Tower President, and Assistant Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John A. Staley, IV Executive Vice President Vice President
Federated Investors Tower and Assistant Secretary,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James R. Ball Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Thomas E. Territ Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Tower Securities Corp. Secretary
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and
Rules 31a-1 through 31a-3 promulgated thereunder are
maintained at one of the following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
("Transfer Agent, Dividend Pittsburgh, PA 15222-3779
Disbursing Agent and Portfolio
Recordkeeper")
Federated Administrative Services Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779
Federated Management Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust Compnay P.O. Box 8604
("Custodian") Boston, MA 02266-8604
Item 31. Management Services: Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the
provisions of Section 16(c) of the 1940 Act with
respect to removal of Trustees and the calling of
special shareholder meetings by shareholders.
Registrant hereby undertakes to file a post-effective
amendment on behalf of Intermediate Income Fund, a
portfolio of Federated Income Securities Trust, using
financial statements for such portfolio, which need not
be certified, within four to six months from the
effective date of Post-Effective Amendment Number 17 to
the Registrant's Registration Statement.
Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders, upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant,
FEDERATED INCOME SECURITIES TRUST, has duly caused this
Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, all in
the City of Pittsburgh and Commonwealth of Pennsylvania, on
the 6th day of June, 1994.
FEDERATED INCOME SECURITIES TRUST
BY: /s/Victor R. Siclari
Victor R. Siclari for John F. Donahue
June 6, 1994
Pursuant to the requirements of the Securities Act of
1933, this Amendment to its Registration Statement has been
signed below by the following person in the capacity and on
the date indicated:
NAME TITLE
DATE
By: /s/Victor R. Siclari
Victor R. Siclari Attorney In Fact June 6, 1994
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
Edward C. Gonzales* Vice President and Treasurer
(Principal Financial and
Accounting Officer)
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
Exhibit 1 (ii) under Form N-1A
Exhibit 3 (a) under Item 601/Reg. S-K
FEDERATED INCOME SECURITIES TRUST
(Formerly, Federated Floating Rate Trust)
Amendment No. 3
to the
AMENDED AND RESTATED DECLARATION OF TRUST
dated December 31, 1993.
THIS Declaration of Trust is amended as follows:
A. Strike Section 5 of Article III from the
Declaration of Trust and
substitute in its place the following:
"Section 5. Establishment and Designation of
Series or Class. Without limiting the authority of
the Trustees set forth in Article XII, Section 8,
inter alia, to establish or modify the rights and
preferences of any existing Series or Class, the Series and
Class
shall be established and designated as:
Federated Short-Intermediate Income Fund
Institutional Service Shares
Institutional Shares
Intermediate Income Fund
Institutional Service Shares
Institutional Shares
The undersigned Assistant Secretary of Federated Income
Securities Trust hereby certifies that the above stated
amendment is a true and correct Amendment to the Declaration
of Trust, as adopted by the Board of Trustees on November
18, 1993.
Witness the due execution hereof this 1st day of
December, 1993.
By: /s/ Victor R. Siclari
Victor R. Siclari
Assistant Secretary
Exhibit 5(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
Form of
EXHIBIT B
to the
Investment Advisory Contract
Intermediate Income Fund
For all of the services rendered by the Adviser
hereunder, the above-named Fund of the Trust shall pay to
the Adviser and the Adviser agrees to accept as full
compensation for all services rendered thereunder, an annual
investment advisory fee equal to 0.50 of 1% of the average
daily net assets of the Fund.
The portion of the fees based upon the average daily
net assets of the Fund shall be accrued daily at the rate of
1/365th of 0.50 of 1% applied to the daily net assets of the
Fund.
The advisory fee so accrued shall be paid to the
Adviser daily.
Witness the due execution hereof this 1st day of
December, 1993.
Attest: Federated Management
/s/ John W. McGonigle By: /s/William D. Dawson
Secretary Senior Vice President
Federated Income Securities Trust
Attest:
/s/Victor R. Siclari By: /s/ J. Christopher Donahue
Assistant Secretary Vice President
Exhibit 6(ii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
EXHIBIT C
FEDERATED INCOME SECURITIES TRUST
Intermediate Income Fund
Institutional Shares
In consideration of the mutual covenants set forth in
the Distributor's Contract dated December 31, 1991 between
Federated Income Securities Trust and Federated Securities
Corp., Federated Income Securities Trust executes and
delivers this Exhibit on behalf of the Funds, and with
respect to the separate Classes of Shares thereof, first set
forth in this Exhibit.
Witness the due execution hereof this 1st day of
December, 1993.
Attest: Federated Income Securities Trust
/s/ Victor R. Siclari By: /s/Glen R. Johnson
Assistant Secretary President
(SEAL)
Attest: Federated Securities Corp.
/s/ S. Elliott Cohan By: /s/ Edward C. Gonzales
Secretary Executive Vice President
(SEAL)
Exhibit 6(iii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
EXHIBIT D
to the
FEDERATED INCOME SECURITIES TRUST
Intermediate Income Fund-Institutional Service Shares
The following provisions are hereby incorporated and
made part of the Distributor's Contract dated the 31st day
of December, 1991, between Federated Income Securities Trust
("Trust") and Federated Securities Corp. ("FSC") with
respect to Classes of the Funds set forth above.
1. The Trust hereby appoints FSC to engage in
activities principally intended to result in the sale of
shares of the above-listed Classes ("Shares"). Pursuant to
this appointment, FSC is authorized to select a group of
brokers ("Brokers") to sell Shares at the current offering
price thereof as described and set forth in the respective
prospectuses of the Trust, and to render administrative
support services to the Trust and its shareholders. In
addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative
support services to the Trust and its shareholders.
2. Administrative support services may include, but
are not limited to, the following functions: 1) account
openings: the Broker or Administrator communicates account
openings via computer terminals located on the Broker's or
Administrator's premises; 2) account closings; the Broker or
Administrator communicates account closings via computer
terminals; 3) enter purchase transactions: purchase
transactions are entered through the Broker's or
Administrator's own personal computer or through the use of
a toll-free telephone number; 4) enter redemption
transactions: Broker or Administrator enters redemption
transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges
to provide accounting support for all transactions. Broker
or Administrators also wires funds and receives funds for
Trust share purchases and redemptions, confirms and
reconciles all transactions, reviews the activity in the
Trust's accounts, and provides training and supervision of
its personnel; 6) interest posting: Broker or Administrator
posts and reinvests dividends to the Trust's accounts; 7)
prospectus and shareholder reports; Broker or Administrator
maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or
Administrator continuously advertises the availability of
its services and products: 9) customer lists: the Broker or
Administrator continuously provides names of potential
customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and
develops methods of making such materials accessible to
customers; and 11) consultation services: the Broker or
Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will
pay FSC for services pursuant to this Agreement, a monthly
fee computed at the annual rate of 0.25% of the average
aggregate net asset value of the shares of the Intermediate
Income Fund held during the month. For the month in which
this Agreement becomes effective or terminates, there shall
be an appropriate proration of any fee payable on the basis
of the number of days that the Agreement is in effect during
the month.
4. FSC may from time-to-time and for such periods as
it deems appropriate reduce its compensation to the extent
any Classes' expenses exceed such lower expense limitation
as FSC may, by notice to the Trust, voluntarily declare to
be effective.
5. FSC will enter into separate written agreements
with various firms to provide certain of the services set
forth in Paragraph 1 herein. FSC, in its sole discretion,
may pay Brokers and Administrators a periodic fee in respect
of shares owned from time to time by their clients or
customers. The schedules of such fees and the basis upon
which such fees will be paid shall be determined from time
to time by FSC in its sole discretion.
6. FSC will prepare reports to the Board of Trustees
of the Trust on a quarterly basis showing amounts expended
hereunder including amounts paid to Brokers and
Administrators and the purpose for such payments.
In consideration of the mutual covenants set forth in
the Disbributor's Contract dated December 31, 1991 between
Federated Income Securities Trust and Federated Securities
Corp., Federated Income Securities Trust executes and
delivers this exhibit on behalf of the Funds, and with
respect to the separate Classes of Shares thereof, first set
forth in this exhibit.
Witness the due execution hereof this 1st day of
December, 1993.
Attest: Federated Income Securities Trust
/s/ Victor R. Siclari By: /s/Glen R. Johnson
Assistant Secretary President
(SEAL)
Attest: Federated Securities Corp.
/s/ S. Elliott Cohan By: /s/ Edward C. Gonzales
Secretary Executive Vice President
(SEAL)
Exhibit 15 under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
EXHIBIT B
to the
Plan
Intermediate Income Fund
Institutional Service Shares
This plan is adopted by Federated Income Securities
Trust with respect to the Class of Shares of the
portfolio(s) of the Trust set forth above.
In compensation for the services provided pursuant to
this Plan, FSC will be paid a monthly fee computed at the
annual rate of .25 of 1% of the average aggregate net asset
value of the Institutional Service Shares of the
Intermediate Income Fund held during the month
Witness the due execution hereof this 1st day of
December, 1993.
Federated Income Securities Trust
By: /s/ J. Christopher Donahue
Vice President
