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
Pre-Effective Amendment No.
Post-Effective Amendment No. 21 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17 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)
X on June 29, 1994 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)
on 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:
X filed the Notice required by that Rule on June 15, 1994;
or
intends to file the Notice required by that Rule on or
about ____________; 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,
L.L.P.
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, consists 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.
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 (1-2)Summary of (Institutional
or Institutional Service
Shares) Expenses.
Item 3. Condensed Financial
Information (1-2)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 Plan; (1-2)
Distribution and Shareholder
Services Plan;(1(b),2(b))
Shareholder Services Plan
(1(a), 2(a)) 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) Accounts With
Low Balances; (1-2) 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 and
Shareholder Services Plans; (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; (1-2)
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 (Filed in Part A)
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
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Asset-Backed Securities 4
Mortgage-Related Asset-Backed Securities 5
Adjustable Rate Mortgage Securities
("ARMS") 5
Collateralized Mortgage Obligations
("CMOs") 6
Real Estate Mortgage Investment
Conduits ("REMICs") 7
Resets of Interest 7
Caps and Floors 8
Non-Mortgage Related Asset-Backed
Securities 8
Bank Instruments 9
Foreign Investments 9
Credit Facilities 9
Interest Rate Swaps, Caps and Floors 10
Auction Rate Securities 11
Average Portfolio Maturity and Duration 11
Credit Enhancement 12
Demand Features 12
Restricted and Illiquid Securities 12
Repurchase Agreements 13
Reverse Repurchase Agreements 13
Lending of Portfolio Securities 13
When-Issued and Delayed
Delivery Transactions 13
Special Considerations 14
Portfolio Turnover 14
Investment Limitations 14
TRUST INFORMATION 15
- ------------------------------------------------------
Management of the Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Other Payments to Financial Institutions 16
Distribution of Institutional Shares 17
Administration of the Fund 17
Administrative Services 17
Shareholder Services Plan 17
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
NET ASSET VALUE 18
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SHARES 18
- ------------------------------------------------------
Share Purchases 18
By Wire 18
By Mail 18
Minimum Investment Required 18
What Shares Cost 19
Subaccounting Services 19
Certificates and Confirmations 19
Dividends 19
Capital Gains 19
REDEEMING INSTITUTIONAL SHARES 20
- ------------------------------------------------------
Telephone Redemption 20
Written Requests 20
Signatures 20
Receiving Payment 21
Accounts with Low Balances 21
Redemption in Kind 21
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
Massachusetts Partnership Law 22
TAX INFORMATION 22
- ------------------------------------------------------
Federal Income Tax 22
Pennsylvania Corporate and
Personal Property Taxes 22
PERFORMANCE INFORMATION 23
- ------------------------------------------------------
OTHER CLASSES OF SHARES 23
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SERVICE SHARES 24
- ------------------------------------------------------
FINANCIAL STATEMENTS 25
- ------------------------------------------------------
REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 38
- ------------------------------------------------------
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
Contingent Deferred Sales Charge (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)........................................................................ 0.32%
12b-1 Fee................................................................................................ None
Total Other Expenses..................................................................................... 0.24%
Shareholder Services Fee (2).............................................................. 0.00%
Total Institutional Shares Operating Expenses (3)............................................... 0.56%
</TABLE>
- ---------
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) The maximum Shareholder Services Fee is 0.25%.
(3) The Total Institutional Shares Operating Expenses would have been 0.64%
absent the voluntary waiver of a portion of the management fee.
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 "INVESTING IN INSTITUTIONAL SHARES" AND
"TRUST INFORMATION." 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...... $6 $18 $31 $70
</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 up to 0.25%. See
"Other Classes of Shares."
FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors on page
38.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1994 1993 1992* 1991 1990 1989 1988 1987**
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 $ 10.00
- --------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- --------------------------------
Net investment income 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74
- --------------------------------
Net realized and unrealized
gain/(loss) on investments (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42) (0.02)
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72
- --------------------------------
LESS DISTRIBUTIONS
- --------------------------------
Dividends to shareholders from
net investment income (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94) (0.74)
- --------------------------------
Distributions in excess of net
investment income -- -- (0.02*** (0.01*** -- -- -- --
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94) (0.74)
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN**** 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40%
- --------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------
Expenses 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50%(b)
- --------------------------------
Net investment income 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58%(b)
- --------------------------------
Expense waiver/
reimbursement (a) 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60%(b)
- --------------------------------
SUPPLEMENTAL DATA
- --------------------------------
Net assets, end of period (000
omitted) $ 353,106 $ 144,129 $ 36,047 $ 47,223 $ 65,429 $ 69,904 $ 90,581 $ 80,073
- --------------------------------
Portfolio turnover rate 44% 62% 114% 23% 34% 38% 77% 82%
- --------------------------------
</TABLE>
* On December 31, 1991, the shareholders approved a change in the fundamental
investment policies which state that the Fund will be invested in high-
grade
as opposed to lower-rated debt securities, and as a result, investment
income per share is lower.
** Reflects operations for the period from July 1, 1986 to April 30, 1987.
*** Distributions in excess of net investment income for the years ended April
30, 1992 and 1991, were a result of certain book and tax timing
differences. These distributions did not represent a return of capital for
federal income tax purposes for the years ended April 30, 1992 and 1991.
**** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended April 30, 1994 which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
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). Although the Fund may
invest in unrated debt securities that are determined by the Fund's investment
adviser to be of comparable quality to instruments having such ratings, as a
matter of operating policy, the Fund will invest only in rated securities.
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").
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.
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, (collectively, "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.
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.
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.
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.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. 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. Settlement dates
may be a month or more after entering into these transactions, and the market
value of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date. 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.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
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.
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
- --------------------------------------------------------------------------------
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.
Susan M. Nason has been the Fund's co-portfolio manager since January 1994.
Ms. Nason joined Federated Investors in 1987 and has been a Vice President
of the Fund's investment adviser since 1993. Ms. Nason served as an
Assistant Vice President of the investment adviser from 1990 until 1992,
and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a
Chartered Financial Analyst and received her M.B.A. in Finance from
Carnegie Mellon University.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments
to financial institutions under the Shareholder Services Plan, 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.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount
of Shares the financial institution sells or may sell, and/or upon the type
and nature of sales or marketing support furnished by the financial
institution. Any payments made by the distributor may be reimbursed by the
Fund's investment adviser or its affiliates.
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 assets of Shares 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, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young,
One Oxford Centre, Pittsburgh, PA.
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
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: Federated Services Company, c/o 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, P.O. Box 8602, Boston, Massachusetts 02266-8602. Orders by mail are
considered received after payment by check is converted by the transfer agent's
bank, 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 upon instruction of
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 or her name, the Fund name and class
name, the shareholder's 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 of the Trust 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, as amended, 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 Trust:
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 up to .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.
FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors on page
38.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1994 1993 1992*
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.17 $ 8.98 $ 9.08
- -------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------
Net investment income 0.48 0.52 0.15
- -------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments (0.32) 0.19 (0.10)
- ------------------------------------------------------------------------------- --------- --------- ---------
Total from investment operations 0.16 0.71 0.05
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48) (0.52) (0.15)
- ------------------------------------------------------------------------------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.17 $ 8.98
- ------------------------------------------------------------------------------- --------- --------- ---------
TOTAL RETURN** 1.78% 8.12% 0.69%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------
Expenses 0.81% 0.76% 0.78%(b)
- -------------------------------------------------------------------------------
Net investment income 5.30% 5.82% 6.37%(b)
- -------------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.13% 0.45% 0.98%(b)
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 39,649 $ 15,673 $ 778
- -------------------------------------------------------------------------------
Portfolio turnover rate 44% 62% 114%
- -------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 21, 1992 (date of initial
public investment) to April 30, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET-BACKED SECURITIES--64.9%
- ------------------------------------------------------------------------------------------------
AUTOMOTIVE--11.6%
--------------------------------------------------------------------------------
$ 2,996,386 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%,
12/15/97 $ 2,996,176
--------------------------------------------------------------------------------
1,615,610 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/98 1,602,766
--------------------------------------------------------------------------------
8,000,000 Ford Credit Auto Loan Master Trust 1992-1, 6.875%, 1/15/99 8,048,640
--------------------------------------------------------------------------------
1,306,067 John Deere Owner Trust 1992-A, Class E, 4.88%+, 12/29/1999 1,308,914
--------------------------------------------------------------------------------
1,659,434 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/97 1,664,097
--------------------------------------------------------------------------------
3,450,000 Navistar Financial Dealer Note Trust 1990, Class A-3, 4.59%+,
1/25/2003 3,473,702
--------------------------------------------------------------------------------
1,245,653 Nissan Auto Receivable 1992-A Grantor Trust, 5.30%, 5/15/97 1,241,867
--------------------------------------------------------------------------------
7,473,000 Orix Credit Alliance Owner Trust 1993-A, Class B, 4.60%, 8/17/98 7,240,067
--------------------------------------------------------------------------------
2,297,807 Premier Auto Trust 1993-1, Class B, 5.60%, 10/15/98 2,262,903
--------------------------------------------------------------------------------
9,999,863 Premier Auto Trust 1993-4, Class A2, 4.65%, 2/2/99 9,709,167
--------------------------------------------------------------------------------
4,999,967 Premier Auto Trust 1993-6, Class B, 4.88%, 1/3/2000 4,845,368
--------------------------------------------------------------------------------
1,232,263 Volvo Auto Trust 1991-A, 5.65%, 12/15/98 1,232,374
-------------------------------------------------------------------------------- ---------------
Total 45,626,041
-------------------------------------------------------------------------------- ---------------
BANKING--17.3%
--------------------------------------------------------------------------------
12,500,000 Advanta Credit Card Master Trust 1992-3, Class A-1, 5.95%,
8/31/99 12,239,125
--------------------------------------------------------------------------------
3,000,000 Bankamerica Corp., 5.50%+, 6/25/2003 2,992,500
--------------------------------------------------------------------------------
7,450,000 Bankers Trust New York Corp., 5.38%+, 9/24/2002 7,373,191
--------------------------------------------------------------------------------
18,450,000 Citicorp, 5.00%+, 10/25/2005 18,357,750
--------------------------------------------------------------------------------
4,000,000 Colonial Credit Card Trust 1991-B, Class B, 7.95%, 1/15/98 4,077,280
--------------------------------------------------------------------------------
7,000,000 Credit Lyonnais, 5.00%+, 8/7/97 7,136,500
--------------------------------------------------------------------------------
5,000,000 First Chicago Corp., 4.375%+, 7/28/2003 4,929,000
--------------------------------------------------------------------------------
1,000,000 J.P. Morgan and Co., Inc., FRN 5.00%+, 8/19/2002 998,750
--------------------------------------------------------------------------------
7,500,000 MBNA Master Credit Card Trust 1991-1, 7.75%, 10/15/98 7,711,425
--------------------------------------------------------------------------------
2,000,000 Standard Credit Card Master Trust 1991-1A, 8.50%, 6/7/96 2,080,340
-------------------------------------------------------------------------------- ---------------
Total 67,895,861
-------------------------------------------------------------------------------- ---------------
CONSUMER SERVICES--0.7%
--------------------------------------------------------------------------------
3,000,000 Encyclopedia Britannica, Dom. Fdg. Corp. 1994-1, 6.76%, 3/15/2002 2,895,900
-------------------------------------------------------------------------------- ---------------
FINANCE-AUTOMOTIVE--0.8%
--------------------------------------------------------------------------------
3,000,000 Ford Motor Credit Co., 6.55%, 2/3/98 2,936,610
-------------------------------------------------------------------------------- ---------------
FINANCE-RETAIL--13.1%
--------------------------------------------------------------------------------
3,500,000 Diamond Funding Corp., 6.35%, 11/20/97 3,532,830
--------------------------------------------------------------------------------
5,000,000 Discover Credit Card Trust 1991-B, Class A, 8.625%, 7/16/98 5,220,150
--------------------------------------------------------------------------------
2,500,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/98 2,620,800
--------------------------------------------------------------------------------
7,000,000 Discover Credit Card Trust 1991-E, 7.30%, 5/21/99 7,129,850
--------------------------------------------------------------------------------
10,000,000 Discover Credit Card Trust 1991-F, Class A, 7.85%, 11/21/2000 10,181,500
--------------------------------------------------------------------------------
2,474,159 Greentree Financial Corp. 1992-1, Class A-5, 6.50%, 10/15/2017 2,411,637
--------------------------------------------------------------------------------
4,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/97 4,120,880
--------------------------------------------------------------------------------
6,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/97 5,980,020
--------------------------------------------------------------------------------
10,000,000 Sears Credit Account Trust 1991-D, 7.75%, 9/15/98 10,327,000
-------------------------------------------------------------------------------- ---------------
Total 51,524,667
-------------------------------------------------------------------------------- ---------------
HOME EQUITY RECEIVABLES--13.8%
--------------------------------------------------------------------------------
1,106,088 Advanta Home Equity Loan Trust 1991-1, 9.00%, 2/25/2006 1,140,886
--------------------------------------------------------------------------------
4,152,957 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 4,208,690
--------------------------------------------------------------------------------
2,855,579 Advanta Home Equity Loan Trust 1992-4, Class A-2, 7.15%,
12/25/2008 2,849,068
--------------------------------------------------------------------------------
1,000,000 Capital Home Equity Loan Trust 1991-1, Class B, 4.54%+,
12/25/2011 1,001,100
--------------------------------------------------------------------------------
8,361,563 Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%,
7/15/2020 8,184,716
--------------------------------------------------------------------------------
2,000,000 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%,
11/15/2013 1,930,856
--------------------------------------------------------------------------------
4,925,320 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 4,783,786
--------------------------------------------------------------------------------
991,891 Fleet Finance Home Equity Trust 1991-2, 6.70%, 10/15/2006 978,203
--------------------------------------------------------------------------------
1,500,000 GE Capital Home Equity Loan, 1991-1, Class B, 8.70%, 8/30/2011 1,534,245
--------------------------------------------------------------------------------
6,428,464 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 4.75%+,
2/15/2003 6,456,364
--------------------------------------------------------------------------------
1,355,754 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 1,345,911
--------------------------------------------------------------------------------
1,123,994 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 1,117,542
--------------------------------------------------------------------------------
13,935,967 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 13,934,434
--------------------------------------------------------------------------------
4,684,235 TMS Home Equity Loan Trust 1993-C, Class A-3, 5.75%, 10/15/2022 4,567,129
-------------------------------------------------------------------------------- ---------------
Total 54,032,930
-------------------------------------------------------------------------------- ---------------
LEASING--0.8%
--------------------------------------------------------------------------------
21,076 Comdisco Receivables Trust 1991-A, 7.70%, 5/15/96 21,066
--------------------------------------------------------------------------------
1,016,900 Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 1,020,714
--------------------------------------------------------------------------------
2,250,000 U.S. Leasing, Inc., 7.00%, 11/1/97 2,263,635
-------------------------------------------------------------------------------- ---------------
Total 3,305,415
-------------------------------------------------------------------------------- ---------------
MANUFACTURED HOUSING RECEIVABLES--2.7%
--------------------------------------------------------------------------------
3,484,632 CIT Group Manufactured Housing 1993-1, Class A-1, 4.70%,
6/15/2018 3,412,152
--------------------------------------------------------------------------------
6,467,886 Merrill Lynch Mortgage Investments, Inc. 1991-1, Class A, 7.65%,
1/15/2012 6,558,307
--------------------------------------------------------------------------------
625,213 Merrill Lynch Mortgage Investments, Inc. 1992-B, 8.50%,
4/15/2012 636,348
-------------------------------------------------------------------------------- ---------------
Total 10,606,807
-------------------------------------------------------------------------------- ---------------
MARINE RECEIVABLES--1.2%
--------------------------------------------------------------------------------
4,785,691 CFC-14 Grantor Trust Class A, 7.15%, 11/15/2006 4,827,566
-------------------------------------------------------------------------------- ---------------
RECREATIONAL VEHICLE RECEIVABLES--1.9%
--------------------------------------------------------------------------------
7,422,285 Fleetwood Credit 1993-A, Class A, 6.00%, 1/15/2008 7,341,827
-------------------------------------------------------------------------------- ---------------
TRADE RECEIVABLES--1.0%
--------------------------------------------------------------------------------
4,000,000 Unisys Receivables Master Trust I, 5.05%, 11/15/96 3,918,160
-------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST, $262,099,875) 254,911,784
-------------------------------------------------------------------------------- ---------------
GOVERNMENT AGENCY--0.3%
- ------------------------------------------------------------------------------------------------
1,000,000 Student Loan Marketing Association, 3.94%+, 5/8/95 1,000,000
-------------------------------------------------------------------------------- ---------------
MORTGAGE-BACKED SECURITIES--33.3%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--1.0%
--------------------------------------------------------------------------------
1,409,826 Federal Home Loan Mortgage Corp. Pound606116, 5.47%+, 9/01/2019 1,450,119
--------------------------------------------------------------------------------
1,643,269 Federal Home Loan Mortgage Corp. Pound785167, 5.63%+, 12/01/2018 1,695,180
--------------------------------------------------------------------------------
652,709 Federal Home Loan Mortgage Corp. Series 1132 Class G, 8.00%,
1/15/2005 657,487
-------------------------------------------------------------------------------- ---------------
Total 3,802,786
-------------------------------------------------------------------------------- ---------------
NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--32.3%
--------------------------------------------------------------------------------
363,756 Capstead Securities Corp. IV 1992, Class 4-E, 4.74%+, 6/25/2018 364,891
--------------------------------------------------------------------------------
116,969 Capstead Securities Corp. IV 1992-10, Class D, 8.25%, 7/25/2023 116,773
--------------------------------------------------------------------------------
2,060,000 Chemical Mortgage Securities, Inc. 1993-1, Class A-4, 7.45%,
7/25/2020 2,098,625
--------------------------------------------------------------------------------
3,586,370 Citicorp Mortgage Securities 1992-18, Class A-1, 5.26%+,
10/25/2022 3,617,751
--------------------------------------------------------------------------------
901,129 Citicorp Mortgage Securities 1992-5, Class A-1, 8.00%, 9/25/2021 902,842
--------------------------------------------------------------------------------
10,200,000 Citicorp Mortgage Securities, Inc., Series 1993-12, Class A-2, 6.50%,
6/25/2021 9,560,358
--------------------------------------------------------------------------------
6,594,982 DLJ Mortgage Acceptance Corp., 1993-15, Class A-1, 4.58%+,
11/25/2023 6,706,305
--------------------------------------------------------------------------------
8,751,940 DLJ Mortgage Acceptance Corp., 1993-Q3, Class A-2, 5.65%+,
4/25/2023 8,932,493
--------------------------------------------------------------------------------
2,379,622 GCA 1993-ASC1, Class B-1, 5.43%+, 9/25/2023 2,357,301
--------------------------------------------------------------------------------
7,144,488 GCA 1993-LB2, Class A-1, 5.74%+, 8/25/2023 7,349,893
--------------------------------------------------------------------------------
6,705,669 GCA 1993-LB3, Class A-1, 5.54%+, 1/25/2024 6,961,356
--------------------------------------------------------------------------------
8,929,613 GCA Long Beach Mortgage PTC, Class A-2, 6.08%+, 7/25/2022 9,189,108
--------------------------------------------------------------------------------
2,485,564 GCA REMIC PTC 1991-4, Class B-1A, 8.76%+, 7/01/2019 2,518,970
--------------------------------------------------------------------------------
3,982,084 GCA REMIC Trust V, 1993-5, Class B, 5.12%+, 5/1/2020 3,817,823
--------------------------------------------------------------------------------
9,484,564 GE Capital Mortgage Services, Inc. 1993-12, Class A, 6.50%,
11/25/2023 9,027,693
--------------------------------------------------------------------------------
4,609,913 GE Capital Mortgage Services, Inc. 1993-9, Class A-1, 6.00%,
8/25/2008 4,466,775
--------------------------------------------------------------------------------
2,669,885 Glendale Federal Bank, 1988-1A, 5.20%+, 3/25/2018 2,684,917
--------------------------------------------------------------------------------
1,964,161 GMBS, Inc., 1990-5, Class A, 6.61%+, 12/26/2020 1,974,590
--------------------------------------------------------------------------------
1,453,110 Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%,
7/15/2002 1,475,808
--------------------------------------------------------------------------------
2,854,461 Prudential Home Mortgage 1992-A, Class B1-1, 7.20%, 4/28/2022 2,705,772
--------------------------------------------------------------------------------
4,506,946 Residential Funding Mortgage Securities, Inc. 1993-S38, Class A, 4.85%+,
9/25/2023 4,680,914
--------------------------------------------------------------------------------
2,000,125 Resolution Trust Corp. 1992-7, Class B-2B, 8.35%, 6/25/2029 2,029,507
--------------------------------------------------------------------------------
2,000,000 Resolution Trust Corp. 1992-12, Class B-3, 5.77%+, 1/25/2025 2,010,620
--------------------------------------------------------------------------------
4,012,100 Salomon Brothers Mortgage Securities VII, Inc. 1992-6, Class A-1, 5.22%+,
11/25/2022 4,124,960
--------------------------------------------------------------------------------
12,000,000 Salomon Brothers Mortgage Securities VII, Inc. 1993-5, Class A-3C, 7.44%+,
10/25/2023 12,234,000
--------------------------------------------------------------------------------
6,686,403 Salomon Brothers Mortgage Securities VII, Inc. 1993-9, Class A-1, 7.24%,
1/25/2024 6,594,465
--------------------------------------------------------------------------------
8,812,654 Zions Home Refinance Loan Trust 1993-1, 5.15%, 9/25/2003 8,437,764
-------------------------------------------------------------------------------- ---------------
Total 126,942,274
-------------------------------------------------------------------------------- ---------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST, $133,837,428) 130,745,060
-------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENTS--1.3%
- ------------------------------------------------------------------------------------------------
3,000,000 Bankers Trust Co., 3.61%, dated 4/29/94, due 5/2/94 3,000,000
--------------------------------------------------------------------------------
2,176,000 Union Bank of Switzerland, 3.62%, dated 4/29/94, due 5/2/94 2,176,000
-------------------------------------------------------------------------------- ---------------
TOTAL REPURCHASE AGREEMENTS 5,176,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST, $402,113,303) $ 391,832,844\\
-------------------------------------------------------------------------------- ---------------
</TABLE>
* Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreements are through
participation in a joint account with other Federated funds based on market
prices at the date of the portfolio.
+ Denotes variable rate and floating rate obligations for which the current
yield is shown.
\\ The cost for federal tax purposes amounts to $402,113,303. The net
unrealized depreciation of investments on a federal tax basis amounts to
$10,280,459 which is comprised of $146,234 appreciation and $10,426,693
depreciation at April 30, 1994.
The following abbreviations are used in this portfolio:
FRN--Floating Rate Note
PTC-Pass Through Certificate
REMIC-Real Estate Mortgage Investment Conduit
Note: The categories of investments are shown as a percentage of net assets
($392,755,586) at April 30, 1994.
(See Notes which are integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Investments, at value (Notes 2A and 2B)
(identified and tax cost, $402,113,303) $ 391,832,844
- ------------------------------------------------------------------------------------------------
Cash 234,808
- ------------------------------------------------------------------------------------------------
Interest receivable 2,775,314
- ------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 1,411,953
- ------------------------------------------------------------------------------------------------ ---------------
Total assets 396,254,919
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed $ 1,929,125
- ---------------------------------------------------------------------------------
Dividends payable 1,435,826
- ---------------------------------------------------------------------------------
Payable to transfer and dividend disbursing agent (Note 4) 3,980
- ---------------------------------------------------------------------------------
Accrued expenses 130,402
- --------------------------------------------------------------------------------- -------------
Total liabilities 3,499,333
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS for 44,384,375 shares of beneficial interest outstanding $ 392,755,586
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid-in capital $ 415,115,331
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (10,280,459)
- ------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (12,079,286)
- ------------------------------------------------------------------------------------------------ ---------------
Total $ 392,755,586
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share;
Institutional Shares ($353,106,260 / 39,903,321 shares of beneficial interest
outstanding) $8.85
- ------------------------------------------------------------------------------------------------ ---------------
Institutional Service Shares ($39,649,326 / 4,481,054 shares of beneficial interest outstanding) $8.85
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 19,390,453
- -------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 1,269,273
- ----------------------------------------------------------------------------------
Trustees' fees 10,646
- ----------------------------------------------------------------------------------
Administrative personnel and services fees (Note 4) 383,643
- ----------------------------------------------------------------------------------
Custodian and portfolio accounting fees and expenses 163,757
- ----------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 7,460
- ----------------------------------------------------------------------------------
Fund share registration costs 98,061
- ----------------------------------------------------------------------------------
Auditing fees 21,469
- ----------------------------------------------------------------------------------
Distribution service fees (Note 4) 70,952
- ----------------------------------------------------------------------------------
Shareholder services fees (Note 4) 15,198
- ----------------------------------------------------------------------------------
Legal fees 14,495
- ----------------------------------------------------------------------------------
Printing and postage 36,222
- ----------------------------------------------------------------------------------
Insurance premiums 6,741
- ----------------------------------------------------------------------------------
Taxes 4,377
- ----------------------------------------------------------------------------------
Miscellaneous 5,114
- ---------------------------------------------------------------------------------- -------------
Total expenses 2,107,408
- ----------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 4) $ 259,625
- ---------------------------------------------------------------------
Waiver of distribution service fees (Note 4) 15,198 274,823
- --------------------------------------------------------------------- ----------- -------------
Net expenses 1,832,585
- ------------------------------------------------------------------------------------------------- ---------------
Net investment income 17,557,868
- ------------------------------------------------------------------------------------------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (2,324,205)
- -------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (11,254,546)
- ------------------------------------------------------------------------------------------------- ---------------
Net realized and unrealized loss on investments (13,578,751)
- ------------------------------------------------------------------------------------------------- ---------------
Change in net assets resulting from operations $ 3,979,117
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1994 1993
- ------------------------------------------------------------------------------ ---------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------
Net investment income $ 17,557,868 $ 5,989,214
- ------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($669,532 net loss and
$61,811 net gain, respectively, as computed for federal
tax purposes) (2,324,205) (2,884)
- ------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (11,254,546) 1,162,577
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from operations 3,979,117 7,148,907
- ------------------------------------------------------------------------------ ---------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Institutional Shares (16,047,919) (5,534,478)
- ------------------------------------------------------------------------------
Institutional Service Shares (1,509,949) (340,673)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from distributions to shareholders (17,557,868) (5,875,151)
- ------------------------------------------------------------------------------ ---------------- ---------------
FUND SHARE TRANSACTIONS (NOTE 3)
- ------------------------------------------------------------------------------
Net proceeds from sale of shares 513,518,367 202,156,588
- ------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of dividends declared 3,669,215 895,871
- ------------------------------------------------------------------------------
Cost of shares redeemed (270,654,913) (81,349,085)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from Fund share transactions 246,532,669 121,703,374
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets 232,953,918 122,977,130
- ------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------
Beginning of period 159,801,668 36,824,538
- ------------------------------------------------------------------------------ ---------------- ---------------
End of period $ 392,755,586 $ 159,801,668
- ------------------------------------------------------------------------------ ---------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Trust consists of two diversified portfolios. The
financial statements included herein are only those of Federated Short-Term
Income Fund (the "Fund"). The financial statements of the other portfolio are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
The Fund provides two classes of shares, Institutional Shares and Institutional
Service Shares. Institutional Service Shares are identical in all respects to
Institutional Shares except that Institutional Service Shares will be sold
pursuant to a distribution plan ("Plan") adopted in accordance with Investment
Company Act Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Corporate bonds (and other fixed asset
backed securities) are valued at the last sale price reported on national
securities exchanges on that day, if available. Otherwise, corporate bonds
(and other asset backed securities) and short-term obligations are valued at
the prices provided by an independent pricing service. Short-term securities
with remaining maturities of sixty days or less at the time of purchase may
be stated at amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure the value at least equals the principal
amount of the repurchase agreement, including accrued interest.
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 adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees ("Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of these agreements.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount are amortized as required by
the Internal Revenue Code, as amended ("Code"). Distributions to
shareholders are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to, distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary.
At April 30, 1994 the Fund for federal tax purposes, had a capital loss
carryforward of ($10,249,866) which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 1995, ($156,476), 1996 ($791,359), 1997
($3,077,752), 1998 ($316,627), 1999 ($1,132,354), 2000 ($4,105,766) and 2002
($669,532).
Additionally, net capital losses of ($1,829,377) attributable to security
transactions incurred after October 31, 1993, are treated as arising on May
1, 1994, the first day of the Fund's next taxable year.
E. WNEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------------------
1994 1993
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------- ------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 50,506,612 $ 459,763,632 19,997,401 $ 182,667,537
- -----------------------------------------------
Shares issued to shareholders in payment of
dividends declared 307,713 2,782,792 69,745 637,195
- -----------------------------------------------
Shares redeemed (26,635,056) (241,204,503) (8,357,188) (76,399,182)
- ----------------------------------------------- ------------- ---------------- ------------- ---------------
Net change resulting from fund share
transactions 24,179,269 $ 221,341,921 11,709,958 $ 106,905,550
- ----------------------------------------------- ------------- ---------------- ------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------
1994 1993
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------- ------------ --------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 5,927,113 $ 53,754,735 2,134,568 $ 19,489,051
- ----------------------------------------------------
Shares issued to shareholders in payment of
dividends declared 97,795 886,423 28,299 258,676
- ----------------------------------------------------
Shares redeemed (3,253,210) (29,450,410) (541,975) (4,949,903)
- ---------------------------------------------------- ------------ --------------- ----------- --------------
Net change resulting from fund share
transactions 2,771,698 $ 25,190,748 1,620,892 $ 14,797,824
- ---------------------------------------------------- ------------ --------------- ----------- --------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
("Adviser"), receives for its services an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. Adviser may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the fee is based on
the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. 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.
DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the terms of the Plan, the Fund will compensate Federated Securities Corp.
("FSC"), the principal distributor, from the net assets of the Fund to finance
activities intended to result in the sale of the Fund's Institutional Service
Shares. The Plan provides that the Fund may incur distribution expenses up to
.25 of 1% of the average daily net assets of the Institutional Service Shares,
annually, to compensate FSC.
Under the terms of a shareholder services agreement with Federated Shareholder
Services ("FSS") the Fund will pay FSS up to .25 of 1% of average net assets for
each class of shares for the period. This fee is to obtain certain personal
services for shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves
as transfer agent and dividend disbursing agent for the Fund. The fee is based
on the size, type and number of accounts and transactions made by shareholders.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended April 30, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 373,721,007
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 136,235,736
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED SHORT-TERM INCOME FUND
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities of the
Federated Short-Term Income Fund (a portfolio of Federated Income Securities
Trust), including the portfolio of investments, as of April 30, 1994, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights (see pages 2 and 24 of the Prospectus) for the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term Income Fund at April 30, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
June 9, 1994
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
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 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
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
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
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Privately Issued Mortgage-Related Securities 2
Portfolio Turnover 3
Investment Limitations 3
TRUST MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
The Funds 7
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Other Advisory Services 8
Other Related Services 8
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
SHAREHOLDER SERVICES PLAN 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING INSTITUTIONAL SHARES 9
- ---------------------------------------------------------------
Other Payments to Financial Institutions 9
Conversion to Federal Funds 9
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
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.
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, 1994, and 1993, the portfolio turnover
rates were 44% and 62%, respectively.
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.
During the fiscal year ended April 30, 1994, the Fund did not borrow money,
invest in repurchase agreements or sell securities short in excess of 5% of the
value of its net assets. The Fund does not intend to borrow money, invest in
reverse repurchase agreements, or sell securities short in excess of 5% of the
value of its net assets, during the coming year.
In order to comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with sales loads
of less than 1.00% of the offering price of such securities. The Fund will
purchase securities of closed-end investment companies only in open market
transactions involving any customary brokers' commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. While it is a policy to
waive advisory fees on Fund assets invested in securities of other open-end
investment companies, it should be noted that investment companies incur certain
expenses such as custodian and transfer agency fees and, therefore, any
investment by the Fund in shares of another investment company would be subject
to such duplicate expenses.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan having a capital surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
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, Federated Services Company, Federated Shareholder Services, 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 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, Federated Services Company, and
Federated Shareholder 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, Federated Services Com-
pany, and Federated Shareholder 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.; Trustee, Federated Services Company, and Federated Shareholder
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 as amended.
\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.
As of June 3, 1994, the following shareholder of record owned 5% or more of the
outstanding Institutional Shares of the Fund: Valley Trust Company, Appleton,
Wisconsin, owned approximately 2,373,554 shares (6.12%).
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
$1,269,273, $395,758, and $266,945, respectively, $259,625, all, and all
of which were waived, respectively, 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. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as, the "Administrators".) For the
fiscal years ended April 30, 1994, 1993, and 1992, the Administrators
collectively earned $383,643, $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 the Administrators.
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."
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
The administrative services for which the distributor will pay financial
institutions include, but are not limited to, providing office space, equipment,
telephone facilities, and various clerical, supervisory, and computer personnel
as is necessary or beneficial to establish and maintain shareholders' accounts
and records, process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client inquiries
regarding the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund may
reasonably request.
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 2.04%,
6.51%, and 6.90%, respectively, for Institutional Shares. The Fund's average
annual total returns for the one-year period ended April 30, 1994 and for the
period from January 21, 1992 (the effective date of the Institutional Service
Shares) to April 30, 1994 were 1.78% and 4.62%, respectively, for the
Institutional Service 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 5.11%
4.86% 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.
MERRILL LYNCH TOTAL RETURN INVESTMENT GRADE CORPORATES INDEX (SHORT-TERM 1-2.99
YEARS) is comprised of over 400 issues of investment grade corporate debt
securities with remaining maturities from 1 to 2.99 years.
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 LONG TERM DEBT 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 extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH 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--(GOOD CREDIT QUALITY) Issues carrying this rating have a satisfactory
degree for timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings 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 into 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
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Variable Rate Demand Notes 4
Asset-Backed Securities 4
Mortgage-Related Asset-Backed Securities 5
Adjustable Rate Mortgage Securities ("ARMS") 5
Collateralized Mortgage Obligations ("CMOs") 6
Real Estate Mortgage Investment
Conduits ("REMICs") 7
Resets of Interest 7
Caps and Floors 8
Non-Mortgage Related Asset-Backed
Securities 8
Bank Instruments 9
Foreign Investments 9
Credit Facilities 9
Interest Rate Swaps, Caps and Floors 9
Auction Rate Securities 11
Average Portfolio Maturity and Duration 11
Credit Enhancement 11
Demand Features 12
Restricted and Illiquid Securities 12
Repurchase Agreements 12
Reverse Repurchase Agreements 13
Lending of Portfolio Securities 13
When-Issued and Delayed Delivery Transactions 13
Special Considerations 13
Portfolio Turnover 14
Investment Limitations 14
FEDERATED INCOME SECURITIES TRUST INFORMATION 15
- ------------------------------------------------------
Management of the Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Other Payments to Financial Institutions 16
Distribution of Institutional Service Shares 16
Distribution and Shareholder Services Plans 16
Administration of the Fund 17
Administrative Services 17
Custodian 17
Transfer Agent and Dividend Disbursing Agent 17
Legal Counsel 18
Independent Auditors 18
NET ASSET VALUE 18
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE SHARES 18
- ------------------------------------------------------
Share Purchases 18
By Wire 18
By Mail 18
Minimum Investment Required 18
What Shares Cost 19
Subaccounting Services 19
Certificates and Confirmations 19
Dividends 19
Capital Gains 20
REDEEMING INSTITUTIONAL SERVICE SHARES 20
- ------------------------------------------------------
Telephone Redemption 20
Written Requests 20
Signatures 20
Receiving Payment 21
Accounts with Low Balances 21
Redemption in Kind 21
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
Massachusetts Partnership Law 22
TAX INFORMATION 22
- ------------------------------------------------------
Federal Income Tax 22
Pennsylvania Corporate and
Personal Property Taxes 22
PERFORMANCE INFORMATION 23
- ------------------------------------------------------
OTHER CLASSES OF SHARES 23
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 24
- ------------------------------------------------------
FINANCIAL STATEMENTS 25
- ------------------------------------------------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 38
- ------------------------------------------------------
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
Contingent Deferred Sales Charge (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).......................................................................... 0.32%
12b-1 Fee (after waiver) (2)............................................................................... 0.01%
Total Other Expenses....................................................................................... 0.48%
Shareholder Services Fee (3)................................................................ 0.24%
Total Institutional Service Shares Operating Expenses (4)......................................... 0.81%
</TABLE>
- ---------
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) The maximum 12b-1 fee is 0.25%
(3) The maximum Shareholder Services Fee is 0.25%.
(4) The Total Institutional Service Shares Operating Expenses in the table above
are based on expenses expected during the fiscal year ending April 30, 1995.
The Total Institutional Service Shares Operating Expenses were 0.81% for the
fiscal year ended April 30, 1994 and were 0.94% absent the voluntary waivers
of a portion of the management fee and a portion of the 12b-1 fee.
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 "INVESTING IN INSTITUTIONAL SERVICE SHARES"
AND "TRUST INFORMATION." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales 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....... $8 $26 $45 $100
</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."
FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors on page
38.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1994 1993 1992*
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.17 $ 8.98 $ 9.08
- -----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------
Net investment income 0.48 0.52 0.15
- -----------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments (0.32) 0.19 (0.10)
- ----------------------------------------------------------------------------- --------- --------- ---------
Total from investment operations 0.16 0.71 0.05
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48) (0.52) (0.15)
- ----------------------------------------------------------------------------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.17 $ 8.98
- ----------------------------------------------------------------------------- --------- --------- ---------
TOTAL RETURN** 1.78% 8.12% 0.69%
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------
Expenses 0.81% 0.76% 0.78%(b)
- -----------------------------------------------------------------------------
Net investment income 5.30% 5.82% 6.37%(b)
- -----------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.13% 0.45% 0.98%(b)
- -----------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------
Net assets, end of period (000 omitted) $39,649 $15,673 $778
- -----------------------------------------------------------------------------
Portfolio turnover rate 44% 62% 114%
- -----------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 21, 1992 (date of initial
public investment) to April 30, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
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). Although the Fund may
invest in unrated debt securities that are determined by the Fund's investment
adviser to be of comparable quality to instruments having such ratings, as a
matter of operating policy, the Fund will invest only in rated securities.
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").
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.
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 (collectively, "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.
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.
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.
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.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. 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. Settlement dates may be
a month or more after entering into these transactions, and the market value of
the securities purchased may vary from the purchase prices. Accordingly, the
Fund may pay more/less than the market value of the securities on the settlement
date. 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.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
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.
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.
FEDERATED INCOME SECURITIES 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.
Susan M. Nason has been the Fund's co-portfolio manager since January 1994.
Ms. Nason joined Federated Investors in 1987 and has been a Vice President
of the Fund's investment adviser since 1993. Ms. Nason served as an
Assistant Vice President of the investment adviser from 1990 until 1992,
and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a
Chartered Financial Analyst and received her M.B.A. in Finance from
Carnegie Mellon University.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments
to financial institutions under the Distribution and Shareholder Services
Plans 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.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
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 PLANS. 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 assets of the Shares 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 Shares 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, L.L.P., Washington, D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young,
One Oxford Centre Building, Pittsburgh, PA.
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: Federated Services Company, c/o 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, P.O. Box 8602, Boston, Massachusetts 02266-8602. Orders by
mail are considered received after payment by check is converted by the transfer
agent's bank, 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 upon instruction of
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 or her name, the Fund name and class
name, the shareholder's 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 of the Trust 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 of June 3, 1994, Heritage Trust Company, Grand
Junction, Colorado owned 34.80% of the Shares of the Fund, and, therefore, may,
for certain purposes be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
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, as amended, 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 Trust:
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 maximum offering price 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.
FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors on page
38.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1994 1993 1992* 1991 1990 1989 1988 1987**
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 $ 10.00
- ---------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ---------------------------
Net investment income 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74
- ---------------------------
Net realized and
unrealized gain/(loss)
on investments (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42) (0.02)
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72
- ---------------------------
LESS DISTRIBUTIONS
- ---------------------------
Dividends to shareholders
from net investment
income (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94) (0.74)
- ---------------------------
Distributions in excess
of net investment income -- -- (0.02)*** (0.01)*** -- -- -- --
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94) (0.74)
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PE-
RIOD $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN**** 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40%
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS
- ---------------------------
Expenses 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50%(b)
- ---------------------------
Net investment income 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58%(b)
- ---------------------------
Expense waiver/
reimbursement (a) 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60%(b)
- ---------------------------
SUPPLEMENTAL DATA
- ---------------------------
Net assets, end of period
(000 omitted) $ 353,106 $ 144,129 $ 36,047 $ 47,223 $ 65,429 $ 69,904 $ 90,581 $ 80,073
- ---------------------------
Portfolio turnover rate 44% 62% 114% 23% 34% 38% 77% 82%
- ---------------------------
</TABLE>
* On December 31, 1991, the shareholders approved a change in the fundamental
investment policies which state that the Fund will be invested in
high-grade as opposed to lower-rated debt securities, and as a result,
investment income per share is lower.
** Reflects operations for the period from July 1, 1986 to April 30, 1987.
*** Distributions in excess of net investment income for the years ended April
30, 1992 and 1991, were a result of certain book and tax timing
differences. These distributions did not represent a return of capital for
federal income tax purposes for the years ended April 30, 1992 and 1991.
**** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- -------------------------------------------------------------------------------- ---------------
CORPORATE BONDS/ASSET-BACKED SECURITIES--64.9%
- ------------------------------------------------------------------------------------------------
AUTOMOTIVE--11.6%
--------------------------------------------------------------------------------
$ 2,996,386 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%,
12/15/97 $ 2,996,176
--------------------------------------------------------------------------------
1,615,610 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/98 1,602,766
--------------------------------------------------------------------------------
8,000,000 Ford Credit Auto Loan Master Trust 1992-1, 6.875%, 1/15/99 8,048,640
--------------------------------------------------------------------------------
1,306,067 John Deere Owner Trust 1992-A, Class E., 4.88%+, 12/29/1999 1,308,914
--------------------------------------------------------------------------------
1,659,434 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/97 1,664,097
--------------------------------------------------------------------------------
3,450,000 Navistar Financial Dealer Note Trust 1990, Class A-3, 4.59%+,
1/25/2003 3,473,702
--------------------------------------------------------------------------------
1,245,653 Nissan Auto Receivable 1992-A Grantor Trust, 5.30%, 5/15/97 1,241,867
--------------------------------------------------------------------------------
7,473,000 Orix Credit Alliance Owner Trust 1993-A, Class B, 4.60%, 8/17/98 7,240,067
--------------------------------------------------------------------------------
2,297,807 Premier Auto Trust 1993-1, Class B, 5.60%, 10/15/98 2,262,903
--------------------------------------------------------------------------------
9,999,863 Premier Auto Trust 1993-4, Class A2, 4.65%, 2/2/99 9,709,167
--------------------------------------------------------------------------------
4,999,967 Premier Auto Trust 1993-6, Class B, 4.88%, 1/3/2000 4,845,368
--------------------------------------------------------------------------------
1,232,263 Volvo Auto Trust 1991-A, 5.65%, 12/15/98 1,232,374
-------------------------------------------------------------------------------- ---------------
Total 45,626,041
-------------------------------------------------------------------------------- ---------------
BANKING--17.3%
--------------------------------------------------------------------------------
12,500,000 Advanta Credit Card Master Trust 1992-3, Class A-1, 5.95%,
8/31/99 12,239,125
--------------------------------------------------------------------------------
3,000,000 Bankamerica Corp., 5.50%+, 6/25/2003 2,992,500
--------------------------------------------------------------------------------
7,450,000 Bankers Trust New York Corp., 5.38%+, 9/24/2002 7,373,191
--------------------------------------------------------------------------------
18,450,000 Citicorp, 5.00%+, 10/25/2005 18,357,750
--------------------------------------------------------------------------------
4,000,000 Colonial Credit Card Trust 1991-B, Class B, 7.95%, 1/15/98 4,077,280
--------------------------------------------------------------------------------
7,000,000 Credit Lyonnais, 5.00%+, 8/7/97 7,136,500
--------------------------------------------------------------------------------
5,000,000 First Chicago Corp., 4.375%+, 7/28/2003 4,929,000
--------------------------------------------------------------------------------
1,000,000 J.P. Morgan and Co., Inc., FRN 5.00%+, 8/19/2002 998,750
--------------------------------------------------------------------------------
7,500,000 MBNA Master Credit Card Trust 1991-1, 7.75%, 10/15/98 7,711,425
--------------------------------------------------------------------------------
2,000,000 Standard Credit Card Master Trust 1991-1A, 8.50%, 6/7/96 2,080,340
-------------------------------------------------------------------------------- ---------------
Total 67,895,861
-------------------------------------------------------------------------------- ---------------
CONSUMER SERVICES--0.7%
--------------------------------------------------------------------------------
3,000,000 Encyclopedia Britannica, Dom. Fdg. Corp. 1994-1, 6.76%, 3/15/2002 2,895,900
-------------------------------------------------------------------------------- ---------------
FINANCE-AUTOMOTIVE--0.8%
--------------------------------------------------------------------------------
3,000,000 Ford Motor Credit Co., 6.55%, 2/3/98 2,936,610
-------------------------------------------------------------------------------- ---------------
FINANCE-RETAIL--13.1%
--------------------------------------------------------------------------------
3,500,000 Diamond Funding Corp., 6.35%, 11/20/97 3,532,830
--------------------------------------------------------------------------------
5,000,000 Discover Credit Card Trust 1991-B, Class A, 8.625%, 7/16/98 5,220,150
--------------------------------------------------------------------------------
2,500,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/98 2,620,800
--------------------------------------------------------------------------------
7,000,000 Discover Credit Card Trust 1991-E, 7.30%, 5/21/99 7,129,850
--------------------------------------------------------------------------------
10,000,000 Discover Credit Card Trust 1991-F, Class A, 7.85%, 11/21/2000 10,181,500
--------------------------------------------------------------------------------
2,474,159 Greentree Financial Corp. 1992-1, Class A-5, 6.50%, 10/15/2017 2,411,637
--------------------------------------------------------------------------------
4,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/97 4,120,880
--------------------------------------------------------------------------------
6,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/97 5,980,020
--------------------------------------------------------------------------------
10,000,000 Sears Credit Account Trust 1991-D, 7.75%, 9/15/98 10,327,000
-------------------------------------------------------------------------------- ---------------
Total 51,524,667
-------------------------------------------------------------------------------- ---------------
HOME EQUITY RECEIVABLES--13.8%
--------------------------------------------------------------------------------
1,106,088 Advanta Home Equity Loan Trust 1991-1, 9.00%, 2/25/2006 1,140,886
--------------------------------------------------------------------------------
4,152,957 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 4,208,690
--------------------------------------------------------------------------------
2,855,579 Advanta Home Equity Loan Trust 1992-4, Class A-2, 7.15%,
12/25/2008 2,849,068
--------------------------------------------------------------------------------
1,000,000 Capital Home Equity Loan Trust 1991-1, Class B, 4.54%+,
12/25/2011 1,001,100
--------------------------------------------------------------------------------
8,361,563 Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%,
7/15/2020 8,184,716
--------------------------------------------------------------------------------
2,000,000 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%,
11/15/2013 1,930,856
--------------------------------------------------------------------------------
4,925,320 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 4,783,786
--------------------------------------------------------------------------------
991,891 Fleet Finance Home Equity Trust 1991-2, 6.70%, 10/15/2006 978,203
--------------------------------------------------------------------------------
1,500,000 GE Capital Home Equity Loan, 1991-1, Class B, 8.70%, 8/30/2011 1,534,245
--------------------------------------------------------------------------------
6,428,464 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 4.75%+,
2/15/2003 6,456,364
--------------------------------------------------------------------------------
1,355,754 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 1,345,911
--------------------------------------------------------------------------------
1,123,994 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 1,117,542
--------------------------------------------------------------------------------
13,935,967 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 13,934,434
--------------------------------------------------------------------------------
4,684,235 TMS Home Equity Loan Trust 1993-C, Class A-3, 5.75%, 10/15/2022 4,567,129
-------------------------------------------------------------------------------- ---------------
Total 54,032,930
-------------------------------------------------------------------------------- ---------------
LEASING--0.8%
--------------------------------------------------------------------------------
21,076 Comdisco Receivables Trust 1991-A, 7.70%, 5/15/96 21,066
--------------------------------------------------------------------------------
1,016,900 Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 1,020,714
--------------------------------------------------------------------------------
2,250,000 U.S. Leasing, Inc., 7.00%, 11/1/97 2,263,635
-------------------------------------------------------------------------------- ---------------
Total 3,305,415
-------------------------------------------------------------------------------- ---------------
MANUFACTURED HOUSING RECEIVABLES--2.7%
--------------------------------------------------------------------------------
3,484,632 CIT Group Manufactured Housing 1993-1, Class A-1, 4.70%,
6/15/2018 3,412,152
--------------------------------------------------------------------------------
6,467,886 Merrill Lynch Mortgage Investments, Inc. 1991-1, Class A, 7.65%,
1/15/2012 6,558,307
--------------------------------------------------------------------------------
625,213 Merrill Lynch Mortgage Investments, Inc. 1992-B, 8.50%,
4/15/2012 636,348
-------------------------------------------------------------------------------- ---------------
Total 10,606,807
-------------------------------------------------------------------------------- ---------------
MARINE RECEIVABLES--1.2%
--------------------------------------------------------------------------------
4,785,691 CFC-14 Grantor Trust Class A, 7.15%, 11/15/2006 4,827,566
-------------------------------------------------------------------------------- ---------------
RECREATIONAL VEHICLE RECEIVABLES--1.9%
--------------------------------------------------------------------------------
7,422,285 Fleetwood Credit 1993-A, Class A, 6.00%, 1/15/2008 7,341,827
-------------------------------------------------------------------------------- ---------------
TRADE RECEIVABLES--1.0%
--------------------------------------------------------------------------------
4,000,000 Unisys Receivables Master Trust I, 5.05%, 11/15/96 3,918,160
-------------------------------------------------------------------------------- ---------------
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST, $262,099,875) 254,911,784
-------------------------------------------------------------------------------- ---------------
GOVERNMENT AGENCY--0.3%
- ------------------------------------------------------------------------------------------------
1,000,000 Student Loan Marketing Association, 3.94%+, 5/8/95 1,000,000
-------------------------------------------------------------------------------- ---------------
MORTGAGE-BACKED SECURITIES--33.3%
- ------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--1.0%
--------------------------------------------------------------------------------
1,409,826 Federal Home Loan Mortgage Corp. Pound606116, 5.47%+, 9/01/2019 1,450,119
--------------------------------------------------------------------------------
1,643,269 Federal Home Loan Mortgage Corp. Pound785167, 5.63%+, 12/01/2018 1,695,180
--------------------------------------------------------------------------------
652,709 Federal Home Loan Mortgage Corp. Series 1132 Class G, 8.00%,
1/15/2005 657,487
-------------------------------------------------------------------------------- ---------------
Total 3,802,786
-------------------------------------------------------------------------------- ---------------
NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--32.3%
--------------------------------------------------------------------------------
363,756 Capstead Securities Corp. IV 1992, Class 4-E, 4.74%+, 6/25/2018 364,891
--------------------------------------------------------------------------------
116,969 Capstead Securities Corp. IV 1992-10, Class D, 8.25%, 7/25/2023 116,773
--------------------------------------------------------------------------------
2,060,000 Chemical Mortgage Securities, Inc. 1993-1, Class A-4, 7.45%,
7/25/2020 2,098,625
--------------------------------------------------------------------------------
3,586,370 Citicorp Mortgage Securities 1992-18, Class A-1, 5.26%+,
10/25/2022 3,617,751
--------------------------------------------------------------------------------
901,129 Citicorp Mortgage Securities 1992-5, Class A-1, 8.00%, 9/25/2021 902,842
--------------------------------------------------------------------------------
10,200,000 Citicorp Mortgage Securities, Inc., Series 1993-12, Class A-2, 6.50%,
6/25/2021 9,560,358
--------------------------------------------------------------------------------
6,594,982 DLJ Mortgage Acceptance Corp., 1993-15, Class A-1, 4.58%+,
11/25/2023 6,706,305
--------------------------------------------------------------------------------
8,751,940 DLJ Mortgage Acceptance Corp., 1993-Q3, Class A-2, 5.65%+,
4/25/2023 8,932,493
--------------------------------------------------------------------------------
2,379,622 GCA 1993-ASC1, Class B-1, 5.43%+, 9/25/2023 2,357,301
--------------------------------------------------------------------------------
7,144,488 GCA 1993-LB2, Class A-1, 5.74%+, 8/25/2023 7,349,893
--------------------------------------------------------------------------------
6,705,669 GCA 1993-LB3, Class A-1, 5.54%+, 1/25/2024 6,961,356
--------------------------------------------------------------------------------
8,929,613 GCA Long Beach Mortgage PTC, Class A-2, 6.08%+, 7/25/2022 9,189,108
--------------------------------------------------------------------------------
2,485,564 GCA REMIC PTC 1991-4, Class B-1A, 8.76%+, 7/01/2019 2,518,970
--------------------------------------------------------------------------------
3,982,084 GCA REMIC Trust V, 1993-5, Class B, 5.12%+, 5/1/2020 3,817,823
--------------------------------------------------------------------------------
9,484,564 GE Capital Mortgage Services, Inc. 1993-12, Class A, 6.50%,
11/25/2023 9,027,693
--------------------------------------------------------------------------------
4,609,913 GE Capital Mortgage Services, Inc. 1993-9, Class A-1, 6.00%,
8/25/2008 4,466,775
--------------------------------------------------------------------------------
2,669,885 Glendale Federal Bank, 1988-1A, 5.20%+, 3/25/2018 2,684,917
--------------------------------------------------------------------------------
1,964,161 GMBS, Inc., 1990-5, Class A, 6.61%+, 12/26/2020 1,974,590
--------------------------------------------------------------------------------
1,453,110 Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%,
7/15/2002 1,475,808
--------------------------------------------------------------------------------
2,854,461 Prudential Home Mortgage 1992-A, Class B1-1, 7.20%, 4/28/2022 2,705,772
--------------------------------------------------------------------------------
4,506,946 Residential Funding Mortgage Securities, Inc. 1993-S38, Class A, 4.85%+,
9/25/2023 4,680,914
--------------------------------------------------------------------------------
2,000,125 Resolution Trust Corp. 1992-7, Class B-2B, 8.35%, 6/25/2029 2,029,507
--------------------------------------------------------------------------------
2,000,000 Resolution Trust Corp. 1992-12, Class B-3, 5.77%+, 1/25/2025 2,010,620
--------------------------------------------------------------------------------
4,012,100 Salomon Brothers Mortgage Securities VII, Inc. 1992-6, Class A-1, 5.22%+,
11/25/2022 4,124,960
--------------------------------------------------------------------------------
12,000,000 Salomon Brothers Mortgage Securities VII, Inc. 1993-5, Class A-3C, 7.44%+,
10/25/2023 12,234,000
--------------------------------------------------------------------------------
6,686,403 Salomon Brothers Mortgage Securities VII, Inc. 1993-9, Class A-1, 7.24%,
1/25/2024 6,594,465
--------------------------------------------------------------------------------
8,812,654 Zions Home Refinance Loan Trust 1993-1, 5.15%, 9/25/2003 8,437,764
-------------------------------------------------------------------------------- ---------------
Total 126,942,274
-------------------------------------------------------------------------------- ---------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST, $133,837,428) 130,745,060
-------------------------------------------------------------------------------- ---------------
*REPURCHASE AGREEMENTS-1.3%
- ------------------------------------------------------------------------------------------------
3,000,000 Bankers Trust Co., 3.61%, dated 4/29/94, due 5/2/94 3,000,000
--------------------------------------------------------------------------------
2,176,000 Union Bank of Switzerland, 3.62%, dated 4/29/94, due 5/2/94 2,176,000
-------------------------------------------------------------------------------- ---------------
TOTAL REPURCHASE AGREEMENTS 5,176,000
-------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST, $402,113,303) $ 391,832,844\\
-------------------------------------------------------------------------------- ---------------
</TABLE>
* Repurchase agreements are fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreements are through
participation in a joint account with other Federated funds based on market
prices at the date of the portfolio.
+ Denotes variable rate and floating rate obligations for which the current
yield is shown.
\\ The cost for federal tax purposes amounts to $402,113,303. The net
unrealized depreciation of investments on a federal tax basis amounts to
$10,280,459 which is comprised of $146,234 appreciation and $10,426,693
depreciation at April 30, 1994.
The following abbreviations are used in this portfolio:
FRN-Floating Rate Note
PTC-Pass Through Certificate
REMIC-Real Estate Mortgage Investment Conduit
Note: The categories of investments are shown as a percentage of net assets
($392,755,586) at April 30, 1994.
(See Notes which are integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Investments, at value (Notes 2A and 2B)
(identified and tax cost, $402,113,303) $ 391,832,844
- ------------------------------------------------------------------------------------------------
Cash 234,808
- ------------------------------------------------------------------------------------------------
Interest receivable 2,775,314
- ------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 1,411,953
- ------------------------------------------------------------------------------------------------ ---------------
Total assets 396,254,919
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed $ 1,929,125
- ---------------------------------------------------------------------------------
Dividends payable 1,435,826
- ---------------------------------------------------------------------------------
Payable to transfer and dividend disbursing agent (Note 4) 3,980
- ---------------------------------------------------------------------------------
Accrued expenses 130,402
- --------------------------------------------------------------------------------- -------------
Total liabilities 3,499,333
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS for 44,384,375 shares of beneficial interest outstanding $ 392,755,586
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid-in capital $ 415,115,331
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (10,280,459)
- ------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (12,079,286)
- ------------------------------------------------------------------------------------------------ ---------------
Total $ 392,755,586
- ------------------------------------------------------------------------------------------------ ---------------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share;
Institutional Shares ($353,106,260 / 39,903,321 shares of beneficial interest
outstanding) $8.85
- ------------------------------------------------------------------------------------------------ ---------------
Institutional Service Shares ($39,649,326 / 4,481,054 shares of beneficial interest outstanding) $8.85
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 19,390,453
- -------------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 1,269,273
- ----------------------------------------------------------------------------------
Trustees' fees 10,646
- ----------------------------------------------------------------------------------
Administrative personnel and services fees (Note 4) 383,643
- ----------------------------------------------------------------------------------
Custodian and portfolio accounting fees and expenses 163,757
- ----------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 7,460
- ----------------------------------------------------------------------------------
Fund share registration costs 98,061
- ----------------------------------------------------------------------------------
Auditing fees 21,469
- ----------------------------------------------------------------------------------
Distribution service fees (Note 4) 70,952
- ----------------------------------------------------------------------------------
Shareholder services fees (Note 4) 15,198
- ----------------------------------------------------------------------------------
Legal fees 14,495
- ----------------------------------------------------------------------------------
Printing and postage 36,222
- ----------------------------------------------------------------------------------
Insurance premiums 6,741
- ----------------------------------------------------------------------------------
Taxes 4,377
- ----------------------------------------------------------------------------------
Miscellaneous 5,114
- ---------------------------------------------------------------------------------- -------------
Total expenses 2,107,408
- ----------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee (Note 4) $ 259,625
- ---------------------------------------------------------------------
Waiver of distribution service fees (Note 4) 15,198 274,823
- --------------------------------------------------------------------- ----------- -------------
Net expenses 1,832,585
- ------------------------------------------------------------------------------------------------- ---------------
Net investment income 17,557,868
- ------------------------------------------------------------------------------------------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments transactions (identified cost basis) (2,324,205)
- -------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (11,254,546)
- ------------------------------------------------------------------------------------------------- ---------------
Net realized and unrealized loss on investments (13,578,751)
- ------------------------------------------------------------------------------------------------- ---------------
Change in net assets resulting from operations $ 3,979,117
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1994 1993
- ------------------------------------------------------------------------------ ---------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------
Net investment income $ 17,557,868 $ 5,989,214
- ------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($669,532 net loss and
$61,811 net gain, respectively, as computed for federal
tax purposes) (2,324,205) (2,884)
- ------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (11,254,546) 1,162,577
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from operations 3,979,117 7,148,907
- ------------------------------------------------------------------------------ ---------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Institutional Shares (16,047,919) (5,534,478)
- ------------------------------------------------------------------------------
Institutional Service Shares (1,509,949) (340,673)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from distributions to shareholders (17,557,868) (5,875,151)
- ------------------------------------------------------------------------------ ---------------- ---------------
FUND SHARE TRANSACTIONS (NOTE 3)
- ------------------------------------------------------------------------------
Net proceeds from sale of shares 513,518,367 202,156,588
- ------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of dividends declared 3,669,215 895,871
- ------------------------------------------------------------------------------
Cost of shares redeemed (270,654,913) (81,349,085)
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets from Fund share transactions 246,532,669 121,703,374
- ------------------------------------------------------------------------------ ---------------- ---------------
Change in net assets 232,953,918 122,977,130
- ------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------
Beginning of period 159,801,668 36,824,538
- ------------------------------------------------------------------------------ ---------------- ---------------
End of period $ 392,755,586 $ 159,801,668
- ------------------------------------------------------------------------------ ---------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Trust consists of two diversified portfolios. The
financial statements included herein are only those of Federated Short-Term
Income Fund (the "Fund"). The financial statements of the other portfolio are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
The Fund provides two classes of shares, Institutional Shares and Institutional
Service Shares. Institutional Service Shares are identical in all respects to
Institutional Shares except that Institutional Service Shares will be sold
pursuant to a distribution plan ("Plan") adopted in accordance with Investment
Company Act Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Corporate bonds (and other fixed asset
backed securities) are valued at the last sale price reported on national
securities exchanges on that day, if available. Otherwise, corporate bonds
(and other asset backed securities) and short-term obligations are valued at
the prices provided by an independent pricing service. Short-term securities
with remaining maturities of sixty days or less at the time of purchase may
be stated at amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure the value at least equals the principal
amount of the repurchase agreement, including accrued interest.
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 adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees ("Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of these agreements.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount are amortized as required by
the Internal Revenue Code, as amended ("Code"). Distributions to
shareholders are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to, distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary.
At April 30, 1994 the Fund for federal tax purposes, had a capital loss
carryforward of ($10,249,866) which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 1995, ($156,476), 1996 ($791,359), 1997
($3,077,752), 1998 ($316,627), 1999 ($1,132,354), 2000 ($4,105,766) and 2002
($669,532).
Additionally, net capital losses of ($1,829,377) attributable to security
transactions incurred after October 31, 1993, are treated as arising on May
1, 1994, the first day of the Fund's next taxable year.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------------------
1994 1993
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------- ------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 50,506,612 $ 459,763,632 19,997,401 $ 182,667,537
- -----------------------------------------------
Shares issued to shareholders in payment of
dividends declared 307,713 2,782,792 69,745 637,195
- -----------------------------------------------
Shares redeemed (26,635,056) (241,204,503) (8,357,188) (76,399,182)
- ----------------------------------------------- ------------- ---------------- ------------- ---------------
Net change resulting from fund share
transactions 24,179,269 $ 221,341,921 11,709,958 $ 106,905,550
- ----------------------------------------------- ------------- ---------------- ------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------
1994 1993
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------- ------------ --------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 5,927,113 $ 53,754,735 2,134,568 $ 19,489,051
- ----------------------------------------------------
Shares issued to shareholders in payment of
dividends declared 97,795 886,423 28,299 258,676
- ----------------------------------------------------
Shares redeemed (3,253,210) (29,450,410) (541,975) (4,949,903)
- ---------------------------------------------------- ------------ --------------- ----------- --------------
Net change resulting from fund share
transactions 2,771,698 $ 25,190,748 1,620,892 $ 14,797,824
- ---------------------------------------------------- ------------ --------------- ----------- --------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
("Adviser"), receives for its services an annual investment advisory fee equal
to .40 of 1% of the Fund's average daily net assets. Adviser may voluntarily
choose to waive a portion of its fee and reimburse certain operating expenses of
the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the fee is based on
the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. 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.
DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the terms of the Plan, the Fund will compensate Federated Securities Corp.
("FSC"), the principal distributor, from the net assets of the Fund to finance
activities intended to result in the sale of the Fund's Institutional Service
Shares. The Plan provides that the Fund may incur distribution expenses up to
.25 of 1% of the average daily net assets of the Institutional Service Shares,
annually, to compensate FSC.
Under the terms of a shareholder services agreement with Federated Shareholder
Services ("FSS") the Fund will pay FSS up to .25 of 1% of average net assets for
each class of shares for the period. This fee is to obtain certain personal
services for shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves
as transfer agent and dividend disbursing agent for the Fund. The fee is based
on the size, type and number of accounts and transactions made by shareholders.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended April 30, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 373,721,007
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 136,235,736
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED SHORT-TERM INCOME FUND
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities of the
Federated Short-Term Income Fund (a portfolio of Federated Income Securities
Trust), including the portfolio of investments, as of April 30, 1994, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights (see pages 2 and 24 of the Prospectus) for the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term Income Fund at April 30, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
June 9, 1994
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
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 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
1111903A-SS (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.
---------------------------------------------------------
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
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Privately Issued Mortgage-Related Securities 2
Portfolio Turnover 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
Other Advisory Services 8
Other Related Services 8
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING INSTITUTIONAL SERVICE SHARES 9
- ---------------------------------------------------------------
Distribution and Shareholder Services Plans 9
Other Payments to Financial Institutions 10
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Value of Securities 10
REDEEMING INSTITUTIONAL SERVICE SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 10
- ---------------------------------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
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 Service Shares and
Institutional Shares. This statement of additional information relates to
Institutional Service 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 (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.
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, 1994, and 1993, the portfolio turnover
rates were 44% and 62%, respectively.
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 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.
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.
During the fiscal year ended April 30, 1994, the Fund did not borrow money,
invest in repurchase agreements or sell securities short in excess of 5% of the
value of its net assets. The Fund does not intend to borrow money, invest in
reverse repurchase agreements, or sell securities short in excess of 5% of the
value of its net assets during the coming year.
In order to comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with sales loads
of less than 1.00% of the offering price of such securities. The Fund will
purchase securities of closed-end investment companies only in open market
transactions involving any customary brokers' commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. While it is a policy to
waive advisory fees on Fund assets invested in securities of other open-end
investment companies, it should be noted that investment companies incur certain
expenses such as custodian and transfer agency fees and, therefore, any
investment by the Fund in shares of another investment company would be subject
to such duplicate expenses.
For purposes of its policies and limitations the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having a capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be cash items.
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, Federated Services Company, Federated Shareholder Services, 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, Federated Services Company, and Federated
Shareholder 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, Federated Services Company and
Federated Shareholder 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; Trustee,
Federated Services Company and Federated Shareholder 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 as amended.
\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
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.
As of June 3, 1994, the following shareholders of record owned 5% or more of the
outstanding Institutional Service Shares of the Fund: Heritage Trust Company,
Grand Junction, Colorado, owned approximately 1,449,742 shares (34.80%); Charles
Schwab & Co., Inc., San Francisco, California, owned approximately 934,521
shares (21.69%); The Trust Company of St. Joseph, St. Joseph, Missouri, owned
approximately 379,991 shares (8.82%); and Howell Paving, Incorporated, owned
approximately 222,352 shares (5.16%).
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 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
$1,269,273, $395,758, and $266,945, respectively, $259,625, all, and all
of which were waived, respectively, 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. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
collectively be referred to as, the "Administrators".) For the fiscal years
ended April 30, 1994, 1993, and 1992, the Administrators collectively earned
$383,643, $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 the
Administrators.
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 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, (Institutional Service Shares only) 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.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
The administrative services for which the distributor will pay financial
institutions include, but are not limited to, providing office space, equipment,
telephone facilities, and various clerical, supervisory, and computer personnel
as is necessary or beneficial to establish and maintain shareholders' accounts
and records, process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client inquiries
regarding the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund may
reasonably request.
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 annual total return for the one-year period ended April 30,
1994, and for the period from January 21, 1992 (effective date of the
Institutional Service Shares) to April 30, 1994 were 1.78% and 4.62%,
respectively, for Institutional Service Shares. 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 2.04%, 6.51%, and 6.90%, 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 4.86% and
5.11% 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.
MERRILL LYNCH TOTAL RETURN INVESTMENT GRADE CORPORATES INDEX (SHORT-TERM 1-2.99
YEARS) is comprised of over 400 issues of investment grade corporate debt
securities with remaining maturities from 1 to 2.99 years.
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 LONG-TERM DEBT 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 extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS DEFINITIONS
FITCH-1--(VERY STRONG CREDIT QUALITY) Issues assigned this rating reflect an
assurance for timely payment.
FITCH-2--(GOOD CREDIT QUALITY) Issues carrying this rating have a satisfactory
degree for timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
1111903B-SS (6/94)
INTERMEDIATE INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares of Intermediate Income Fund (the "Fund") offered by
this prospectus represent interests in a no load, 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 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 Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Combined Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1994, with
the Securities and Exchange Commission. The information contained in the
Combined Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information, or to 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
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
U.S. Government Obligations 4
Corporate Debt Obligations 4
Floating Rate Corporate Debt Obligations 5
Fixed Rate Corporate Debt Obligations 5
Variable Rate Demand Notes 6
Credit Facilities 6
Asset-Backed Securities 6
Mortgage-Related Asset-Backed Securities 7
Adjustable Rate Mortgage Securities ("ARMS") 7
Collateralized Mortgage Obligations ("CMOs") 8
Real Estate Mortgage Investment Conduits
("REMICs") 8
Resets of Interest 8
Caps and Floors 9
Non-Mortgage Related Asset-Backed Securities 9
Bank Instruments 10
Foreign Securities 10
Interest Rate Swaps, Caps and Floors 11
Credit Enhancement 12
Demand Features 12
Repurchase Agreements 12
Restricted and Illiquid Securities 13
Lending of Portfolio Securities 13
When-Issued and Delayed Delivery Transactions 13
Special Considerations 14
Weighted Average Portfolio Duration 14
Investment Limitations 14
FEDERATED INCOME SECURITIES TRUST INFORMATION 15
- ------------------------------------------------------
Management of the Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Other Payments to Financial Institutions 16
Distribution of Institutional Shares 16
Administration of the Fund 16
Administrative Services 16
Shareholder Services Plan 17
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Expenses of the Fund and Institutional Shares 17
NET ASSET VALUE 18
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SHARES 18
- ------------------------------------------------------
Share Purchases 18
By Wire 18
By Mail 18
Minimum Investment Required 19
What Shares Cost 19
Exchanging Securities for Fund Shares 19
Subaccounting Services 19
Exchange Privilege 20
Certificates and Confirmations 20
Dividends 20
Capital Gains 20
REDEEMING INSTITUTIONAL SHARES 20
- ------------------------------------------------------
Telephone Redemption 21
Written Requests 21
Signatures 21
Receiving Payment 21
Accounts with Low Balances 22
SHAREHOLDER INFORMATION 22
- ------------------------------------------------------
Voting Rights 22
Massachusetts Partnership Law 22
TAX INFORMATION 23
- ------------------------------------------------------
Federal Income Tax 23
Pennsylvania Corporate and
Personal Property Taxes 23
PERFORMANCE INFORMATION 23
- ------------------------------------------------------
OTHER CLASSES OF SHARES 24
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES 25
- ------------------------------------------------------
FINANCIAL STATEMENTS 26
- ------------------------------------------------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 36
- ------------------------------------------------------
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
Contingent Deferred Sales Charge (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)......................................................................... 0.00%
12b-1 Fee................................................................................................. None
Total Other Expenses (after expense reimbursement)........................................................ 0.55%
Shareholder Services Fee (2)................................................................. 0.00%
Total Institutional Shares Operating Expenses (3)................................................ 0.55%
</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 0.50%.
(2) The maximum Shareholder Services Fee is 0.25%.
(3) The Total Institutional Shares Operating Expenses in the table above are
based on expenses expected during the fiscal year ending April 30, 1995. The
Total Institutional Shares Operating Expenses were 0.00% for the fiscal year
ended April 30, 1994 and were 1.40% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain other operating
expenses.
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 "INVESTING IN INSTITUTIONAL SHARES" AND
"FEDERATED INCOME SECURITIES TRUST INFORMATION." Wire-transferred redemptions of
less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <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.................................................. $6 $18
</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 up to 0.25%. See
"Other Classes of Shares."
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors, on page
36.
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
<S> <C>
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ---------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------
Net investment income 0.23
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.47)
- --------------------------------------------------------------------------------------------- ---------------
Total from investment operations (0.24)
- --------------------------------------------------------------------------------------------- ---------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.23)
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.53
- --------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN** (2.48)%
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------
Expenses 0.00%(a)
- ---------------------------------------------------------------------------------------------
Net investment income 6.36%(a)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 1.40%(a)
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $17,702
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. The Trust may 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.
As of the date of this prospectus the Board of Trustees ("Trustees") has
established two classes of shares of Intermediate Income Fund, 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 current income. This investment
objective cannot be changed without approval of 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 pursues its investment objective by investing in a diversified
portfolio of high grade debt securities, which are securities rated in one of
the three highest categories (A or better) by a nationally recognized
statistical rating organization ("NRSRO")(for example, rated Aaa, Aa, or A by
Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's
Corporation ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch")) or
if unrated, of comparable quality as determined by the Fund's adviser. If a
security is subsequently downgraded, the adviser will determine whether it
continues to be an acceptable investment; if not, the security will be sold. A
description of the rating categories is contained in the Appendix to the
Combined Statement of Additional Information. Under normal market conditions,
the dollar-weighted average portfolio maturity of the Fund will be between three
and ten years, and the Fund's average-weighted duration will be between three
and seven years.
Unless indicated otherwise, the investment policies may be changed by the Board
of Trustees without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of U.S. government obligations, corporate debt
obligations, and asset-backed securities. The Fund may also invest in derivative
instruments of such securities, including instruments with demand features or
credit enhancement, as well as money market instruments.
The securities in which the Fund invests are:
obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies and instrumentalities including
bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S.
government agencies or instrumentalities, such as Federal Home Loan
Banks, Federal National Mortgage Association, Government National Mortgage
Association, Federal Farm Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, Federal
Home Loan Mortgage Corporation, or National Credit Union Administration;
domestic and foreign issues of corporate debt obligations (including
Eurobonds, Medium Term Notes and Deposit Notes) having floating or fixed
rates of interest;
asset-backed securities, including mortgage-related securities;
commercial paper (including Europaper and Canadian Commercial Paper) which
matures in 270 days or less so long as at least two ratings are high
quality ratings by an NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by Standard & Poor's, or F-1 or F-2 by
Fitch;
foreign currency transactions (including spot, futures, options and
swaps);
time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) in commercial or savings banks whose
accounts are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by the
Federal Deposit Insurance Corporation ("FDIC"), including certificates of
deposit issued by and other time deposits in foreign branches of FDIC
insured banks or who have at least $100,000,000 in capital; and
repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT OBLIGATIONS. 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;
The Student Loan Marketing Association;
Federal Home Loan Mortgage Corporation; and
Federal National Mortgage Association.
CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating
rate corporate debt obligations, including increasing rate securities.
Floating rate securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest rate paid on
these securities is then reset periodically (commonly every 90 days) to an
increment over some predetermined interest rate index. Commonly utilized
indices include the three-month Treasury Bill rate, the 180-day Treasury
Bill rate, the one-month or three-month London Interbank Offered Rate
("LIBOR"), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings
and loans and collateralized by adjustable rate mortgage loans, also known
as collateralized thrift notes. Many of these collateralized thrift notes
have received AAA ratings from recognized rating agencies. Collateralized
thrift notes differ from traditional "pass through" certificates in which
payments made are linked to monthly payments made by individual borrowers
net of any fees paid to the issuer or guarantor of such securities.
Collateralized thrift notes pay a floating interest rate which is tied to a
predetermined index, such as the 180-day Treasury Bill rate. Floating rate
corporate debt obligations also include securities issued to fund
commercial real estate construction.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed
rate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
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."
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 require 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.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related and private loans, receivables and
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
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one 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 mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
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 may invest
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 may invest 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.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the
Fund may invest 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 may invest 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 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 CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In
the event 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 may invest 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 BIF or SAIF. Bank Instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar
Time Deposits ("ETDs").
FOREIGN SECURITIES. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper,
Eurobonds 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 of
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 requirements, loan limitations, examinations, accounting,
auditing, and record keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
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.
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.
REPURCHASE AGREEMENTS. Certain of the securities in which the Fund invests may
be purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. 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 Trustees.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
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, certain interest rate swaps, caps and floors determined by the Fund's
investment adviser to be illiquid, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of the value 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.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a 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 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. In these loan arrangements, the Fund will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. 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. 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. Accordingly, the Fund may pay more/less than the market
value of the securities on the settlement date.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
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.
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 15% of the
value of its total assets to secure such borrowings;
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.
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.
FEDERATED INCOME SECURITIES 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 .50 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.
Joseph M. Balestrino has been the Fund's co-portfolio manager since
January, 1994. Mr Balestrino joined Federated Investors in 1986 and has
been an Assistant Vice President of the Fund's investment adviser since
1991. Mr. Balestrino served as an Investment Analyst of the investment
adviser from 1989 until 1991, and from 1986 until 1989 he acted as Project
Manager in the Product Development Department. Mr. Balestrino is a
Chartered Financial Analyst and received his M.A. in Urban and Regional
Planning from the University of Pittsburgh.
Susan M. Nason has been the Fund's co-portfolio manager since the Fund's
inception. Ms. Nason joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since January, 1993. Ms. Nason
served as an Assistant Vice President of the investment adviser from 1990
until 1992, and from 1987 until 1990 she acted as an investment analyst.
Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in
Finance from Carnegie Mellon University.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Shareholder Services Plan, 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.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
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 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 Shares 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,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Boston, Massachusetts, a subsidiary of Federated Investors, 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, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young,
Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INSTITUTIONAL SHARES
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; shareholder services; and such non-recurring and
extraordinary items as may arise.
At present, the only expenses allocated to shares as a class are expenses under
the Fund's 12b-1 Plan which only relates to the Institutional Service Shares.
However, 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; 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
Shares will exceed that of Institutional Service Shares due to the variance in
daily net income realized by each class. Such variance will reflect only accrued
net income to which the shareholders of a particular class are entitled.
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. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Intermediate 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; ABA Number 011000028.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Intermediate Income Fund--Institutional Shares to the Fund's transfer agent,
Federated Services Company, P.O. Box 8602, Boston, Massachusetts 02266-8602.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, 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 shares 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. (Eastern 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.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
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.
EXCHANGE PRIVILEGE
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares at net asset value
(plus a sales charge, if applicable). The ability to exchange shares is
available to shareholders residing in any state in which the shares being
acquired may be legally sold and the exchange is subject to any initial or
subsequent investment amounts of the fund being acquired. Prior to any exchange,
the shareholder must receive a copy of the current prospectus of the fund or
class thereof into which an exchange is to be effected. A shareholder may obtain
further information on the exchange privilege by calling Federated Securities
Corp. or the shareholder's financial institution.
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 Federated Services Company. 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 upon
instruction of 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.
(Eastern 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 or her name, the Fund name and class
name, the shareholder's 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 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, provided that the transfer agent has received
payment for the Shares from the shareholder.
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.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust 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 of June 3, 1994, First National Bank & Trust,
Escanaba, Michigan, owned 38.47% of the Institutional Shares of the Fund, and,
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
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 the 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, as amended, 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.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
The Trust 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 maximum offering price
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.
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 up to .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 services expenses borne by shares of each
respective class.
The stated advisory fee is the same for both classes of the Fund.
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors, on page
36.
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
<S> <C>
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ---------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------
Net investment income 0.22
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.47)
- --------------------------------------------------------------------------------------------- ---------------
Total from investment operations (0.25)
- --------------------------------------------------------------------------------------------- ---------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.22)
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.53
- --------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN** (2.57)%
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------
Expenses 0.25%(a)
- ---------------------------------------------------------------------------------------------
Net investment income 6.12%(a)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 1.40%(a)
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $225
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
INTERMEDIATE INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
ASSET-BACKED SECURITIES--15.4%
- --------------------------------------------------------------------------------------------------
BANKING--7.5%
-----------------------------------------------------------------------------------
$ 300,000 American Express Master Trust, 1993-1, Class A, 5.375%, 7/15/2001 $ 270,549
-----------------------------------------------------------------------------------
200,000 First Chicago Master Trust,1990-A, Class A, 9.25%, 6/15/95 208,658
-----------------------------------------------------------------------------------
150,000 First Chicago Master Trust, 1991-D, Class A, 8.40%, 6/15/98 156,048
-----------------------------------------------------------------------------------
350,000 Signet Credit Card Trust, 1993-1, Class B, 5.40%, 2/15/2002 326,546
-----------------------------------------------------------------------------------
400,000 Standard Credit Card Master Trust, 1993-1, Class B, 5.50%, 9/7/98 382,736
----------------------------------------------------------------------------------- --------------
Total 1,344,537
----------------------------------------------------------------------------------- --------------
HOME EQUITY RECEIVABLES--1.6%
-----------------------------------------------------------------------------------
280,987 TMS Home Equity Loan Trust 1993-B, Class A, 6.90%, 7/15/2007 279,374
----------------------------------------------------------------------------------- --------------
NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--6.3%
-----------------------------------------------------------------------------------
400,000 Prudential Bache CMO, Series 8, Class F, 7.965%, 3/1/2019 396,136
-----------------------------------------------------------------------------------
500,000 Residential Funding Mortgage Securities, Inc. Series 1993-S26,
Class A-10, 7.50%, 7/25/2023 485,690
-----------------------------------------------------------------------------------
300,000 Residential Funding Mortgage Securities, Inc. Series 1993-S31,
Class A-7, 7.00%, 9/25/2023 253,830
----------------------------------------------------------------------------------- --------------
Total 1,135,656
----------------------------------------------------------------------------------- --------------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $2,918,984) 2,759,567
----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--57.2%
- --------------------------------------------------------------------------------------------------
BANKING & FINANCE--18.6%
-----------------------------------------------------------------------------------
900,000 Bank of Montreal, Note, 6.10%, 9/15/2005 784,278
-----------------------------------------------------------------------------------
500,000 Bank One, Milwaukee, Note, 6.625%, 4/15/2003 467,890
-----------------------------------------------------------------------------------
1,100,000 Credit Lyonnais, Sub. Floating Rate Note, 5.00%, 7/19/94\ 1,098,625
-----------------------------------------------------------------------------------
200,000 Meridian Bank, Reading, Note, 6.625%, 3/15/2003 184,004
-----------------------------------------------------------------------------------
100,000 Northern Trust Corp., Note, 9.125%, 8/1/94 100,952
-----------------------------------------------------------------------------------
150,000 Norwest Financial, Inc., Note, 6.875%, 12/15/99 147,886
-----------------------------------------------------------------------------------
400,000 PNC Funding Corp., Note, 6.875%, 3/1/2003 379,248
-----------------------------------------------------------------------------------
200,000 U.S. Bancorp., Note, 7.00%, 3/15/2003 188,366
----------------------------------------------------------------------------------- --------------
Total 3,351,249
----------------------------------------------------------------------------------- --------------
BROADCASTING--2.9%
-----------------------------------------------------------------------------------
500,000 CBS, Inc., Sr. Deb., 8.875%, 6/1/2022 521,370
----------------------------------------------------------------------------------- --------------
CONSUMER PRODUCTS--3.1%
-----------------------------------------------------------------------------------
200,000 Eastman Kodak Co., 9.20%, 1/15/95 204,862
-----------------------------------------------------------------------------------
150,000 Eastman Kodak Co., 9.125%, 3/1/98 154,372
-----------------------------------------------------------------------------------
200,000 Philip Morris Cos., Inc., Note, 8.25%, 10/15/2003 204,558
----------------------------------------------------------------------------------- --------------
Total 563,792
----------------------------------------------------------------------------------- --------------
ECOLOGICAL SERVICES--2.8%
-----------------------------------------------------------------------------------
500,000 Waste Management Inc., 6.375%, 7/1/97 498,720
----------------------------------------------------------------------------------- --------------
FINANCE--6.2%
-----------------------------------------------------------------------------------
100,000 Ford Capital Bv, Note, 9.00%, 8/15/98 106,820
-----------------------------------------------------------------------------------
200,000 General Motors Acceptance Corp., 9.40%, 5/18/95 207,242
-----------------------------------------------------------------------------------
105,000 Household Finance Corp., Note, 8.875%, 7/5/99 110,369
-----------------------------------------------------------------------------------
140,000 Household Finance Corp., Note, 8.95%, 9/15/99 151,112
-----------------------------------------------------------------------------------
200,000 ITT Financial Corp., Note, 8.125%, 11/15/98 206,516
-----------------------------------------------------------------------------------
300,000 Texaco Capital, Inc., Note, 9.00%, 12/15/99 323,643
----------------------------------------------------------------------------------- --------------
Total 1,105,702
----------------------------------------------------------------------------------- --------------
OIL & GAS--1.7%
-----------------------------------------------------------------------------------
200,000 B.P. America, Inc., Note, 7.875%, 5/15/2002 205,528
-----------------------------------------------------------------------------------
100,000 Sun, Inc., Note, 7.95%, 12/15/2001 101,062
----------------------------------------------------------------------------------- --------------
Total 306,590
----------------------------------------------------------------------------------- --------------
SOVEREIGN GOVERNMENT--11.3%
-----------------------------------------------------------------------------------
500,000 Province of Manitoba, Deb., 9.50%, 10/1/2000 559,760
-----------------------------------------------------------------------------------
500,000 Province of Ontario, Sr. Unsecured Notes, 7.375%, 1/27/2003 492,870
-----------------------------------------------------------------------------------
500,000 Province of Quebec, Note, 7.50%, 7/15/2002 499,710
-----------------------------------------------------------------------------------
500,000 Republic of Malta, 7.50%, 3/29/2009 474,065
----------------------------------------------------------------------------------- --------------
Total 2,026,405
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--1.5%
-----------------------------------------------------------------------------------
250,000 CSX Corp., Note, 9.50%, 11/15/95 263,033
----------------------------------------------------------------------------------- --------------
UTILITIES--9.1%
-----------------------------------------------------------------------------------
100,000 Baltimore Gas & Electric Co., 8.375%, 8/15/2001 106,026
-----------------------------------------------------------------------------------
400,000 Duke Power, 5.78%, 7/8/99 379,616
-----------------------------------------------------------------------------------
500,000 GTE Corp., Deb., 8.50%, 4/1/2017 497,935
-----------------------------------------------------------------------------------
180,000 Minnesota Power & Light Co., 7.75%, 6/1/2007 181,984
-----------------------------------------------------------------------------------
500,000 Wisconsin Telephone Co., 6.25%, 8/1/2004 458,155
----------------------------------------------------------------------------------- --------------
Total 1,623,716
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $10,785,534) 10,260,577
----------------------------------------------------------------------------------- --------------
U.S. TREASURY NOTE--1.1%
- --------------------------------------------------------------------------------------------------
200,000 3.875%, 4/30/95 (IDENTIFIED COST $199,998) 197,582
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENTS--36.8%
- --------------------------------------------------------------------------------------------------
3,000,000 B.T. Securities, Inc., 3.61%, dated 4/29/94 due 5/2/94 3,000,000
-----------------------------------------------------------------------------------
3,589,000 UBS Securities, Inc., 3.62%, dated 4/29/94, due 5/2/94 3,589,000
----------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) (NOTE 2B) 6,589,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $20,493,516) (NOTE 2A) $ 19,806,726\\
----------------------------------------------------------------------------------- --------------
</TABLE>
* The repurchase agreements are fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio. The
investments in repurchase agreements are through participation in joint
accounts with other Federated Funds.
\ Denotes floating rate obligation for which the current rate and next reset
date is shown.
\\ The cost of investments for federal tax purposes amounts to $20,493,516. The
net unrealized depreciation of investments on a federal income tax basis
amounts to $686,790, which is comprised of $6,285 appreciation and $693,075
depreciation at April 30,1994.
The following abbreviation is used in this portfolio:
CMO--Collateralized Mortgage Obligation
Note: The categories of investments are shown as a percentage of net assets
($17,927,250) at April 30, 1994.
INTERMEDIATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments in repurchase agreements (Note 2B) $ 6,589,000
- ---------------------------------------------------------------------------------
Investments in other securities (Note 2A) 13,217,726
- --------------------------------------------------------------------------------- --------------
Total investments, at value
(identified and tax cost, $20,493,516) $ 19,806,726
- -------------------------------------------------------------------------------------------------
Cash 133,515
- -------------------------------------------------------------------------------------------------
Interest receivable 206,796
- -------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 117,093
- -------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 8,416
- ------------------------------------------------------------------------------------------------- --------------
Total assets 20,272,546
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for investments purchased 2,234,876
- ---------------------------------------------------------------------------------
Dividends payable 77,054
- ---------------------------------------------------------------------------------
Payable to Transfer and Dividend Disbursing Agent (Note 4) 2,592
- ---------------------------------------------------------------------------------
Payable to Administrator (Note 4) 1,076
- ---------------------------------------------------------------------------------
Accrued expenses and other liabilities 29,698
- --------------------------------------------------------------------------------- --------------
Total liabilities 2,345,296
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 1,881,796 shares of beneficial interest outstanding $ 17,927,250
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 18,621,894
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (686,790)
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (7,854)
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 17,927,250
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
Institutional Shares (net assets of $17,702,269 / 1,858,178 shares of
beneficial interest) $9.53
- ------------------------------------------------------------------------------------------------- --------------
Institutional Service Shares (net assets of $224,981 / 23,618 shares of
beneficial interest) $9.53
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF OPERATIONS
PERIOD ENDED APRIL 30, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 279,962
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 22,003
- ----------------------------------------------------------------------------------------
Administrative personnel and services fees (Note 4) 1,077
- ----------------------------------------------------------------------------------------
Custodian fees 28,474
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 4,082
- ----------------------------------------------------------------------------------------
Fund share registration costs 765
- ----------------------------------------------------------------------------------------
Legal fees 2,000
- ----------------------------------------------------------------------------------------
Printing and postage 1,584
- ----------------------------------------------------------------------------------------
Distribution services fees--Institutional Service Shares (Note 4) 146
- ----------------------------------------------------------------------------------------
Miscellaneous 1,373
- ---------------------------------------------------------------------------------------- ---------
Total expenses 61,504
- ----------------------------------------------------------------------------------------
Deduct--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 22,003
- -----------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 4) 39,355 61,358
- ----------------------------------------------------------------------------- --------- ---------
Net expenses 146
- --------------------------------------------------------------------------------------------------- -----------
Net investment income 279,816
- --------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (7,854)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (686,790)
- --------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (694,644)
- --------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (414,828)
- --------------------------------------------------------------------------------------------------- -----------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
<S> <C>
- ---------------------------------------------------------------------------------------------- ------------------
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------------------
Net investment income $ 279,816
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions
($0 as computed for federal income tax purposes) (Note 2D) (7,854)
- ----------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (686,790)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from operations (414,828)
- ---------------------------------------------------------------------------------------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ----------------------------------------------------------------------------------------------
Institutional Shares (276,248)
- ----------------------------------------------------------------------------------------------
Institutional Service Shares (3,568)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from distributions to shareholders (279,816)
- ---------------------------------------------------------------------------------------------- ------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- ----------------------------------------------------------------------------------------------
Net proceeds from sale of shares 25,769,938
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 11,515
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (7,159,559)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from fund share transactions 18,621,894
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets 17,927,250
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------------------------- ------------------
End of period $ 17,927,250
- ---------------------------------------------------------------------------------------------- ------------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Trust consists of two diversified portfolios. The
financial statements included herein present only those of Intermediate Income
Fund (the "Fund"). The financial statements of the other portfolio are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
The Fund provides two classes of shares: Institutional Shares, and Institutional
Service Shares. Institutional Service Shares are identical in all respects to
Institutional Shares except that Institutional Service Shares will be sold
pursuant to a distribution plan ("Plan") adopted in accordance with Investment
Company Act Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Corporate bonds and other fixed income
securities/asset backed securities are valued at the last sale price
reported on national securities exchanges on that day, if available.
Otherwise, corporate bonds and other fixed income securities/asset backed
securities and short-term obligations are valued at the prices provided by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less at the time of purchase, may be stated at
amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the value of each
repurchase agreements underlying collateral to ensure the value at least
equals the principal amount of the repurchase agreement, including accrued
interest.
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"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount are amortized as required by
the Internal Revenue Code, as amended ("Code"). Distributions to
shareholders are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. Net capital
losses of $7,854 attributable to security transactions incurred after
October 31, 1993, are treated as arising on May 1, 1994, the first day of
the Fund's next taxable year.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1994*
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares sold 2,565,565 $ 25,464,130
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,194 11,509
- ------------------------------------------------------------------------------------
Shares redeemed (708,581) (7,091,038)
- ------------------------------------------------------------------------------------ ----------- --------------
1,858,178 $ 18,384,601
- ------------------------------------------------------------------------------------ ----------- --------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1994*
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares sold 30,700 $ 305,815
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- --
- ------------------------------------------------------------------------------------
Shares redeemed (7,082) (68,522)
- ------------------------------------------------------------------------------------ ----------- --------------
23,618 $ 237,293
- ------------------------------------------------------------------------------------ ----------- --------------
Net change resulting from Fund share transactions 1,881,796 $ 18,621,894
- ------------------------------------------------------------------------------------ ----------- --------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering), to
April 30, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
("Adviser"), receives for its services an annual investment advisory fee equal
to 0.50 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive its fee and reimburse certain operating expenses of
the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the fee is based on
the level of average aggregate net assets of all funds advised by subsidiaries
of Federated Investors. 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.
DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the terms of the Plan, the Fund will compensate Federated Securities Corp.
("FSC"), the principal distributor, from the net assets of the Fund to finance
activities intended to result in the sale of the Institutional Service Shares.
The Plan provides that the Fund may incur distribution expenses up to 0.25 of 1%
of the average daily net assets of the shares, annually, to compensate FSC.
Under the terms of a shareholder service agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets
for each class of shares for the period. This fee is to obtain certain personal
services for shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves
as transfer and dividend disbursing agent for the Fund. The fee is based on the
size, type and number of accounts and transactions made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses ($47,948) and start-up
administrative service expenses ($38,751) were borne initially by Adviser. The
Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following December
15, 1993 (date the Fund's portfolio first became effective). For the period
ended April 30, 1994, the Fund paid ($1,331) and ($1,076), respectively pursuant
to this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1994 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES-- $ 14,487,562
- -------------------------------------------------------------------------------------------------- --------------
SALES-- $ 21,423
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
INTERMEDIATE INCOME FUND
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Intermediate Income Fund (one of the portfolios
comprising Federated Income Securities Trust), as of April 30, 1994, and the
related statement of operations, the statement of changes in net assets and the
financial highlights (see pages 2 and 25 of this prospectus) for the period from
December 15, 1993 (date of initial public offering) to April 30, 1994. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of April 30, 1994, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Intermediate Income Fund at April 30, 1994, and the results of its operations,
the changes in its net assets and the financial highlights for the period from
December 15, 1993 to April 30, 1994, in conformity with generally accepted
accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
June 9, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Intermediate Income Fund
Institutional Shares Federated Investors Tower
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
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
INTERMEDIATE
INCOME
FUND
INSTITUTIONAL SHARES
PROSPECTUS
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1994
3090804A-IS (6/94)
INTERMEDIATE INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares of Intermediate Income Fund (the "Fund")
offered by this prospectus represent interests in a no load, 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 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 Combined Statement of Additional Information for
Institutional Service Shares and Institutional Shares dated June 30, 1994, with
the Securities and Exchange Commission. The information contained in the
Combined Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information or to 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
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SERVICE SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
U.S. Government Obligations 4
Corporate Debt Obligations 4
Floating Rate Corporate Debt Obligations 5
Fixed Rate Corporate Debt Obligations 5
Variable Rate Demand Notes 6
Credit Facilities 6
Asset-Backed Securities 6
Mortgage-Related Asset-Backed Securities 7
Adjustable Rate Mortgage
Securities ("ARMS") 7
Collateralized Mortgage Obligations
("CMOs") 8
Real Estate Mortgage Investment
Conduits ("REMICs") 8
Resets of Interest 8
Caps and Floors 9
Non-Mortgage Related Asset-Backed
Securities 9
Bank Instruments 10
Foreign Securities 10
Interest Rate Swaps, Caps and Floors 11
Credit Enhancement 12
Demand Features 12
Repurchase Agreements 12
Restricted and Illiquid Securities 13
Lending of Portfolio Securities 13
When-Issued and Delayed Delivery
Transactions 13
Special Considerations 14
Weighted Average Portfolio Duration 14
Investment Limitations 14
FEDERATED INCOME SECURITIES TRUST
INFORMATION 15
- ------------------------------------------------------
Management of the Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Other Payments to Financial Institutions 16
Distribution of Institutional Service Shares 16
Distribution and Shareholder
Services Plans 16
Administration of the Fund 17
Administrative Services 17
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 18
Legal Counsel 18
Independent Auditors 18
Expenses of the Fund and Institutional
Service Shares 18
NET ASSET VALUE 18
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE SHARES 19
- ------------------------------------------------------
Share Purchases 19
By Wire 19
By Mail 19
Minimum Investment Required 19
What Shares Cost 19
Exchanging Securities for Fund Shares 20
Subaccounting Services 20
Exchange Privilege 20
Certificates and Confirmations 20
Dividends 21
Capital Gains 21
REDEEMING INSTITUTIONAL SERVICE SHARES 21
- ------------------------------------------------------
Telephone Redemption 21
Written Requests 21
Signatures 22
Receiving Payment 22
Accounts with Low Balances 22
SHAREHOLDER INFORMATION 22
- ------------------------------------------------------
Voting Rights 22
Massachusetts Partnership Law 23
TAX INFORMATION 23
- ------------------------------------------------------
Federal Income Tax 23
Pennsylvania Corporate and Personal
Property Taxes 24
PERFORMANCE INFORMATION 24
- ------------------------------------------------------
OTHER CLASSES OF SHARES 24
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 26
- ------------------------------------------------------
FINANCIAL STATEMENTS 27
- ------------------------------------------------------
REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 37
- ------------------------------------------------------
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
Contingent Deferred Sales Charge (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)......................................................................... 0.00%
12b-1 Fee (after waiver) (2).............................................................................. 0.02%
Total Other Expenses (after expense reimbursement)........................................................ 0.78%
Shareholder Services Fee (3).................................................................... 0.23%
Total Institutional Service Shares Operating Expenses (4)........................................ 0.80%
</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 0.50%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The maximum Shareholder Services Fee is 0.25%.
(4) The Total Institutional Service Shares Operating Expenses in the table above
are based on expenses expected during the fiscal year ending April 30, 1995.
The Total Institutional Service Shares Operating Expenses were 0.25% for the
fiscal year ended April 30, 1994 and were 1.65% absent the voluntary waiver
of the management fee and the voluntary reimbursement of certain other
operating expenses.
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 "Investing in Institutional
Service Shares" and "Federated Income Securities Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <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.................................................. $8 $26
</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 Service Shares and
Institutional 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."
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors, on page
37.
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
<S> <C>
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ---------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------
Net investment income 0.22
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.47)
- --------------------------------------------------------------------------------------------- ---------------
Total from investment operations (0.25)
- --------------------------------------------------------------------------------------------- ---------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.22)
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.53
- --------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN** (2.57)%
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------
Expenses 0.25%(a)
- ---------------------------------------------------------------------------------------------
Net investment income 6.12%(a)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 1.40%(a)
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $225
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. The Trust may 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.
As of the date of this prospectus, the Board of Trustees ("Trustees") has
established two classes of shares of Intermediate Income Fund, 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 current income. This investment
objective cannot be changed without approval of 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 pursues its investment objective by investing in a diversified
portfolio of high grade debt securities, which are securities rated in one of
the three highest categories (A or better) by a nationally recognized
statistical rating organization ("NRSRO")(for example, rated Aaa, Aa, or A by
Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's
Corporation ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch")) or
if unrated, of comparable quality as determined by the Fund's adviser. If a
security is subsequently downgraded, the adviser will determine whether it
continues to be an acceptable investment; if not, the security will be sold. A
description of the rating categories is contained in the Appendix to the
Combined Statement of Additional Information. Under normal market conditions,
the dollar-weighted average portfolio maturity of the Fund will be between three
and ten years, and the Fund's average-weighted duration will be between three
and seven years.
Unless indicated otherwise, the investment policies may be changed by the Board
of Trustees without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of U.S. government obligations, corporate debt
obligations, and asset-backed securities. The Fund may also invest in derivative
instruments of such securities, including instruments with demand features or
credit enhancement, as well as money market instruments.
The securities in which the Fund invests are:
obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies and instrumentalities including
bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S.
government agencies or instrumentalities, such as Federal Home Loan Banks,
Federal National Mortgage Association, Government National Mortgage
Association, Federal Farm Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation,
Federal Financing Bank, The Student Loan Marketing Association, Federal
Home Loan Mortgage Corporation, or National Credit Union Administration;
domestic and foreign issues of corporate debt obligations (including
Eurobonds, Medium Term Notes and Deposit Notes) having floating or fixed
rates of interest;
asset-backed securities, including mortgage-related securities;
commercial paper (including Europaper and Canadian Commerical Paper) which
matures in 270 days or less so long as at least two ratings are high
quality ratings by an NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by Standard & Poor's, or F-1 or F-2 by
Fitch;
foreign currency transactions (including spot, futures, options and
swaps);
time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) in commercial or savings banks whose
accounts are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by the
Federal Deposit Insurance Corporation ("FDIC"), including certificates of
deposit issued by and other time deposits in foreign branches of FDIC
insured banks or who have at least $100,000,000 in capital; and
repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT OBLIGATIONS. 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;
The Student Loan Marketing Association;
Federal Home Loan Mortgage Corporation; and
Federal National Mortgage Association.
CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating
rate corporate debt obligations, including increasing rate securities.
Floating rate securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest rate paid on
these securities is then reset periodically (commonly every 90 days) to an
increment over some predetermined interest rate index. Commonly utilized
indices include the three-month Treasury Bill rate, the 180-day Treasury
Bill rate, the one-month or three-month London Interbank Offered Rate
("LIBOR"), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities.
Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings
and loans and collateralized by adjustable rate mortgage loans, also known
as collateralized thrift notes. Many of these collateralized thrift notes
have received AAA ratings from recognized rating agencies. Collateralized
thrift notes differ from traditional "pass through" certificates in which
payments made are linked to monthly payments made by individual borrowers
net of any fees paid to the issuer or guarantor of such securities.
Collateralized thrift notes pay a floating interest rate which is tied to a
predetermined index, such as the 180-day Treasury Bill rate. Floating rate
corporate debt obligations also include securities issued to fund
commercial real estate construction.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed
rate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
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."
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 require 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.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related and private loans, receivables and
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
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one 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 mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
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 may invest
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 may invest 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.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the
Fund may invest 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 may invest 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 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 CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In
the event 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 may invest 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 BIF or SAIF. Bank Instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar
Time Deposits ("ETDs").
FOREIGN SECURITIES. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper,
Eurobonds 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 of
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 requirements, loan limitations, examinations, accounting,
auditing, and record keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
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.
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.
REPURCHASE AGREEMENTS. Certain of the securities in which the Fund invests may
be purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. 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 Trustees.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
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, certain interest rate swaps, caps and floors determined by the Fund's
investment adviser to be illiquid, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of the value 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.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a 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 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. In these loan arrangements, the Fund will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. 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. 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. Accordingly, the Fund may pay more/less than the market
value of the securities on the settlement date.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
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.
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 15% of the
value of its total assets to secure such borrowings;
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.
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.
FEDERATED INCOME SECURITIES 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 .50 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.
Joseph M. Balestrino has been the Fund's portfolio manager since January,
1994. Mr. Balestrino joined Federated Investors in 1986 and has been an
Assistant Vice President of the Fund's investment adviser since 1991. Mr.
Balestrino served as an Investment Analyst of the investment adviser from
1989 until 1991, and from 1986 until 1989 he acted as Project Manager in
the Product Development Department. Mr. Balestrino is a Chartered Financial
Analyst and received his M.A. in Urban and Regional Planning from the
University of Pittsburgh.
Susan M. Nason has been the Fund's co-portfolio manager since the Fund's
inception. Ms. Nason joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since January, 1993. Ms. Nason
served as an Assistant Vice President of the investment adviser from 1990
until 1992, and from 1987 until 1990 she acted as an investment analyst.
Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in
Finance from Carnegie Mellon University.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Distribution and Shareholder Services Plans,
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.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
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 PLANS. Under a distribution plan adopted
in accordance with the 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 Shares to finance any
activity which is principally intended to result in the sale of Shares 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 expect 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 Shares 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>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
------------------ ---------------------------------
<C> <S>
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,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Boston, Massachusetts, a subsidiary of Federated Investors, 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, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington,
D.C.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young,
Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND INSTITUTIONAL SERVICE SHARES
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; shareholder services; and such non-recurring and
extraordinary items as may arise.
At present, the only expenses allocated to shares as a class are expenses under
the Fund's 12b-1 Plan which relate to the Shares. However, 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. 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. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Intermediate 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; ABA Number 011000028.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Intermediate Income Fund--Institutional Service Shares to the Fund's transfer
agent, Federated Services Company, P.O. Box 8602, Boston, Massachusetts
02266-8602. Orders by mail are considered received after payment by check is
converted by the transfer agent's bank, 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 Shares 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. (Eastern 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.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
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.
EXCHANGE PRIVILEGE
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares at net asset value
(plus a sales charge, if applicable). The ability to exchange shares is
available to shareholders residing in any state in which the shares being
acquired may be legally sold and the exchange is subject to any minimum initial
or subsequent investment amounts of the fund being acquired. Prior to any
exchange, the shareholder must receive a copy of the current prospectus of the
fund or class thereof into which an exchange is to be effected. A shareholder
may obtain further information on the exchange privilege by calling Federated
Securities Corp. or the shareholder's financial institution.
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 Federated Services Company. 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 upon
instruction of 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.
(Eastern 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 or her name, the Fund name and class
name, the shareholder's 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 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, provided that the transfer agent has received
payment for the shares from the shareholder.
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.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust 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 of June 3, 1994, Green Mountain Bank, Rutland,
Vermont owned 97.42% of the voting securities of the Fund, and, therefore, may,
for certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
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 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, as amended, 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.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
The Trust 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 maximum offering price 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 on 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 services expenses borne by shares of
each respective class.
The stated advisory fee is the same for both classes of the Fund.
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors, on page
37.
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
- --------------------------------------------------------------------------------------------- ---------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ---------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------
Net investment income 0.23
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.47)
- --------------------------------------------------------------------------------------------- ---------------
Total from investment operations (0.24)
- --------------------------------------------------------------------------------------------- ---------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.23)
- --------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.53
- --------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN** (2.48)%
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------
Expenses 0.00%(a)
- ---------------------------------------------------------------------------------------------
Net investment income 6.36%(a)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 1.40%(a)
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $17,702
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1994, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
INTERMEDIATE INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ----------------------------------------------------------------------------------- --------------
<C> <S> <C>
ASSET-BACKED SECURITIES--15.4%
- --------------------------------------------------------------------------------------------------
BANKING--7.5%
-----------------------------------------------------------------------------------
$ 300,000 American Express Master Trust, 1993-1, Class A, 5.375%, 7/15/2001 $ 270,549
-----------------------------------------------------------------------------------
200,000 First Chicago Master Trust,1990-A, Class A, 9.25%, 6/15/95 208,658
-----------------------------------------------------------------------------------
150,000 First Chicago Master Trust, 1991-D, Class A, 8.40%, 6/15/98 156,048
-----------------------------------------------------------------------------------
350,000 Signet Credit Card Trust, 1993-1, Class B, 5.40%, 2/15/2002 326,546
-----------------------------------------------------------------------------------
400,000 Standard Credit Card Master Trust, 1993-1, Class B, 5.50%, 9/7/98 382,736
----------------------------------------------------------------------------------- --------------
Total 1,344,537
----------------------------------------------------------------------------------- --------------
HOME EQUITY RECEIVABLES--1.6%
-----------------------------------------------------------------------------------
280,987 TMS Home Equity Loan Trust 1993-B, Class A, 6.90%, 7/15/2007 279,374
----------------------------------------------------------------------------------- --------------
NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--6.3%
-----------------------------------------------------------------------------------
400,000 Prudential Bache CMO, Series 8, Class F, 7.965%, 3/1/2019 396,136
-----------------------------------------------------------------------------------
500,000 Residential Funding Mortgage Securities, Inc. Series 1993-S26,
Class A-10, 7.50%, 7/25/2023 485,690
-----------------------------------------------------------------------------------
300,000 Residential Funding Mortgage Securities, Inc. Series 1993-S31,
Class A-7, 7.00%, 9/25/2023 253,830
----------------------------------------------------------------------------------- --------------
Total 1,135,656
----------------------------------------------------------------------------------- --------------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $2,918,984) 2,759,567
----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--57.2%
- --------------------------------------------------------------------------------------------------
BANKING & FINANCE--18.6%
-----------------------------------------------------------------------------------
900,000 Bank of Montreal, Note, 6.10%, 9/15/2005 784,278
-----------------------------------------------------------------------------------
500,000 Bank One, Milwaukee, Note, 6.625%, 4/15/2003 467,890
-----------------------------------------------------------------------------------
1,100,000 Credit Lyonnais, Sub. Floating Rate Note, 5.00%, 7/19/94\ 1,098,625
-----------------------------------------------------------------------------------
200,000 Meridian Bank, Reading, Note, 6.625%, 3/15/2003 184,004
-----------------------------------------------------------------------------------
100,000 Northern Trust Corp., Note, 9.125%, 8/1/94 100,952
-----------------------------------------------------------------------------------
150,000 Norwest Financial, Inc., Note, 6.875%, 12/15/99 147,886
-----------------------------------------------------------------------------------
400,000 PNC Funding Corp., Note, 6.875%, 3/1/2003 379,248
-----------------------------------------------------------------------------------
200,000 U.S. Bancorp., Note, 7.00%, 3/15/2003 188,366
----------------------------------------------------------------------------------- --------------
Total 3,351,249
----------------------------------------------------------------------------------- --------------
BROADCASTING--2.9%
-----------------------------------------------------------------------------------
500,000 CBS, Inc., Sr. Deb., 8.875%, 6/1/2022 521,370
----------------------------------------------------------------------------------- --------------
CONSUMER PRODUCTS--3.1%
-----------------------------------------------------------------------------------
200,000 Eastman Kodak Co., 9.20%, 1/15/95 204,862
-----------------------------------------------------------------------------------
150,000 Eastman Kodak Co., 9.125%, 3/1/98 154,372
-----------------------------------------------------------------------------------
200,000 Philip Morris Cos., Inc., Note, 8.25%, 10/15/2003 204,558
----------------------------------------------------------------------------------- --------------
Total 563,792
----------------------------------------------------------------------------------- --------------
ECOLOGICAL SERVICES--2.8%
-----------------------------------------------------------------------------------
500,000 Waste Management Inc., 6.375%, 7/1/97 498,720
----------------------------------------------------------------------------------- --------------
FINANCE--6.2%
-----------------------------------------------------------------------------------
100,000 Ford Capital Bv, Note, 9.00%, 8/15/98 106,820
-----------------------------------------------------------------------------------
200,000 General Motors Acceptance Corp., 9.40%, 5/18/95 207,242
-----------------------------------------------------------------------------------
105,000 Household Finance Corp., Note, 8.875%, 7/5/99 110,369
-----------------------------------------------------------------------------------
140,000 Household Finance Corp., Note, 8.95%, 9/15/99 151,112
-----------------------------------------------------------------------------------
200,000 ITT Financial Corp., Note, 8.125%, 11/15/98 206,516
-----------------------------------------------------------------------------------
300,000 Texaco Capital, Inc., Note, 9.00%, 12/15/99 323,643
----------------------------------------------------------------------------------- --------------
Total 1,105,702
----------------------------------------------------------------------------------- --------------
OIL & GAS--1.7%
-----------------------------------------------------------------------------------
200,000 B.P. America, Inc., Note, 7.875%, 5/15/2002 205,528
-----------------------------------------------------------------------------------
100,000 Sun, Inc., Note, 7.95%, 12/15/2001 101,062
----------------------------------------------------------------------------------- --------------
Total 306,590
----------------------------------------------------------------------------------- --------------
SOVEREIGN GOVERNMENT--11.3%
-----------------------------------------------------------------------------------
500,000 Province of Manitoba, Deb., 9.50%, 10/1/2000 559,760
-----------------------------------------------------------------------------------
500,000 Province of Ontario, Sr. Unsecured Notes, 7.375%, 1/27/2003 492,870
-----------------------------------------------------------------------------------
500,000 Province of Quebec, Note, 7.50%, 7/15/2002 499,710
-----------------------------------------------------------------------------------
500,000 Republic of Malta, 7.50%, 3/29/2009 474,065
----------------------------------------------------------------------------------- --------------
Total 2,026,405
----------------------------------------------------------------------------------- --------------
TRANSPORTATION--1.5%
-----------------------------------------------------------------------------------
250,000 CSX Corp., Note, 9.50%, 11/15/95 263,033
----------------------------------------------------------------------------------- --------------
UTILITIES--9.1%
-----------------------------------------------------------------------------------
100,000 Baltimore Gas & Electric Co., 8.375%, 8/15/2001 106,026
-----------------------------------------------------------------------------------
400,000 Duke Power, 5.78%, 7/8/99 379,616
-----------------------------------------------------------------------------------
500,000 GTE Corp., Deb., 8.50%, 4/1/2017 497,935
-----------------------------------------------------------------------------------
180,000 Minnesota Power & Light Co., 7.75%, 6/1/2007 181,984
-----------------------------------------------------------------------------------
500,000 Wisconsin Telephone Co., 6.25%, 8/1/2004 458,155
----------------------------------------------------------------------------------- --------------
Total 1,623,716
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $10,785,534) 10,260,577
----------------------------------------------------------------------------------- --------------
U.S. TREASURY NOTE--1.1%
- --------------------------------------------------------------------------------------------------
200,000 3.875%, 4/30/95 (IDENTIFIED COST $199,998) 197,582
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENTS--36.8%
- --------------------------------------------------------------------------------------------------
3,000,000 B.T. Securities, Inc., 3.61%, dated 4/29/94 due 5/2/94 3,000,000
-----------------------------------------------------------------------------------
3,589,000 UBS Securities, Inc., 3.62%, dated 4/29/94, due 5/2/94 3,589,000
----------------------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) (NOTE 2B) 6,589,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $20,493,516) (NOTE 2A) $ 19,806,726\\
----------------------------------------------------------------------------------- --------------
</TABLE>
* The repurchase agreements are fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio. The
investments in repurchase agreements are through participation in joint
accounts with other Federated Funds.
\ Denotes floating rate obligation for which the current rate and next reset
date is shown.
\\ The cost of investments for federal tax purposes amounts to $20,493,516. The
net unrealized depreciation of investments on a federal income tax basis
amounts to $686,790, which is comprised of $6,285 appreciation and $693,075
depreciation at April 30,1994.
The following abbreviation is used in this portfolio:
CMO--Collateralized Mortgage Obligation
Note: The categories of investments are shown as a percentage of net assets
($17,927,250) at April 30, 1994.
INTERMEDIATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments in repurchase agreements (Note 2B) $ 6,589,000
- ---------------------------------------------------------------------------------
Investments in other securities (Note 2A) 13,217,726
- --------------------------------------------------------------------------------- --------------
Total investments, at value
(identified and tax cost, $20,493,516) $ 19,806,726
- -------------------------------------------------------------------------------------------------
Cash 133,515
- -------------------------------------------------------------------------------------------------
Interest receivable 206,796
- -------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 117,093
- -------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 8,416
- ------------------------------------------------------------------------------------------------- --------------
Total assets 20,272,546
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------
Payable for investments purchased 2,234,876
- ---------------------------------------------------------------------------------
Dividends payable 77,054
- ---------------------------------------------------------------------------------
Payable to Transfer and Dividend Disbursing Agent (Note 4) 2,592
- ---------------------------------------------------------------------------------
Payable to Administrator (Note 4) 1,076
- ---------------------------------------------------------------------------------
Accrued expenses 29,698
- --------------------------------------------------------------------------------- --------------
Total liabilities 2,345,296
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 1,881,796 shares of beneficial interest outstanding $ 17,927,250
- ------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 18,621,894
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (686,790)
- -------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (7,854)
- ------------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 17,927,250
- ------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------
Institutional Shares (net assets of $17,702,269 / 1,858,178 shares of
beneficial interest) $9.53
- ------------------------------------------------------------------------------------------------- --------------
Institutional Service Shares (net assets of $224,981 / 23,618
shares of beneficial interest) $9.53
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF OPERATIONS
PERIOD ENDED APRIL 30, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest income (Note 2C) $ 279,962
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 22,003
- ----------------------------------------------------------------------------------------
Administrative personnel and services fees (Note 4) 1,077
- ----------------------------------------------------------------------------------------
Custodian and recordkeeper fees and expenses 28,474
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 4,082
- ----------------------------------------------------------------------------------------
Fund share registration costs 765
- ----------------------------------------------------------------------------------------
Distribution services fees--Institutional Service Shares (Note 4) 146
- ----------------------------------------------------------------------------------------
Legal fees 2,000
- ----------------------------------------------------------------------------------------
Printing and postage 1,584
- ----------------------------------------------------------------------------------------
Miscellaneous 1,373
- ---------------------------------------------------------------------------------------- ---------
Total expenses 61,504
- ----------------------------------------------------------------------------------------
Deduct--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 22,003
- -----------------------------------------------------------------------------
Reimbursement of other operating expenses (Note 4) 39,355 61,358
- ----------------------------------------------------------------------------- --------- ---------
Net expenses 146
- --------------------------------------------------------------------------------------------------- -----------
Net investment income 279,816
- --------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (7,854)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (686,790)
- --------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (694,644)
- --------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (414,828)
- --------------------------------------------------------------------------------------------------- -----------
</TABLE>
* For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------------------
Net investment income $ 279,816
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions
($0 as computed for federal income tax purposes) (Note 2D) (7,854)
- ----------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (686,790)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets resulting from operations (414,828)
- ---------------------------------------------------------------------------------------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income:
- ----------------------------------------------------------------------------------------------
Institutional Shares (276,248)
- ----------------------------------------------------------------------------------------------
Institutional Service Shares (3,568)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from distributions to shareholders (279,816)
- ---------------------------------------------------------------------------------------------- ------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- ----------------------------------------------------------------------------------------------
Net proceeds from sale of shares 25,769,938
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 11,515
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (7,159,559)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from fund share transactions 18,621,894
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets 17,927,250
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------------------------- ------------------
End of period $ 17,927,250
- ---------------------------------------------------------------------------------------------- ------------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Trust consists of two diversified portfolios. The
financial statements included herein present only those of Intermediate Income
Fund (the "Fund"). The financial statements of the other portfolio are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
The Fund provides two classes of shares: Institutional Shares, and Institutional
Service Shares. Institutional Service Shares are identical in all respects to
Institutional Shares except that Institutional Service Shares will be sold
pursuant to a distribution plan ("Plan") adopted in accordance with Investment
Company Act Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Corporate bonds and other fixed income
securities/asset backed securities are valued at the last sale price
reported on national securities exchanges on that day, if available.
Otherwise, corporate bonds and other fixed income securities/asset backed
securities and short-term obligations are valued at the prices provided by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less at the time of purchase may be stated at
amortized cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the value of each
repurchase agreements underlying collateral to ensure the value at least
equals the principal amount of the repurchase agreement, including accrued
interest.
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"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount are amortized as required by
the Internal Revenue Code, as amended ("Code"). Distributions to
shareholders are recorded on the ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. Net capital
losses of $7,854 attributable to security transactions incurred after
October 31, 1993 are treated as arising on May 1, 1994, the first day of
the Fund's next taxable year.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1994*
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares sold 2,565,565 $ 25,464,130
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 1,194 11,509
- ------------------------------------------------------------------------------------
Shares redeemed (708,581) (7,091,038)
- ------------------------------------------------------------------------------------ ----------- --------------
1,858,178 $ 18,384,601
- ------------------------------------------------------------------------------------ ----------- --------------
</TABLE>
* For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1994*
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Shares sold 30,700 $ 305,815
- ------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- --
- ------------------------------------------------------------------------------------
Shares redeemed (7,082) (68,522)
- ------------------------------------------------------------------------------------ ----------- --------------
23,618 $ 237,293
- ------------------------------------------------------------------------------------ ----------- --------------
Net change resulting from Fund Share transactions 1,881,796 $ 18,621,894
- ------------------------------------------------------------------------------------ ----------- --------------
</TABLE>
* For the period from December 15, 1993 (date of initial public offering), to
April 30, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
("Adviser"), receives for its services an annual investment advisory fee equal
to 0.50 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive its fee and reimburse certain operating expenses of
the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the fee is based on
the level of average aggregate net assets of all funds advised by subsidiaries
of Federated Investors. 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.
DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the terms of the Plan, the Fund will compensate Federated Securities Corp.
("FSC"), the principal distributor, from the net assets of the Fund to finance
activities intended to result in the sale of the Institutional Service Shares.
The Plan provides that the Fund may incur distribution expenses up to 0.25 of 1%
of the average daily net assets of the shares, annually, to compensate FSC.
Under the terms of a shareholder service agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets
for each class of shares for the period. This fee is to obtain certain personal
services for shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves
as transfer and dividend disbursing agent for the Fund. The fee is based on the
size, type and number of accounts and transactions made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses ($47,948) and start-up
administrative service expenses ($38,751) were borne initially by Adviser. The
Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following December
15, 1993 (date the Fund's portfolio first became effective). For the period
ended April 30, 1994, the Fund paid ($1,331) and ($1,076), respectively pursuant
to this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1994 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES-- $ 14,487,562
- -------------------------------------------------------------------------------------------------- --------------
SALES-- $ 21,423
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
INTERMEDIATE INCOME FUND
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Intermediate Income Fund (one of the portfolios
comprising Federated Income Securities Trust), as of April 30, 1994, and the
related statement of operations, the statement of changes in net assets and the
financial highlights (see pages 2 and 26 of this prospectus) for the period from
December 15, 1993 (date of initial public offering) to April 30, 1994. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of April 30, 1994, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Intermediate Income Fund at April 30, 1994 and the results of its operations,
the changes in its net assets and the financial highlights for the period from
December 15, 1993 to April 30, 1994, in conformity with generally accepted
accounting principles.
ERNST & YOUNG
Pittsburgh, Pennsylvania
June 9, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Intermediate 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
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- ---------------------------------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
INTERMEDIATE
INCOME FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1994
3090804A-SS (6/94)
INTERMEDIATE INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
The Institutional Shares and Institutional Service Shares of
Intermediate Income Fund (the "Fund") represent interests in a
diversified investment portfolio in Federated Income Securities Trust
(the "Trust").
This Combined Statement of Additional Information should be read with
the respective prospectus for either class of shares dated June 30,
1994. This Statement is not a prospectus itself. To receive a copy of
either prospectus, write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated June 30, 1994
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Collateralized Mortgage Obligations 1
Medium Term Notes and Deposit Notes 1
Average Life 1
Weighted Average Portfolio Maturity 1
Weighted Average Portfolio Duration 2
When-Issued and Delayed Delivery
Transactions 2
Foreign Currency Transactions 2
Risks 4
Lending of Portfolio Securities 4
Restricted and Illiquid Securities 4
Repurchase Agreements 4
Portfolio Turnover 5
Reverse Repurchase Agreements 5
Investment Limitations 5
TRUST MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
The Funds 10
Fund Ownership 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 11
- ---------------------------------------------------------------
Adviser to the Fund 11
Other Advisory Services 11
Other Related Services 11
ADMINISTRATIVE SERVICES 12
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 12
- ---------------------------------------------------------------
PURCHASING SHARES 12
- ---------------------------------------------------------------
Distribution Plan (Institutional Service Shares
only) and Shareholder Services Plans 12
Other Payments to Financial Institutions 13
DETERMINING NET ASSET VALUE 13
- ---------------------------------------------------------------
Determining Value of Securities 13
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 14
TOTAL RETURN 14
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
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 (individually and collectively referred to as the
"Shares"). This Combined Statement of Additional Information relates to both
classes of shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income. The investment
objective may not be changed without the prior approval of the Fund's
shareholders. The policies described below may be changed by the Board of
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
COLLATERALIZED MORTGAGE OBLIGATIONS
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.
MEDIUM TERM NOTES AND DEPOSIT NOTES
Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the respective prospectuses. MTNs and Deposit Notes
trade like commercial paper, but may have maturities from 9 months to ten years
and are rated like corporate debt obligations.
AVERAGE LIFE
Average life, as applicable to asset-backed securities, is computed by
multiplying each principal repayment by the time of payment (months or years
from the evaluation date), summing these products, and dividing the sum by the
total amount of principal repaid. The weighted-average life is calculated by
multiplying the maturity of each security in a given pool by its remaining
balance, summing the products, and dividing the result by the total remaining
balance.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The Fund will determine its dollar-weighted present 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 removed.
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 calculated by dividing the sum of the time-weighted present 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.
Mathematically, duration is measured as follows:
PVCF1(1) PVCF2(2) PVCF3(3) PVCFn(n)
Duration = -------- + -------- + -------- + . . . . . + --------
PVTCF PVTCF PVTCF PVTCF
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity
The duration of interest rate agreements, such as interest rate 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, and 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 are 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.
FOREIGN CURRENCY TRANSACTIONS
When the Fund invests in foreign securities, such securities may be denominated
in foreign currency, and the Fund may temporarily hold funds in foreign
currencies. Thus, the value of the Fund's shares can be affected by changes in
currency exchange rates. The value of the Fund's investments denominated in
foreign currencies and any cash it holds in foreign currencies will depend on
the relative strength of those currencies and the U.S. dollar, and the Fund may
be affected favorably or unfavorably by exchange control regulations or changes
in the exchange rate between foreign currencies and the U.S. dollar. The rate of
exchange between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange market as well as by
political factors. Changes in the foreign currency exchange rates may also
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
Accordingly, the Fund's ability to achieve its investment objective will depend,
to a certain extent, on favorable exchange rates.
Subject to certain percentage limitations, the Fund may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Fund expects to engage in foreign currency exchange
transactions in connection with the purchase and sale of portfolio securities
("transaction hedging"), and to protect the value of specific portfolio
positions ("position hedging").
The Fund may engage in "transaction hedging" to protect against a change in the
foreign currency exchange rate between the date on which the Fund contracts to
purchase or sell the security and the settlement date, or to "lock in" the U.S.
dollar equivalent of a dividend or interest payment in a foreign currency. For
that purpose, the Fund may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency.
If conditions warrant, the Fund may also enter into contracts to purchase or
sell foreign currencies at a future date ("forward contracts") and purchase and
sell foreign currency futures contracts as a hedge against changes in foreign
currency exchange rates between the trade and settlement dates on particular
transactions and not for speculation. A foreign currency forward contract is a
negotiated agreement to exchange currency at a future time at a rate or rates
that may be higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, the Fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies.
The Fund may engage in "position hedging" to protect against the decline in the
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of currency or
securities which the Fund intends to buy, when the Fund holds cash reserves and
short-term investments). For position hedging purposes, the Fund may purchase or
sell foreign currency futures contracts and foreign currency forward contracts,
and may purchase put or call options on foreign currency futures contracts and
on foreign currencies on domestic and foreign exchanges or over-the-counter
markets. In connection with position hedging, the Fund may also purchase or sell
foreign currency on a spot basis.
The Fund may write covered call options on foreign currencies to offset some of
the costs of hedging those currencies. Over-the-counter transactions are less
liquid than exchange-traded transactions, and are subject to the Fund's 15
percent limitation on illiquid investments. The Fund will engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of the Fund's investment adviser, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations. The Fund's
ability to engage in hedging and related option transactions may be limited by
tax considerations.
Hedging transactions involve costs and may result in losses. Unlike entering
directly into a foreign currency futures contract or directly purchasing foreign
currencies, which require the purchaser to buy the security on a set date at a
specified price, the purchase of a put option entitles, but does not obligate,
its purchaser to decide, on or before a future date, whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the term
of an option, the related foreign currency futures contract will also decrease
in value and the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the second option
will be large enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the position.
To do so, it would simultaneously enter into the futures contract of the type
underlying the option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the foreign currency futures
contract in return for payment of the strike price. If the Fund neither closes
out nor exercises an option, the option will expire on the date provided in the
option contract, and only the premium paid for the contract will be lost.
When the Fund writes a call option on foreign currency, it is undertaking the
obligation of assuming a short position (i.e., selling a foreign currency) at
the fixed strike price at any time during the life of the option if the option
is exercised. As currency exchange rates fall, the Fund's obligation under a
call option on foreign currencies costs less to fulfill, causing the value of
the Fund's call option position to increase.
In other words, as the exchange rate goes down below the strike price, the buyer
of the option has no reason to exercise the call, so that the Fund keeps the
premium received for the option. This premium can offset some or all of the drop
in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by the
buyer, the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium income of the Fund
will then offset some or all of the decrease in value of the hedged currencies.
The Fund will not maintain open positions in foreign currency futures contracts
it has sold or call options it has written on foreign currencies if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation.
RISKS. When the Fund invests in foreign currency futures contracts and
foreign currency forward contracts, and options thereon as hedging devices,
there is a risk that the prices of the securities subject to the futures
contract, forward contract, or option thereon may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract, forward contract, and any related options to react
differently than the portfolio securities to market changes. In addition,
the Fund's investment adviser could be incorrect in its expectations about
the direction or extent of market factors, such as interest rate or
currency exchange rate movements. In these events, the Fund may lose money
on the futures contract, forward contract or option. With respect to
futures contracts, the Fund may be unable to anticipate the extent of its
losses.
It is not certain that a secondary market for positions in futures
contracts, forward contracts or for options will exist at all times.
Although the investment adviser will consider liquidity before entering
into such transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular futures contract,
forward contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this
secondary market.
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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities eligible for resale under
Rule 144A to the Trustees . The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are 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 a defaulting seller files for bankruptcy or
becomes insolvent, disposition of 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 Trustees.
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. The Fund will not attempt to set or meet any arbitrary
portfolio turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective. However, it is expected
that the portfolio turnover rate generally will not exceed 100%.
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.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money 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 borrowings in excess of 5% of the value
of the Fund's total assets are outstanding.
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 the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the time
of the borrowing. For purposes of this limitation, the following are not
deemed to be pledges: margin deposits for the purchase and sale of
futures contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the purchase
of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, 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.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may engage
in transactions involving futures contracts and related options.
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.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry except that the Fund may invest 25% or more of the value
of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
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
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies, and limitations.
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 these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits with maturities over seven days, interest rate swaps, caps and
floors determined by the investment adviser to be illiquid, and certain
securities not determined to be liquid under guidelines established by
the Trustees.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund 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
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
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 the Fund's 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.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on foreign currency futures and
foreign currencies, unless the underlying securities are held in the
Fund's portfolio and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the underlying
securities are held in a Fund's portfolio, or unless the Fund is entitled
to them in deliverable form without further payment or after segregating
cash in the amount of any further payment. The Fund will not write call
options in excess of 25% of the value of its net assets.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on nationally recognized stock
exchanges to 2% of its total assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be cash items.
In order to comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with sales loads
of less than 1.00% of the offering price of such securities. The Fund will
purchase securities of closed-end investment companies only in open market
transactions involving any customary brokers' commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. While it is a policy to
waive advisory fees on Fund assets invested in securities of other open-end
investment companies, it should be noted that investment companies incur certain
expenses such as custodian and transfer agency fees and, therefore, any
investment by the Fund in shares of another investment company would be subject
to such duplicate expenses.
The Fund does not intend to borrow money or invest in reverse repurchase
agreements during the coming year.
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 Services Company,
Federated Administrative Services, Federated Shareholder Services, 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; for-
merly, 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
John R. Wood and private real estate ventures in Southwest Florida; Director,
Associates, Inc., Realtors Trustee, or Managing General Partner of the Funds; formerly,
3255 Tamiami Trail North President, Naples 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;
23rd Floor formerly, Vice Chairman and Director, PNC Bank, N.A. and PNC Bank
Pittsburgh, PA Corp. and Director, Ryan Homes, Inc.
James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the Funds;
Concord, MA formerly, Director, 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;
Boston, MA formerly, 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,
1202 Cathedral of Learning Carnegie Endowment for International Peace, Online Computer Library
Pittsburgh, PA Center, Inc., RAND Corporation, 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
4905 Bayard Street Managing 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;
Trustee, Federated Services Company; 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
Federated Investors Tower the Funds; staff member, Federated Securities Corp. and Federated
Pittsburgh, PA Administrative Services, Inc.
J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated
Federated Investors Tower Advisers, Federated Management, and Federated Research; President
Pittsburgh, PA and Director, Federated Administrative Services, Inc.; Trustee,
Federated Services Company and Federated Shareholder 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
Pittsburgh, PA President 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,
Pittsburgh, PA and Federated Research; Executive Vice President, Treasurer, and
Director, Federated Securities Corp.; Chairman, Treasurer, and
Director, Federated Administrative Services, Inc.; Trustee,
Federated Services Company and Federated Shareholder 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
Pittsburgh, PA Advisers, Federated Management, and Federated Research; Trustee,
Federated Services Company; Executive Vice President, Secretary, and
Director, Federated Administrative Services, Inc.; Trustee, Feder-
ated Services Company and Federated Shareholder 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, as amended.
\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
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Intermediate Municipal 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; Insurance Management Series; Intermediate Municipal Trust;
International Series, 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; 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; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 3, 1994, the following shareholders of record owned 5% or more of the
outstanding Institutional Shares of the Fund: First National Bank & Trust
Escanaba, Michigan, owned approximately 964,235 shares (38.47%); First
Commonwealth Trust Company, Indiana, Pennsylvania, owned approximately 478,843
shares (19.11%); The Sunburst Bank, Jackson, Mississippi, owned approximately
402,367 shares (16.05%).
As of June 3, 1994, the following shareholder of record owned 5% or more of the
outstanding Institutional Service Shares of the Fund: Green Mountain Bank,
Rutland, Vermont, owned approximately 21,095 shares (97.42%).
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., Trustee of Federated
Services Company, and Vice President and Trustee of the Trust. J. Christopher
Donahue, Trustee of Federated Management, is President and Trustee of Federated
Investors, President and Director of Federated Administrative Services, Inc.,
Trustee of Federated Services Company and Federated Shareholder Services, and
Vice President of the Trust. John W. McGonigle, Vice President, Secretary, and
Trustee of Federated Management, is Vice President, Secretary, General Counsel
and Trustee of Federated Investors, Director, Executive Vice President, and
Secretary of Federated Administrative Services, Inc., Director and Executive
Vice President of Federated Securities Corp., Trustee of Federated Services
Company and Federated Shareholder Services, 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 period from
December 15, 1993 (date of initial public offering) to April 30, 1994,
the Fund's Adviser earned $22,003, all of which was waived because of
undertakings to limit the Fund's expenses. In addition, the Adviser
reimbursed other operating expenses of $39,355 for the same period.
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. Prior to March 1, 1994, Federated Administrative Services Inc. also
a subsidiary of Federated Investors, served as the Fund's administrator. (For
purposes of this Statement of Additional Information, Federated Administrative
Services and Federated Administrative Services, Inc., may hereinafter
collectively be referred to as the "Administrators".) For the period ended April
30, 1994, the Administrators collectively earned $1,077. John A. Staley, IV, an
officer of the Trust and Dr. Henry J. Gailliot, an officer of Federated
Management, the adviser to the Trust, 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 the Administrators.
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 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 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 respective prospectuses under "Investing
in Institutional Shares" and "Investing in Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) 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 (Institutional Service Shares only), 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 objective. By identifying potential investors whose needs are
served by the Fund's objective, 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 ending April 30, 1994, payments in the amount of $146 were
made pursuant to the Distribution Plan, all of which was paid to financial
institutions. In addition, for this period, no payments were made pursuant to
the Shareholder Services Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
The administrative services for which the distributor will pay financial
institutions include, but are not limited to, providing office space, equipment,
telephone facilities, and various clerical, supervisory, and computer personnel
as is necessary or beneficial to establish and maintain shareholders' accounts
and records, process purchase and redemption transactions, process automatic
investments of client account cash balances, answer routine client inquiries
regarding the Fund, assist clients in changing dividend options, account
designations, and addresses, and providing such other services as the Fund may
reasonably request.
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 respective prospectuses.
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 maturities of less than 60 days or less at the
time of purchase at amortized cost unless the Trustees determine that
particular circumstances of the security indicate otherwise.
REDEEMING 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
respective prospectuses under "Redeeming Institutional Shares" and "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 Fund's portfolio. To the extent available,
such securities will be readily marketable.
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 transaction costs.
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 under the Investment Company
Act of 1940, which obligates the Fund 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, as amended,
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 average annual total return for Shares of the Fund is the average compounded
rate of return for a given period that would equate a $1,000 initial investment
to the ending redeemable value of that investment. The ending redeemable value
is computed by multiplying the number of shares owned at the end of the period
by the offering price per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.
Cumulative total return reflects the Fund's performance over a specific period
to time. The Fund's cumulative total return for Institutional Shares for the
period from December 15, 1993 (date of initial public offering) to April 30,
1994 was -2.48%. The Fund's cumulative total return for Institutional Service
Shares for the same period was -2.57%.
YIELD
- --------------------------------------------------------------------------------
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. The Fund's yield for Institutional Shares for the thirty-day period ended
April 30, 1994 was 6.10%. The Fund's yield for Institutional Service Shares was
5.85% for the same period.
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 "intermediate-term
investment grade debt funds" category in advertising and sales literature.
LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked
by Lehman Brothers, the index calculates total returns for one-month, three-
month, twelve-month, and ten-year periods and year-to-date.
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 LONG TERM DEBT 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
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be 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 extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS DEFINITIONS
FITCH-1--(VERY STRONG CREDIT QUALITY) Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
F-1+.
FITCH-2--(GOOD CREDIT QUALITY) Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
3090804B (6/94)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Filed in Part A)
(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 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) Conformed copy of Specimen Certificate of
Shares of Beneficial Interest of the
Registrant: Short-Term Income Fund (1.);
Intermediate Income Fund; +
(5) (i)Copy of the Investment Advisory
Contract of the Registrant (4.);
(ii) Conformed copy of Exhibit to
the Investment Advisory Contract of
the Registrant to add Intermediate
Income Fund to the present Investment
Advisory Contract; +
(6) (i)Copy of the Distributor's
Contract of the Registrant (3.);
(ii) Conformed copy of Exhibit C
to the Distributor's Contract of the
Registrant (7);
(iii) Conformed copy of Exhibit D
to the Distributor's Contract of the
Registrant (7);
(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) Conformed Copy of the Consent of
Independent Auditors+
(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) Conformed Copy of Exhibit B
to the Plan (7);
(iv) Not applicable;
(16) Schedule for Computation of Funds
Performance Data
(i) Short-Term Income Fund (2);
(ii) Intermediate Income Fund +
(17) Conformed copy of Power of Attorney +
(18) Conformed copy of Opinion and Consent of
Counsel as to
availability of Rule 485 (b)+
+ 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 Nos. 33-3164 and 811-4577)
2. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 3 on Form N-1A filed May 31, 1988.
(File Nos. 33-3164 and 811-4577)
3. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 7 on Form N-1A filed April 25,
1990. (File Nos. 33-3164 and 811-4577)
4. Response is incorporated by reference to Registrant's Post-
Effective Amendment No.12 on Form N-1A filed December 9,
1991. (File Nos. 33-3164 and 811-4577)
5. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed April 30,
1993. (File Nos. 33-3164 and 811-4577)
6. Response is 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)
7. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 20 on Form N-1A filed June 7, 1994.
(File Nos. 33-3164 and 811-4577)
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 3, 1994
Shares of Beneficial Interest
(no par value)
Federated Short-Term Income Fund
Institutional Shares 1,807
Institutional Service Shares 310
Intermediate Income Fund
Institutional Shares 110
Institutional Service Shares 8
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,
1. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 11 on Form N-1a filed on June 25,
1991. (File Nos.
33-3164 and 811-4577
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."
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
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
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
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 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, certifies that it meets
all of the requirements for effectiveness of this Amendment
to its Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and 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 24th day of June, 1994.
FEDERATED INCOME SECURITIES TRUST
BY: /s/Victor R. Siclari
Victor R. Siclari, Assistant Secretary
Attorney in Fact for John F. Donahue
June 24, 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 24, 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 11 under Form N-1A
Exhibit 23 under Item 601/Reg SK
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions
"Financial Highlights" and "Independent Auditors" and to the
use of our report dated June 9, 1994, in Post-Effective
Amendment Number 21 to the Registration Statement (Form N-1A
Number 33-3164) and the related Prospectuses of Federated
Income Securities Trust (comprisingly respectively, Federated
Short-Term Income Fund and Federated Intermediate Income
Fund).
By: ERNST & YOUNG
Ernst & Young
Pittsburgh, Pennsylvania
June 21, 1994
Exhibit 18 under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
HOUSTON, HOUSTON & DONNELLY
ATTORNEYS-AT-LAW
2510 CENTRE CITY TOWER
WILLIAM McC. HOUSTONPITTSBURGH, PA. 15222
FRED CHALMERS HOUSTON, JR.__________
THOMAS J. DONNELLY
JOHN F. MECK (412) 471-5828 FRED CHALMERS
HOUSTON
FAX (412) 471-0736 (1914 -1971)
MARIO SANTILLI, JR.
THEODORE M. HAMMER
June 22, 1994
FEDERATED INCOME SECURITIES TRUST
Federated Investors Tower
Pittsburgh, PA 15222-3779
Gentlemen:
As counsel to FEDERATED INCOME SECURITIES TRUST
("Trust"), we have reviewed Post-effective Amendment No. 21
to the Trust's Registration Statement to be filed with the
Securities and Exchange Commission under the Securities Act
of 1933 (File No. 33-3164). The subject Post-effective
Amendment will be filed pursuant to Paragraph (b) of Rule
485 and become effective pursuant to said Rule (immediately
upon filing/on _______________.)
Our review also included an examination of other
relevant portions of the amended 1933 Act Registration
Statement of the Fund/Trust and such other documents and
records deemed appropriate. On the basis of this review we
are of the opinion that Post-effective Amendment No.
does not contain disclosure which would render it ineligible
to become effective pursuant to Paragraph (b) of Rule 485.
We hereby consent to the filing of this representation
letter as part of the Fund's/Trust's Registration Statement
filed with the Securities and Exchange Commission under the
Securities Act of 1933 and as part of any application or
registration statement filed under the Securities Laws of
the States of the United States.
Very truly yours,
HOUSTON, HOUSTON & DONNELLY
By: /s/ Thomas J. Donnelly
TJD:amn
Exhibit 17 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby
constitutes and appoints the Secretary and Assistant
Secretary of FEDERATED INCOME SECURITIES
TRUST__________ and the Assistant General Counsel of
Federated Investors, and each of them, their true and lawful
attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names,
place and stead, in any and all capacities, to sign any and
all documents to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the Investment Company
Act of 1940, by means of the Securities and Exchange
Commission's electronic disclosure system known as EDGAR;
and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to
sign and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to
all intents and purposes as each of them might or could do
in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or
his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
SIGNATURES TITLE DATE
/s/ John F. Donahue Chairman and Trustee June 23, 1994
John F. Donahue (Chief Executive Officer)
/s/ Glen R. Johnson President June 23, 1994
Glen R. Johnson
/s/ E. C. Gonzales Vice President and Treasurer June 23, 1994
Edward C. Gonzales (Principal Financial and
Accounting Officer)
/s/ William J. Copeland Trustee June 23, 1994
William J. Copeland
/s/ James E. Dowd Trustee June 23, 1994
James E. Dowd
/s/ Lawrence D. Ellis, M.D. Trustee June 23, 1994
Lawrence D. Ellis, M.D.
s/ Edward L. Flaherty, Jr. Trustee June 23, 1994
Edward L. Flaherty, Jr.
SIGNATURES TITLE DATE
/s/ Gregor F. Meyer Trustee June 23, 1994
Gregor F. Meyer
/s/ Wesley W. Posvar Trustee June 23, 1994
Wesley W. Posvar
/s/ Marjorie P. Smuts Trustee June 23, 1994
Marjorie P. Smuts
/s/ Peter E. Madden Trustee June 23, 1994
Peter E. Madden
/s/ John T. Conroy, Jr. Trustee June 23, 1994
John T. Conroy, Jr.
Sworn to and subscribed before me this _23rd day of __June,
1994.
(SEAL)
/s/ Elaine T. Polens
____________________________________________
Notary Public
Notarial Seal
Elaine T. Polens, Notary
Public
Pittsburgh, Allegheny County
My Commission Expires March
28, 1994
Member, Pennsylvania
Association of Notaries
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 and
designate any additional Series or
Class, or to 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 23rd
day of November, 1993.
/s/ Victor R. Siclari
Victor R. Siclari
Assistant Secretary
Exhibit 4 under Form N-1A
Exhibit 3(c) under Item 601/Reg S-K
FEDERATED INCOME SECURITIES TRUST
INTERMEDIATE INCOME FUND
(INSTITUTIONAL SHARES)
P O R T F O L I O
Number Shares
______ ______
Account No. Alpha Code Organized Under the See Reverse Side
For
Laws of the Commonwealth Certain
Definitions
of Massachusetts
THIS IS TO CERTIFY THAT is the owner
of
CUSIP (applied for)
Fully Paid and Non-Assessable Shares of Beneficial Interest of
the INTERMEDIATE INCOME FUND Portfolio of FEDERATED INCOME
SECURITIES TRUST
hereafter called the "Trust", transferable on the books of the
Trust by the owner in person or by duly authorized attorney upon
surrender of this certificate properly endorsed.
The shares represented hereby are issued and shall be held
subject to the provisions of the Declaration of Trust and By-
Laws of the Trust and all amendments thereto, all of which the
holder by acceptance hereof assents.
This Certificate is not valid unless countersigned by the
Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to
be signed in its name by its proper officers and to be sealed
with its seal.
Dated: FEDERATED INCOME SECURITIES TRUST
Corporate Seal
1994
Massachusetts
/s/ Edward C. Gonzales /s/ John F. Donahue
Treasurer Chairman
Countersigned: Federated Services Company
(Pittsburgh)
Transfer Agent
By:
Authorized Signature
The following abbreviations, when used in the inscription on
the face of this Certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations;
TEN COM - as tenants in common UNIF GIFT MIN ACT-
.......Custodian........
TEN ENT - as tenants by the entirety (Cust)
(Minors)
JT TEN - as joint tenants with right of under Uniform Gifts
to Minors
survivorship and not as tenants
Act.............................
in common (State)
Additional abbreviations may also be used though not in the
above list.
For value received __________ hereby sell, assign, and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________
_____________
(Please print or typewrite name and address, including zip code,
of assignee)
________________________________________________________________
_____________
________________________________________________________________
_____________
________________________________________________________________
______ shares
of beneficial interest represented by the within Certificate,
and do hereby irrevocably constitute and appoint
__________________________________________
________________________________________________________________
_____________
to transfer the said shares on the books of the within named
Trust with full power of substitution in the premises.
Dated ______________________
NOTICE:___________________________________
The signature to this
assignment must correspond
with the name as written upon
the face of the certificate
in every particular, without
alteration or enlargement or
any change whatever.
All persons dealing with FEDERATED INCOME SECURITIES TRUST, a
Massachusetts business trust, must look solely to the Trust
property for the enforcement of any claim against the Trust, as
the Trustees, officers, agents or shareholders of the Trust
assume no personal liability whatsoever for obligations entered
into on behalf of the Trust
THIS SPACE MUST NOT BE COVERED IN ANY WAY
DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE
Page One
A. The Certificate is outlined by a one-half inch border.
B. The number in the upper left-hand corner and the number
of shares in the upper right-hand corner are outlined by
octagonal boxes.
C. The cusip number in the middle right-hand area of the
page is boxed.
D. The Massachusetts corporate seal appears in the bottom
middle of the page.
Page Two
The social security or other identifying number of the
assignee appears in a box in the top-third upper-left area of
the page.
Exhibit 4 under Form N-1A
Exhibit 3(c) under Item 601/Reg S-K
FEDERATED INCOME SECURITIES TRUST
INTERMEDIATE INCOME FUND
(INSTITUTIONAL SERVICE SHARES)
P O R T F O L I O
Number Shares
______ ______
Account No. Alpha Code Organized Under the See Reverse Side
For
Laws of the Commonwealth Certain
Definitions
of Massachusetts
THIS IS TO CERTIFY THAT is the owner
of
CUSIP (applied for)
Fully Paid and Non-Assessable Shares of Beneficial Interest of
the INTERMEDIATE INCOME FUND Portfolio of FEDERATED INCOME
SECURITIES TRUST
hereafter called the "Trust", transferable on the books of the
Trust by the owner in person or by duly authorized attorney upon
surrender of this certificate properly endorsed.
The shares represented hereby are issued and shall be held
subject to the provisions of the Declaration of Trust and By-
Laws of the Trust and all amendments thereto, all of which the
holder by acceptance hereof assents.
This Certificate is not valid unless countersigned by the
Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to
be signed in its name by its proper officers and to be sealed
with its seal.
Dated: FEDERATED INCOME SECURITIES TRUST
Corporate Seal
1994
Massachusetts
/s/ Edward C. Gonzales /s/ John F. Donahue
Treasurer Chairman
Countersigned: Federated Services Company
(Pittsburgh)
Transfer Agent
By:
Authorized Signature
The following abbreviations, when used in the inscription on
the face of this Certificate, shall be construed as though they
were written out in full according to applicable laws or
regulations;
TEN COM - as tenants in common UNIF GIFT MIN ACT-
.......Custodian........
TEN ENT - as tenants by the entirety (Cust)
(Minors)
JT TEN - as joint tenants with right of under Uniform Gifts
to Minors
survivorship and not as tenants
Act.............................
in common (State)
Additional abbreviations may also be used though not in the
above list.
For value received __________ hereby sell, assign, and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________
_____________
(Please print or typewrite name and address, including zip code,
of assignee)
________________________________________________________________
_____________
________________________________________________________________
_____________
________________________________________________________________
______ shares
of beneficial interest represented by the within Certificate,
and do hereby irrevocably constitute and appoint
__________________________________________
________________________________________________________________
_____________
to transfer the said shares on the books of the within named
Trust with full power of substitution in the premises.
Dated ______________________
NOTICE:___________________________________
The signature to this
assignment must correspond
with the name as written upon
the face of the certificate
in every particular, without
alteration or enlargement or
any change whatever.
All persons dealing with FEDERATED INCOME SECURITIES TRUST, a
Massachusetts business trust, must look solely to the Trust
property for the enforcement of any claim against the Trust, as
the Trustees, officers, agents or shareholders of the Trust
assume no personal liability whatsoever for obligations entered
into on behalf of the Trust
THIS SPACE MUST NOT BE COVERED IN ANY WAY
DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE
Page One
A. The Certificate is outlined by a one-half inch border.
B. The number in the upper left-hand corner and the number
of shares in the upper right-hand corner are outlined by
octagonal boxes.
C. The cusip number in the middle right-hand area of the
page is boxed.
D. The Massachusetts corporate seal appears in the bottom
middle of the page.
Page Two
The social security or other identifying number of the
assignee appears in a box in the top-third upper-left area of
the page.
Exhibit 5 (ii) under Form N-1A
Exhibit 10 under Item 601/ Reg. S-K
EXHIBIT B
to the
Investment Advisory Contract
Intermediate Income Fund
For all 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 hereunder, 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 Vice President
Attest: Federated Income Securities Trust
/s/ Victor R. Siclari By: /s/ J. Christopher Donahue
Assistant Secretary Vice President
Exhibit 9 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AGREEMENT
for
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
and
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of the 1st day of December, 1993, by and between
those investment companies listed on Exhibit 1 as may be amended from
time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Trust"), on
behalf of the portfolios (individually referred to herein as a "Fund" and
collectively as ("Funds") of the Trust, and FEDERATED SERVICES COMPANY, a
Delaware business trust, having its principal office and place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-
3779 (the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended
(the "1940 Act"), with authorized and issued shares of capital stock or
beneficial interest ("Shares"); and
WHEREAS, the Trust wishes to retain the Company to provide certain
pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes"), and the
Company is willing to furnish such services; and
WHEREAS, the Trust desires to appoint the Company as its transfer
agent, dividend disbursing agent, and agent in connection with certain
other activities, and the Company desires to accept such appointment; and
WHEREAS, the Trust desires to appoint the Company as its agent to
select, negotiate and subcontract for custodian services from an approved
list of qualified banks and the Company desires to accept such
appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or
another agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for
those investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
SECTION ONE: Fund Accounting.
Article 1. Appointment.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and
on the terms set forth in this Agreement. The Company accepts such
appointment and agrees to furnish the services herein set forth in return
for the compensation as provided in Article 3 of this Section.
Article 2. The Company and Duties.
Subject to the supervision and control of the Trust's Board of
Trustees or Directors ("Board"), the Company will assist the Trust with
regard to fund accounting for the Trust, and/or the Funds, and/or the
Classes, and in connection therewith undertakes to perform the following
specific services;
A. Value the assets of the Funds and determine the net asset value per
share of each Fund and/or Class, at the time and in the manner from
time to time determined by the Board and as set forth in the
Prospectus and Statement of Additional Information ("Prospectus")
of each Fund;
B. Calculate the net income of each of the Funds, if any;
C. Calculate capital gains or losses of each of the Funds resulting
from sale or disposition of assets, if any;
D. Maintain the general ledger and other accounts, books and financial
records of the Trust, including for each Fund, and/or Class, as
required under Section 31(a) of the 1940 Act and the Rules
thereunder in connection with the services provided by the Company;
E. Preserve for the periods prescribed by Rule 31a-2 under the 1940
Act the records to be maintained by Rule 31a-1 under the 1940 Act
in connection with the services provided by the Company. The
Company further agrees that all such records it maintains for the
Trust are the property of the Trust and further agrees to surrender
promptly to the Trust such records upon the Trust's request;
F. At the request of the Trust, prepare various reports or other
financial documents required by federal, state and other applicable
laws and regulations; and
G. Such other similar services as may be reasonably requested by the
Trust.
Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for its services rendered
pursuant to Section One of this Agreement in accordance with the
fees set forth on Fee Schedules A ("A1, A2, A3 etc..."), annexed
hereto and incorporated herein, as may be added or amended from
time to time. Such fees do not include out-of-pocket disbursements
of the Company for which the Funds shall reimburse the Company upon
receipt of a separate invoice. Out-of-pocket disbursements shall
include, but shall not be limited to, the items specified in
Schedules B ("B1, B2, B3, etc..."), annexed hereto and incorporated
herein, as may be added or amended from time to time. Schedules B
may be modified by the Company upon not less than thirty days'
prior written notice to the Trust.
B. The Fund and/or the Class, and not the Company, shall bear the cost
of: custodial expenses; membership dues in the Investment Company
Institute or any similar organization; transfer agency expenses;
investment advisory expenses; costs of printing and mailing stock
certificates, Prospectuses, reports and notices; administrative
expenses; interest on borrowed money; brokerage commissions; taxes
and fees payable to federal, state and other governmental agencies;
fees of Trustees or Directors of the Trust; independent auditors
expenses; Federated Administrative Services and/or Federated
Administrative Services, Inc. legal and audit department expenses
billed to Federated Services Company for work performed related to
the Trust, the Funds, or the Classes; law firm expenses; or other
expenses not specified in this Article 3 which may be properly
payable by the Funds and/or classes.
C. The Company will send an invoice to each of the Funds as soon as
practicable after the end of each month. Each invoice will provide
detailed information about the compensation and out-of-pocket
expenses in accordance with Schedules A and Schedules B. The Funds
and or the Classes will pay to the Company the amount of such
invoice within 30 days of receipt of the invoices.
D. Any compensation agreed to hereunder may be adjusted from time to
time by attaching to Schedules A revised Schedules dated and signed
by a duly authorized officer of the Trust and/or the Funds and a
duly authorized officer of the Company.
E. The fee for the period from the effective date of this Agreement
with respect to a Fund or a Class to the end of the initial month
shall be prorated according to the proportion that such period
bears to the full month period. Upon any termination of this
Agreement before the end of any month, the fee for such period
shall be prorated according to the proportion which such period
bears to the full month period. For purposes of determining fees
payable to the Company, the value of the Fund's net assets shall be
computed at the time and in the manner specified in the Fund's
Prospectus.
F. The Company, in its sole discretion, may from time to time
subcontract to, employ or associate with itself such person or
persons as the Company may believe to be particularly suited to
assist it in performing services under this Section One. Such
person or persons may be third-party service providers, or they may
be officers and employees who are employed by both the Company and
the Funds. The compensation of such person or persons shall be
paid by the Company and no obligation shall be incurred on behalf
of the Trust, the Funds, or the Classes in such respect.
SECTION TWO: Shareholder Recordkeeping.
Article 4. Terms of Appointment.
Subject to the terms and conditions set forth in this Agreement, the
Trust hereby appoints the Company to act as, and the Company agrees to
act as, transfer agent and dividend disbursing agent for each Fund's
Shares, and agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of any Fund
("Shareholder(s)"), including without limitation any periodic investment
plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a
writing signed or initialed by one or more person or persons as the Board
shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved. Oral
instructions will be deemed to be Proper Instructions if (a) the Company
reasonably believes them to have been given by a person previously
authorized in Proper Instructions to give such instructions with respect
to the transaction involved, and (b) the Trust, or the Fund, and the
Company promptly cause such oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Trust, or the
Fund, and the Company are satisfied that such procedures afford adequate
safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
Article 5. Duties of the Company.
The Company shall perform the following services in accordance with
Proper Instructions as may be provided from time to time by the Trust as
to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase
of shares and promptly deliver payment and appropriate
documentation therefore to the custodian of the relevant Fund,
(the "Custodian"). The Company shall notify the Fund and the
Custodian on a daily basis of the total amount of orders and
payments so delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and
hold such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent,
shall countersign and mail by first class mail, a certificate
to the Shareholder at its address as set forth on the transfer
books of the Funds, and/or Classes, subject to any Proper
Instructions regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any
reason, the Company shall debit the Share account of the
Shareholder by the number of Shares that had been credited to
its account upon receipt of the check or other order, promptly
mail a debit advice to the Shareholder, and notify the Fund
and/or Class of its action. In the event that the amount paid
for such Shares exceeds proceeds of the redemption of such
Shares plus the amount of any dividends paid with respect to
such Shares, the Fund and/the Class or its distributor will
reimburse the Company on the amount of such excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as
Dividend Disbursing Agent for the Funds in accordance with the
provisions of its governing document and the then-current
Prospectus of the Fund. The Company shall prepare and mail or
credit income, capital gain, or any other payments to
Shareholders. As the Dividend Disbursing Agent, the Company
shall, on or before the payment date of any such distribution,
notify the Custodian of the estimated amount required to pay
any portion of said distribution which is payable in cash and
request the Custodian to make available sufficient funds for
the cash amount to be paid out. The Company shall reconcile
the amounts so requested and the amounts actually received
with the Custodian on a daily basis. If a Shareholder is
entitled to receive additional Shares by virtue of any such
distribution or dividend, appropriate credits shall be made to
the Shareholder's account, for certificated Funds and/or
Classes, delivered where requested; and
(2) The Company shall maintain records of account for each Fund
and Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set
forth in Proper Instructions, deliver the appropriate
instructions therefor to the Custodian. The Company shall
notify the Funds on a daily basis of the total amount of
redemption requests processed and monies paid to the Company
by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds
from the Custodian with respect to any redemption, the Company
shall pay or cause to be paid the redemption proceeds in the
manner instructed by the redeeming Shareholders, pursuant to
procedures described in the then-current Prospectus of the
Fund.
(3) If any certificate returned for redemption or other request
for redemption does not comply with the procedures for
redemption approved by the Fund, the Company shall promptly
notify the Shareholder of such fact, together with the reason
therefor, and shall effect such redemption at the price
applicable to the date and time of receipt of documents
complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual
basis and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the
total number of Shares of the Fund and/or Class which are
authorized, based upon data provided to it by the Fund, and
issued and outstanding. The Company shall also provide the
Fund on a regular basis or upon reasonable request with the
total number of Shares which are authorized and issued and
outstanding, but shall have no obligation when recording the
issuance of Shares, except as otherwise set forth herein, to
monitor the issuance of such Shares or to take cognizance of
any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Trust or the Fund to include a record for each Shareholder's
account of the following:
(a) Name, address and tax identification number (and whether
such number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application,
dividend address and correspondence relating to the
current maintenance of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Company to
perform the calculations contemplated or required by this
Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such
record retention shall be at the expense of the Company, and
such records may be inspected by the Fund at reasonable times.
The Company may, at its option at any time, and shall
forthwith upon the Fund's demand, turn over to the Fund and
cease to retain in the Company's files, records and documents
created and maintained by the Company pursuant to this
Agreement, which are no longer needed by the Company in
performance of its services or for its protection. If not so
turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of
creation, during the first two of which such documents will be
in readily accessible form. At the end of the six year
period, such records and documents will either be turned over
to the Fund or destroyed in accordance with Proper
Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the
following information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the
Fund to the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption fees,
or other transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with
the Internal Revenue Service and appropriate state agencies,
and, if required, mail to Shareholders, such notices for
reporting dividends and distributions paid as are required to
be so filed and mailed and shall withhold such sums as are
required to be withheld under applicable federal and state
income tax laws, rules and regulations.
(3) In addition to and not in lieu of the services set forth
above, the Company shall:
(a) Perform all of the customary services of a transfer
agent, dividend disbursing agent and, as relevant, agent
in connection with accumulation, open-account or similar
plans (including without limitation any periodic
investment plan or periodic withdrawal program),
including but not limited to: maintaining all
Shareholder accounts, mailing Shareholder reports and
Prospectuses to current Shareholders, withholding taxes
on accounts subject to back-up or other withholding
(including non-resident alien accounts), preparing and
filing reports on U.S. Treasury Department Form 1099 and
other appropriate forms required with respect to
dividends and distributions by federal authorities for
all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and
mailing activity statements for Shareholders, and
providing Shareholder account information; and
(b) provide a system which will enable the Fund to monitor
the total number of Shares of each Fund and/or Class sold
in each state ("blue sky reporting"). The Fund shall by
Proper Instructions (i) identify to the Company those
transactions and assets to be treated as exempt from the
blue sky reporting for each state and (ii) verify the
classification of transactions for each state on the
system prior to activation and thereafter monitor the
daily activity for each state. The responsibility of the
Company for each Fund's and/or Class's state blue sky
registration status is limited solely to the recording of
the initial classification of transactions or accounts
with regard to blue sky compliance and the reporting of
such transactions and accounts to the Fund as provided
above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders
relating to their Share accounts and such other correspondence
as may from time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail
proxy cards and other material supplied to it by the Fund in
connection with Shareholder Meetings of each Fund; receive,
examine and tabulate returned proxies, and certify the vote of
the Shareholders;
(3) The Company shall establish and maintain facilities and
procedures for safekeeping of stock certificates, check forms
and facsimile signature imprinting devices, if any; and for
the preparation or use, and for keeping account of, such
certificates, forms and devices.
Article 6. Duties of the Trust.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes'
Prospectus and for complying with all applicable requirements of
the Securities Act of 1933, as amended (the "1933 Act"), the 1940
Act and any laws, rules and regulations of government authorities
having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of
blank Share certificates and from time to time shall renew such
supply upon request of the Company. Such blank Share certificates
shall be properly signed, manually or by facsimile, if authorized
by the Trust and shall bear the seal of the Trust or facsimile
thereof; and notwithstanding the death, resignation or removal of
any officer of the Trust authorized to sign certificates, the
Company may continue to countersign certificates which bear the
manual or facsimile signature of such officer until otherwise
directed by the Trust.
C. Distributions
The Fund shall promptly inform the Company of the declaration of
any dividend or distribution on account of any Fund's shares.
Article 7. Compensation and Expenses.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an
annual maintenance fee for each Shareholder account as set out in
Schedules C ("C1, C2, C3 etc..."), attached hereto, as may be added
or amended from time to time. Such fees may be changed from time
to time subject to written agreement between the Trust and the
Company. Pursuant to information in the Fund Prospectus or other
information or instructions from the Fund, the Company may sub-
divide any Fund into Classes or other sub-components for
recordkeeping purposes. The Company will charge the Fund the fees
set forth on Schedule C for each such Class or sub-component the
same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust
and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items set out
in Schedules D ("D1, D2, D3 etc..."), attached hereto, as may be
added or amended from time to time. In addition, any other
expenses incurred by the Company at the request or with the consent
of the Trust and/or the Fund, will be reimbursed by the appropriate
Fund.
C. Payment
The Company shall send an invoice with respect to fees and
reimbursable expenses to the Trust or each of the Funds as soon as
practicable at the end of each month. Each invoice will provide
detailed information about the Compensation and out-of-pocket
expenses in accordance with Schedules C and Schedules D. The Trust
or the Funds will pay to the Company the amount of such invoice
within 30 days following the receipt of the invoices.
Article 8. Assignment of Shareholder Recordkeeping.
Except as provided below, no right or obligation under this Section
Two may be assigned by either party without the written consent of
the other party.
(1) This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and
assigns.
(2) The Company may without further consent on the part of the
Trust subcontract for the performance hereof with (A) State
Street Bank and its subsidiary, Boston Financial Data
Services, Inc., a Massachusetts Trust ("BFDS"), which is duly
registered as a transfer agent pursuant to Section 17A(c)(1)
of the Securities Exchange Act of 1934, as amended, or any
succeeding statute ("Section 17A(c)(1)"), or (B) a BFDS
subsidiary duly registered as a transfer agent pursuant to
Section 17A(c)(1), or (C) a BFDS affiliate, or (D) such other
provider of services duly registered as a transfer agent under
Section 17A(c)(1) as Company shall select; provided, however,
that the Company shall be as fully responsible to the Trust
for the acts and omissions of any subcontractor as it is for
its own acts and omissions; or
(3) The Company shall upon instruction from the Trust subcontract
for the performance hereof with an Agent selected by the
Trust, other than BFDS or a provider of services selected by
Company, as described in (2) above; provided, however, that
the Company shall in no way be responsible to the Trust for
the acts and omissions of the Agent.
SECTION THREE: Custody Services Procurement
Article 9. Appointment.
The Trust hereby appoints Company as its agent to evaluate and
obtain custody services from a financial institution that (i) meets
the criteria established in Section 17(f) of the 1940 Act and (ii)
has been approved by the Board as eligible for selection by the
Company as a custodian (the "Eligible Custodian"). The Company
accepts such appointment.
Article 10. The Company and Its Duties.
Subject to the review, supervision and control of the Board, the
Company shall:
(1) evaluate the nature and the quality of the custodial services
provided by the Eligible Custodian;
(2) employ the Eligible Custodian to serve on behalf of the Trust
as Custodian of the Trust's assets substantially on the terms
set forth as the form of agreement in Exhibit 2;
(3) negotiate and enter into agreements with the Custodians for
the benefit of the Trust, with the Trust as a party to each
such agreement. The Company shall not be a party to any
agreement with any such Custodian;
(4) establish procedures to monitor the nature and the quality of
the services provided by the Custodians;
(5) continuously monitor the nature and the quality of services
provided by the Custodians; and
(6) periodically provide to the Trust (i) written reports on the
activities and services of the Custodians; (ii) the nature and
amount of disbursement made on account of the Trust with
respect to each custodial agreement; and (iii) such other
information as the Board shall reasonably request to enable it
to fulfill its duties and obligations under Sections 17(f) and
36(b) of the 1940 Act and other duties and obligations
thereof.
Article 11. Fees and Expenses.
A. Annual Fee
For the performance by the Company pursuant to Section Three of
this Agreement, the Trust and/or the Fund agree to pay the Company
an annual fee as set forth in Schedule E, attached hereto.
B. Payment
The Company shall send an invoice with respect to fees and
reimbursable expenses to each of the Trust/or Fund as soon as
practicable at the end of each month. Each invoice will provide
detailed information about the Compensation and out-of-pocket
expenses in occurrence with Schedule E. The Trust and/or Fund will
pay to the Company the amount of such invoice within 30 days
following the receipt of the invoice.
Article 12. Representations.
The Company represents and warrants that it has obtained all
required approvals from all government or regulatory authorities
necessary to enter into this arrangement and to provide the
services contemplated in Section Three of this Agreement.
SECTION FOUR: General Provisions.
Article 13. Documents.
A. In connection with the appointment of the Company under this
Agreement, the Trust shall file with the Company the following
documents:
(1) A copy of the Charter and By-Laws of the Trust and all
amendments thereto;
(2) A copy of the resolution of the Board of the Trust authorizing
this Agreement;
(3) Specimens of all forms of outstanding Share certificates of
the Trust or the Funds in the forms approved by the Board of
the Trust with a certificate of the Secretary of the Trust as
to such approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following
documents:
(1) Each resolution of the Board of the Trust authorizing the
original issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to
the sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document
and the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing
officers to give Proper Instructions to the Custodian and
agents for fund accountant, custody services procurement, and
shareholder recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of
any Fund, accompanied by Board resolutions approving such
forms;
(6) Such other certificates, documents or opinions which the
Company may, in its discretion, deem necessary or appropriate
in the proper performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
Article 14. Representations and Warranties.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State of
Delaware.
(3) It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to
authorize it to enter into and perform its obligations under
this Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(6) It is in compliance with federal securities law requirements
and in good standing as a transfer agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in
good standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws
have been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Trust is an open-end investment company registered under
the 1940 Act; and
(5) A registration statement under the 1933 Act will be effective,
and appropriate state securities law filings have been made
and will continue to be made, with respect to all Shares of
each Fund being offered for sale.
Article 15. Indemnification.
A. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund
shall indemnify and hold the Company, including its officers,
directors, shareholders and their agents employees and affiliates,
harmless against any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or
attributable to:
(1) The acts or omissions of any Custodian,
(2) The Trust's or Fund's refusal or failure to comply with the
terms of this Agreement, or which arise out of the Trust's or
The Fund's lack of good faith, negligence or willful
misconduct or which arise out of the breach of any
representation or warranty of the Trust or Fund hereunder or
otherwise.
(3) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper
form which
(a) are received by the Company or its agents or
subcontractors and furnished to it by or on behalf of the
Fund, its Shareholders or investors regarding the
purchase, redemption or transfer of Shares and
Shareholder account information; or
(b) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the
Trust.
(4) The reliance on, or the carrying out by the Company or its
agents or subcontractors of Proper Instructions of the Trust
or the Fund.
(5) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the
securities laws or regulations of any state that such Shares
be registered in such state or in violation of any stop order
or other determination or ruling by any federal agency or any
state with respect to the offer or sale of such Shares in such
state.
Provided, however, that the Company shall not be protected by
this Article 15.A. from liability for any act or omission
resulting from the Company's willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties.
B. Indemnification by the Company
The Company shall indemnify and hold the Trust or each Fund
harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising
out of or attributable to any action or failure or omission to act
by the Company as a result of the Company's willful misfeasance,
bad faith, gross negligence or reckless disregard of its duties.
C. Reliance
At any time the Company may apply to any officer of the Trust or
Fund for instructions, and may consult with legal counsel with
respect to any matter arising in connection with the services to be
performed by the Company under this Agreement, and the Company and
its agents or subcontractors shall not be liable and shall be
indemnified by the Trust or the appropriate Fund for any action
reasonably taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel provided such
action is not in violation of applicable federal or state laws or
regulations. The Company, its agents and subcontractors shall be
protected and indemnified in recognizing stock certificates which
are reasonably believed to bear the proper manual or facsimile
signatures of the officers of the Trust or the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 shall apply, upon the assertion of a claim for which
either party may be required to indemnify the other, the party
seeking indemnification shall promptly notify the other party of
such assertion, and shall keep the other party advised with respect
to all developments concerning such claim. The party who may be
required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The
party seeking indemnification shall in no case confess any claim or
make any compromise in any case in which the other party may be
required to indemnify it except with the other party's prior
written consent.
Article 16. Termination of Agreement.
This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other. Should the Trust
exercise its rights to terminate, all out-of-pocket expenses
associated with the movement of records and materials will be borne
by the Trust or the appropriate Fund. Additionally, the Company
reserves the right to charge for any other reasonable expenses
associated with such termination. The provisions of Article 15
shall survive the termination of this Agreement.
Article 17. Amendment.
This Agreement may be amended or modified by a written agreement
executed by both parties.
Article 18. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Company and
the Trust may from time to time agree on such provisions
interpretive of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor
of this Agreement. Any such interpretive or additional provisions
shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any
provision of the Charter. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an
amendment of this Agreement.
Article 19. Governing Law.
This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the
Commonwealth of Massachusetts
Article 20. Notices.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or
to the Company at Federated Investors Tower, Pittsburgh,
Pennsylvania, 15222-3779, or to such other address as the Trust or
the Company may hereafter specify, shall be deemed to have been
properly delivered or given hereunder to the respective address.
Article 21. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
Article 22. Limitations of Liability of Trustees and Shareholders of
the Trust.
The execution and delivery of this Agreement have been authorized
by the Trustees of the Trust and signed by an authorized officer of
the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose
any liability on any of them personally, and the obligations of
this Agreement are not binding upon any of the Trustees or
Shareholders of the Trust, but bind only the appropriate property
of the Fund, or Class, as provided in the Declaration of Trust.
Article 23. Limitations of Liability of Trustees and Shareholders of
the Company.
The execution and delivery of this Agreement have been authorized
by the Trustees of the Company and signed by an authorized officer
of the Company, acting as such, and neither such authorization by
such Trustees nor such execution and delivery by such officer shall
be deemed to have been made by any of them individually or to
impose any liability on any of them personally, and the obligations
of this Agreement are not binding upon any of the Trustees or
Shareholders of the Company, but bind only the property of the
Company as provided in the Declaration of Trust.
Article 24. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to the Trust or the Funds by either of the
parties hereto except by the specific written consent of the other
party.
Article 25. Merger of Agreement.
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written.
Article 26. Successor Agent.
If a successor agent for the Trust shall be appointed by the Trust,
the Company shall upon termination of this Agreement deliver to
such successor agent at the office of the Company all properties of
the Trust held by it hereunder. If no such successor agent shall
be appointed, the Company shall at its office upon receipt of
Proper Instructions deliver such properties in accordance with such
instructions.
In the event that no written order designating a successor agent or
Proper Instructions shall have been delivered to the Company on or
before the date when such termination shall become effective, then
the Company shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the 1940 Act, of its own
selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$2,000,000, all properties held by the Company under this
Agreement. Thereafter, such bank or trust company shall be the
successor of the Company under this Agreement.
Article 27. Force Majeure.
The Company shall have no liability for cessation of services
hereunder or any damages resulting therefrom to the Fund as a
result of work stoppage, power or other mechanical failure, natural
disaster, governmental action, communication disruption or other
impossibility of performance.
Article 28. Assignment; Successors.
This Agreement shall not be assigned by either party without the
prior written consent of the other party, except that either party
may assign to a successor all of or a substantial portion of its
business, or to a party controlling, controlled by, or under common
control with such party. Nothing in this Article 28 shall prevent
the Company from delegating its responsibilities to another entity
to the extent provided herein.
Article 29. Severability.
In the event any provision of this Agreement is held illegal, void
or unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and
through their duly authorized officers, as of the day and year first
above written.
ATTEST: INVESTMENT COMPANIES (listed on Exhibit 1)
/s/ John W. McGonigle_______ By:__/s/ John F. Donahue___
John W. McGonigle John F. Donahue
Secretary Chairman
ATTEST: FEDERATED SERVICES COMPANY
/s/ Jeannette Fisher-Garber By:_/s/ James J. Dolan_____
Jeannette Fisher-Garber James J. Dolan
Secretary President
EXHIBIT 1
CONTRACT
DATE INVESTMENT COMPANY
12/1/93 Federated Income Securities Trust
12/1/93 Federated Short-Term Income Fund
12/1/93 Institutional Service Shares
2/1/93 Institutional Shares
12/1/93 Intermediate Income Fund
12/1/93 Institutional Service Shares
12/1/93 Institutional Shares
<TABLE>
Exhibit 16 (ii) under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
<S> <C> <C> <C> <C> <C>
Computation of SEC Yield Yield = 2{( $80,310.15 - $0.00 )+1)^6-1}=
As of: April 29, 1994 1,679,092 * $9.53 - 0.00000 )
SEC Yield = 6.10%
Dividend and/or Interest
Inc for the 30 days ended $80,310.15
Net Expenses for $0.00
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 1,679,092
Maxium offering price
per share as of 4-30-94 $9.53
Undistributed net income 0.00000
</TABLE>
<TABLE>
Exhibit 16 (ii) under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
<C> <S> <S> <S> <S> <S> <S> <S> <S>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
Federated Intermediate Income Price/
Fund Share= 10.00
Return Since Inception
ending 04/29/94 NAV= 9.53
FYE: April 30
Begin Capital Reinvest Ending Total
DECLARED: DAILY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
12/31/93 100.000 0.021759123 0.00000 $10.00 100.218 $10.00 $1,002.18
1/31/94 100.218 0.054296045 0.00000 $10.09 100.757 $10.09 $1,016.64
2/28/94 100.757 0.050397990 0.00000 $9.87 101.271 $9.87 $ 999.95
3/31/94 101.271 0.051750514 0.00000 $9.63 101.816 $9.63 $ 980.48
4/30/94 101.816 0.047914449 0.00000 $9.53 102.327 $9.53 $ 975.64
$1,000 (1+T) = End Value
T = -2.48%
</TABLE>
<TABLE>
Exhibit 16 (ii) under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
<S> <S> <S> <S> <S>
Computation of SEC Yield Yield = 2{( $1,213.79 - $49.86 )+1)^6-1}=
As of: April 29, 1994 25,374 * $9.53 - 0.00000 )
SEC Yield = 5.85%
Dividend and/or Interest
Inc for the 30 days ended $1,213.79
Net Expenses for $49.86
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 25,374
Maxium offering price
per share as of 4-30-94 $9.53
Undistributed net income 0.00000
</TABLE>
<TABLE>
Exhibit 16 (ii) under Form N-1A
Exhibit 99 under Item 601 / Reg. S-K
<S> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
Federated Intermediate Income Price/
Fund Share= $10.00
Return Since Inception
ending 04/29/94 NAV= $9.53
FYE: April 30
DECLARED: DAILY Begin Capital Reinvest Ending Total
PAID: MONTHLY Reinvest Period Dividend Gain Price Period Ending Invest
Dates Shares /Share /Share /Share Shares Price Value
12/31/93 100.000 0.020951393 0.00000 $10.00 100.210 $10.00 $1,002.10
1/31/94 100.210 0.052201014 0.00000 $10.09 100.728 $10.09 $1,016.35
2/28/94 100.728 0.048322618 0.00000 $9.87 101.221 $9.87 $999.05
3/31/94 101.221 0.049719937 0.00000 $9.63 101.744 $9.63 $979.79
4/30/94 101.744 0.045930646 0.00000 $9.53 102.234 $9.53 $974.29
$1,000 (1+T) = End Value
T = -2.57%
</TABLE>
