1933 Act File No. 333164
1940 Act File No. 811-4577
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 22 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 18 X
FEDERATED INCOME SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on _________________ pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
filed the Notice required by that Rule on _________________; or
X intends to file the Notice required by that Rule on or about
June 15, 1995; 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:
Charles H. Morin, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED INCOME
SECURITIES TRUST, which 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 three classes of shares, (a) Institutional Shares; (b)
Institutional Service Shares; and (c) Schwab Shares, relates only to
Schwab Shares of Intermediate Income Fund* and is comprised of the
following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page (1a,1b,2a,2b,2c) Cover Page.
Item 2. Synopsis (1a,1b,2a,2b,2c) Summary of
(Institutional, Institutional
Service or Schwab Shares) Expenses.
Item 3. Condensed Financial
Information (1a,1b,2a,2b) Financial Highlights
Item 4. General Description of
Registrant (1a,1b,2a,2b,2c) General
Information; Investment Information;
Investment Objective; Investment
Policies; Interest Rate Swaps;
Restricted Securities; Temporary
Investments; Lending of Portfolio
Securities; When-Issued and Delayed
Delivery Transactions; Portfolio
Turnover; Investment Limitations;
Other Classes of Shares; Performance
Information.
Item 5. Management of the Fund (1a,1b,2a,2b,2c) Trust Information;
Management of the Trust;
Distribution of Shares; (1b,2b,2c)
Distribution and Shareholder
Services Plans;(1a,2a, 2c)
Shareholder Services Plan;
(1a,1b,2a,2b,2c) Administration of
the Fund; Expenses of the Fund and
(Institutional, Schwab or
Institutional Service) Shares.
Item 6. Capital Stock and Other
Securities (1a,1b,2a,2b,2c) Dividends; Capital
Gains; Shareholder Information;
Voting Rights; Massachusetts
Partnership Law; Tax Information;
Federal Income Tax; Pennsylvania
Corporate and Personal Property
Taxes.
*Information for all classes of all Funds of the Trust has been included
in the Cross-Reference Sheet to facilitate the review process.
Item 7. Purchase of Securities Being
Offered
(1a,1b,2a,2b,2c) Net Asset Value;
Investing in (Institutional, Schwab
or Institutional Service) Shares;
Share Purchases; Minimum Investment
Required; What Shares Cost;
Subaccounting Services; Certificates
and Confirmations; Exchange
Privilege; (2c) Tax-Advantaged
Retirement Plans; Methods of
Exchanging Shares.
Item 8. Redemption or Repurchase (1a,1b,2a,2b,2c) Redeeming
(Institutional, Schwab or
Institutional Service) Shares;
(1a,1b,2a,2b) Telephone Redemption;
Written Requests; Accounts With Low
Balances; Redemption in Kind; (2c)
Redeeming Shares; Methods of
Redeeming Shares; Schwab Automatic
Investment Plan; Other Important
Information.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page (1a,1b,2a,2b,2c) Cover Page.
Item 11. Table of Contents (1a,1b,2a,2b,2c) Table of Contents.
Item 12. General Information and
History (1a,1b,2a,2b,2c) General Information
About the Fund.
Item 13. Investment Objectives and
Policies (1a,1b,2a,2b,2c) Investment
Objective and Policies.
Item 14. Management of the Fund (1a,1b,2a,2b,2c) Trust Management;
(2c) Trustees' Compensation
Item 15. Control Persons and Principal
Holders of Securities (1a,1b,2a,2b,2c) Fund Ownership.
Item 16. Investment Advisory and Other
Services (1b,2b) Distribution and Shareholder
Services Plans; (2c) Shareholder
Services Plan; (1a,1b,2a,2b,2c)
Investment Advisory Services;
Administrative Services.
Item 17. Brokerage Allocation (1a,1b,2a,2b,2c) Brokerage
Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered (1a,1b,2a,2b,2c) Purchasing
(Institutional, Schwab or
Institutional Service) Shares;
Determining Net Asset Value;
Redeeming (Institutional, Schwab or
Institutional Service) Shares;
(1a,1b,2a,2b,2c) Redemption in Kind.
Item 20. Tax Status (1a,1b,2a,2b,2c) Tax Status.
Item 21. Underwriters (1a,1b,2a,2b,2c) Not applicable.
Item 22. Calculation of Performance
Data (1a,1b,2a,2b,2c) Total Return;
Yield; Performance Comparisons.
Item 23. Financial Statements (1a,1b,2a,2b,2c) to be filed by
Amendment.
INTERMEDIATE INCOME FUND
SCHWAB SHARES
PROSPECTUS
The Schwab Shares of Intermediate Income Fund (the "Fund") offered by this
prospectus represent interests in a no load, diversified portfolio of
securities.
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 Schwab Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Schwab Shares
dated June 30, 1995, 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 contacting Charles Schwab & Co., Inc.
at 1-800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San Francisco, CA
94104. 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Acceptable Investments 2
U.S. Government Obligations 3
Corporate Debt Obligations 3
Floating Rate Corporate Debt Obligations 4
Fixed Rate Corporate Debt Obligations 4
Variable Rate Demand Notes 5
Credit Facilities 5
Asset-Backed Securities 5
Mortgage-Related Asset-Backed Securities 6
Adjustable Rate Mortgage
Securities ("ARMS") 6
Collateralized Mortgage Obligations ("CMOs") 7
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 Securities 9
Interest Rate Swaps, Caps and Floors 10
Credit Enhancement 11
Demand Features 11
Repurchase Agreements 12
Restricted and Illiquid Securities 12
Lending of Portfolio Securities 12
When-Issued and Delayed Delivery
Transactions 13
Special Considerations 13
Weighted Average Portfolio Duration 13
Investment Limitations 14
TRUST INFORMATION 14
- ------------------------------------------------------
Management of the Trust 14
Board of Trustees 14
Investment Adviser 14
Advisory Fees 15
Adviser's Background 15
Other Payments to Financial Institutions 15
Distribution of Schwab Shares 16
Shareholder Services Plan 16
Administration of the Fund 16
Administrative Services 16
Custodian 17
Transfer Agent and Dividend
Disbursing Agent 17
Independent Auditors 17
Expenses of the Fund and Schwab Shares 17
NET ASSET VALUE 17
- ------------------------------------------------------
INVESTING IN SCHWAB SHARES 18
- ------------------------------------------------------
Share Purchases 18
Purchasing Shares Through a Schwab
Account 18
When and at What Price Shares Will be
Purchased 18
Methods of Purchasing Shares 19
By Phone 19
By Mail 19
In Person at a Schwab Office 19
Automatic Investment 19
Other Purchase Information 20
Tax-Advantaged Retirement Plans 20
Minimum Investment Required 20
What Shares Cost 20
Subaccounting Services 21
Exchange Privilege 21
Methods of Exchanging Shares 21
By Phone 21
By Mail 22
In Person at a Schwab Office 22
Confirmations 22
Dividends 22
Capital Gains 23
REDEEMING SCHWAB SHARES 23
- ------------------------------------------------------
Payment of Redemption Proceeds 23
Methods of Redeeming Shares 23
By Phone 23
By Mail 24
In Person at a Schwab Office 24
Schwab Automatic Investment Plan 24
Investment Minimums 24
Investment Methods 24
Voting Funds in a Schwab Account 24
Using the Schwab MoneyLink 3/4 Transfer
Service 24
Investment Frequency 25
Changing Instructions to an Already
Established Plan 25
Terminating Your Automatic Investment Plan 25
Terminating Authorized Transfer and
Direct Deposit 25
Other Important Information 26
Minimum Balance and Account Requirements 26
Consolidated Mailings 26
Wire Transfers to Your Bank 26
SHAREHOLDER INFORMATION 26
- ------------------------------------------------------
Voting Rights 26
Massachusetts Partnership Law 27
TAX INFORMATION 27
- ------------------------------------------------------
Federal Income Tax 27
Pennsylvania Corporate and Personal
Property Taxes 28
PERFORMANCE INFORMATION 28
- ------------------------------------------------------
OTHER CLASSES OF SHARES 28
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--
SCHWAB SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <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 SCHWAB SHARES OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)......................................................................... %
12b-1 Fee................................................................................................. None
Total Other Expenses (after expense reimbursement)........................................................ %
Shareholder Services Fee......................................................................... %
Total Schwab Shares Operating Expenses (2)....................................................... %
</TABLE>
- ---------
(1) The estimated management fee has been reduced to reflect the anticipated
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 Total Schwab Shares Operating Expenses are estimated to be % absent
the anticipated voluntary waiver of the management fee and the voluntary
reimbursement of certain other operating expenses.
* The Annual Schwab Shares Operating Expenses in the table above are estimated
based on expenses expected to be incurred during the fiscal year ending April
30, 1996. During the course of this period, expenses may be more or less than
the amounts shown. Schwab imposes no fees for opening and maintaining a Schwab
standard brokerage account. Schwab imposes no fees for opening and maintaining
a Schwab One 3/4 account with a minimum of $5,000 account equity. Schwab One
accounts of less than $5,000 account equity are subject to a fee of $5 per
month if there have been fewer than two commissionable trades within the last
twelve months.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Schwab Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Schwab 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
<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.................................................. $-- $--
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING APRIL 30, 1996.
The information set forth in the foregoing table and example relates only to
Schwab Shares of the Fund. The Fund also offers two other classes of shares
called Institutional Shares and Institutional Service Shares. Schwab Shares,
Institutional Service Shares and Institutional 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."
GENERAL INFORMATION
- --------------------------------------------------------------------------------
This prospectus relates only to Schwab Shares ("Shares") of the Fund. Schwab
Shares are designed primarily for customers of Charles Schwab & Co., Inc.
("Schwab") as a convenient means of accumulating an interest in a professionally
managed, diversified portfolio of U.S. government, corporate and asset-backed
securities. A minimum initial investment of $1,000 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
Ratings Group ("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
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 ("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:
Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives;
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.
Like 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 re-registered 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 recordkeeping 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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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. The seller's failure to complete these transactions 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. The Fund may dispose of a commitment prior to settlement
if the adviser deems it appropriate to do so. In addition, the Fund may enter
into transactions to sell its purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
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.
TRUST INFORMATION
- --------------------------------------------------------------------------------
The Fund is an investment portfolio in Federated Income Securities Trust (the
"Trust"), an open-end management investment company (a mutual fund). 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 Trustees have established three classes of shares
of the Fund: Schwab Shares, Institutional Service Shares and Institutional
Shares.
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 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 (including Schwab) under the Shareholder Services Plan,
certain financial institutions (including Schwab) 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 (including Schwab) 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 or Schwab sells or may sell, and/or upon the
type and nature of sales or marketing support furnished by the financial
institution or Schwab. Any payments made by the distributor may be reimbursed by
the Fund's investment adviser or its affiliates.
DISTRIBUTION OF SCHWAB 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.
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 use Schwab to perform shareholder services. Schwab will receive fees
based upon Shares owned by its 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.
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.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUND AND SCHWAB 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 Shareholder Services 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
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The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Schwab Shares and Institutional 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 SCHWAB SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open.
You may place purchase orders as well as request exchanges at any one of over
200 Schwab offices nationwide or by calling 1-800-2 NO-LOAD, 24 hours a day,
where trained representatives are available to answer questions about the Fund
and your account. The privilege to initiate transactions by telephone, as
discussed below, is automatically available through your Schwab account. Schwab,
on behalf of the Fund, will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If these procedures are not
followed, the Fund may be liable for any losses due to unauthorized or
fraudulent instructions. These procedures may include requiring a form of
personal identification prior to acting upon instructions received by telephone,
providing written confirmation of such instructions and tape recording telephone
transactions.
PURCHASING SHARES THROUGH A SCHWAB ACCOUNT. _You may purchase Shares exclusively
through an account maintained with Schwab, and payment for Shares must be made
directly to Schwab. The Securities Investor Protection Corporation ("SIPC") will
provide account protection, in an amount up to $500,000, for securities,
including Shares (up to $100,000 protection for cash), purchased through a
Schwab account. Of course, SIPC account protection does not protect shareholders
from share price fluctuations.
If you already have a Schwab account, you may purchase Shares as described below
and need not open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab Account Application (available by calling 1-800-2
NO-LOAD, 24 hours a day, or by contacting your local Schwab office) and mail or
deliver it to your local Schwab office. You may also mail the application to
Schwab at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should contact their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your existing Schwab account, please contact your local
Schwab office for instructions.
WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. _You must have funds available
in your Schwab account in order to purchase Shares. If funds (including those
transmitted by wire) are received by Schwab before the time the Fund's daily net
asset value is calculated (normally
4:00 p.m. Eastern time), they will be available for investment on the day of
receipt. If funds arrive after that time, they will be available for investment
the next business day when net asset value is determined (a "Business Day").
Orders to purchase shares will be executed at the next determined net asset
value after receipt by the Fund's transfer agent. Orders received after that
time will be executed at the next determined net asset value, generally the next
Business Day. (See "What Shares Cost.") Schwab is responsible for promptly
transmitting orders to the Fund's transfer agent.
METHODS OF PURCHASING SHARES. _Schwab offers you several convenient ways to
purchase Shares. You may choose the one that works best for you and Schwab will
confirm execution of your purchase order.
BY PHONE. You may use existing funds in your Schwab account to make
initial and subsequent Share purchases. To place your order, call your
local Schwab office during regular business hours or 1-800-2 NO-LOAD, 24
hours a day.
BY MAIL. You may direct that funds already in your Schwab account be used
to make initial and subsequent Share purchases. Alternatively, your
purchase instructions may be accompanied by a check made out to Charles
Schwab & Co., Inc. which will be deposited into your Schwab account and
used, as necessary, to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to your
local Schwab office or to Schwab at 101 Montgomery Street, San Francisco,
CA 94104, and should contain the following information:
your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
the name of the Fund and share class (Intermediate Income
Fund--Schwab Shares), and the dollar amount of Shares you would
like purchased; and
(initial Share purchases only) select one of the distribution
options listed below.
IN PERSON AT A SCHWAB OFFICE. _Visit your local Schwab office where a
representative will be happy to assist you.
AUTOMATIC INVESTMENT. Once you have satisfied the initial investment
requirements, you may authorize Schwab to automatically purchase Shares at
intervals and in amounts pre-selected by you on your behalf. (See "Schwab
Automatic Investment Plan.")
You may select from the three distribution options listed below when you
first become a shareholder. If you already are a shareholder and wish to
change your distribution option, please call your local Schwab office for
assistance.
1. AUTOMATIC REINVESTMENT. Both income dividends and any capital gains
distributions will be reinvested in additional Shares. This option
will be selected automatically unless you specify another option.
2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS. Income dividends will be
paid in cash and any capital gain distributions will be reinvested in
additional Shares.
3. ALL CASH. Dividends and any capital gain distributions will both be
paid in cash.
Dividends and distributions subject to reinvestment will be invested at the
net asset value next determined after their record date. Cash distributions
will be credited to your Schwab account and will be held there or mailed to
you depending on the standing instructions applicable to your account. For
information on how to wire funds from a Schwab account to a bank, see
"Other Important Information--Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. The Fund reserves the right in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase Shares are subject
to acceptance by the Fund and are not binding until confirmed or accepted in
writing. Any purchase which would result in a single shareholder owning Shares
with a value of more than 10% of the Fund's assets or $3 million, whichever is
greater, are subject to prior approval by the Fund. Schwab will charge a $15
service fee against an investor's Schwab account if his or her investment check
is returned because of insufficient or uncollected funds or a stop payment
order.
TAX-ADVANTAGED RETIREMENT PLANS
Schwab offers tax-advantaged retirement plans for which Shares may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab provides the Schwab IRA free of Schwab's $29 annual account fee (for
life) on accounts with assets of $10,000 or more by September 15, 1995.
SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permits the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh Plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT ACCOUNT. A well designed retirement program can
help a company attract and retain valuable employees. Call your local Schwab
office or 1-800-2 NO-LOAD, for more information.
MINIMUM INVESTMENT REQUIRED
Your initial investment in Shares may be as low as $1,000 ($500 for custodial
accounts, Individual Retirement Accounts and certain other retirement plans).
The minimum subsequent investment is $100. These requirements may be reduced or
waived on certain occasions.
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.
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.
SUBACCOUNTING SERVICES
Institutions (such as Schwab) 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
The exchange privilege allows you to exchange your investment in Shares for
shares of the following funds sponsored by Schwab as well as any mutual funds
created by Schwab subsequent to the date of this prospectus (collectively
"SchwabFunds 3/4") and available in your state: Schwab 1000 Fund 3/4; Schwab
International Index Fund 2/5; Schwab Small-Cap Index Fund 2/5; Schwab Short/
Intermediate Government Bond Fund; Schwab Long-Term Government Bond Fund; Schwab
Short/ Intermediate Tax-Free Bond Fund; Schwab Long-Term Tax-Free Bond Fund;
Schwab California Short/Intermediate Tax-Free Bond Fund; Schwab California
Long-Term Tax-Free Bond Fund; Schwab Money Market Fund; Schwab Government Money
Fund; Schwab U.S. Treasury Money Fund; Schwab Value Advantage Money Fund 2/5;
Schwab Tax-Exempt Money Fund; Schwab California Tax-Exempt Money Fund; Schwab
Retirement Money Fund 2/5; Schwab Institutional Advantage Money Fund 2/5; and
Schwab New York Tax-Exempt Money Fund. Thus, you can conveniently modify your
investments if your goals or market conditions change. Any exchange will involve
the redemption of Shares and the purchase of shares in another fund on the basis
of the next calculated net asset value per share of each fund after the exchange
order is received. An exchange will be a taxable event for federal income tax
purposes. Note that when exchanging into another fund you must, as applicable,
meet that fund's minimum initial or subsequent investment requirement. Prior to
any exchange, the shareholder must receive a copy of the current prospects of
the fund into which an exchange is to be effected. Each fund reserves the right
on 60 days' written notice to modify, terminate or limit the exchange privilege.
More than four exchanges-out per calendar year may be considered excessive use
of the exchange privilege.
METHODS OF EXCHANGING SHARES
BY PHONE. To exchange among the Fund and any of the SchwabFunds 3/4 by
telephone, please call your local Schwab office during its regular business
hours or 1-800-2 NO-LOAD, 24 hours a day. Investors should be aware that
telephone exchanges may be difficult to implement during periods of drastic
economic or market changes. Shareholders who experience difficulties in
exchanging shares by telephone can mail their exchange requests or make them in
person as set forth below.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If these procedures are not followed, the
Fund may be liable for any losses due to unauthorized or fraudulent
instructions. These procedures may include requiring a form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such instructions and tape recording telephone
transactions.
To properly process your telephone exchange request, we will need the following
information:
your Schwab account number and your name for verification;
the name of the fund and class of shares (if applicable) from which you
wish to exchange shares;
the number of shares or dollar amount to be exchanged;
the name of the fund and class of shares (if applicable) into which
shares are to be exchanged; and
the distribution option you select.
BY MAIL. You may also request an exchange by writing your local Schwab office,
or writing to Schwab at 101 Montgomery Street, San Francisco, CA 94104.
To properly process your mailed exchange request, we will need a letter from you
which:
references your Schwab account number;
specifies the name of the fund and class of shares (if applicable) from
which you wish to exchange shares;
describes the number of shares or dollar amount to be exchanged;
indicates the name of the fund and class of shares (if applicable) into
which shares are to be exchanged;
indicates the distribution option you select; and
is signed by at least one of the registered Schwab account holders in
the exact form specified in the account.
IN PERSON AT A SCHWAB OFFICE. You can also request an exchange in person at
your local Schwab office.
CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued for Schwab
Shares.
The Fund's transfer agent periodically provides Schwab, as the holder of record,
with a detailed statement of the Fund that includes account balances,
information on each purchase or redemption, and a report of dividends paid
during the month. In turn, Schwab will compile this information and generate
account statements to be delivered periodically to the investors in Schwab
Shares as required by the relevant account agreement between the investor and
Schwab.
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 the Fund's transfer agent. Schwab is
responsible for promptly transmitting orders to the Fund's transfer agent. 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.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING SCHWAB SHARES
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Shares will be redeemed at the net asset value per share next determined after
receipt by the transfer agent of proper redemption instructions, as set forth
below. Schwab is responsible for promptly transmitting orders to the Fund's
transfer agent.
PAYMENT OF REDEMPTION PROCEEDS
Payment for redeemed Shares will be credited directly to your Schwab account no
later than 7 days after the Fund's transfer agent receives your redemption
instructions in proper form provided that the transfer agent has received
payment for the Shares redeemed. Schwab is responsible for promptly transmitting
redemption orders to the Fund's transfer agent. Redemption proceeds will then be
held there or mailed to you depending on the account standing instructions you
selected. For information on how to wire funds from your Schwab account to your
bank, see "Other Important Information--Wire Transfers to Your Bank."
If you purchased Shares by check, your redemption proceeds may be held in your
Schwab account until your check clears (which may take up to 15 Business Days
from the purchase date). Depending on the type of Schwab account you have, your
money may earn interest during any holding period.
METHODS OF REDEEMING SHARES
BY PHONE. You may redeem your Shares by telephone by calling your local Schwab
office during its regular business hours or 1-800-2 NO-LOAD, 24 hours a day.
Investors should be aware that telephone redemption may be difficult to
implement during periods of drastic economic or market changes. Shareholders who
experience difficulties in redeeming by telephone can mail their redemption
orders or place them in person as set forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's's identity and
account ownership by the Fund's transfer agent, will be deemed to have been
received by the Fund's transfer agent on that day. Schwab is responsible for
promptly transmitting orders to the Fund's transfer agent.
Schwab, on behalf of the Fund, will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If these procedures are not
followed, the Fund may be liable for any losses due to unauthorized or
fraudulent instructions. These procedures may include requiring a form of
personal identification prior to acting upon instructions received by telephone,
providing written confirmation of such instructions and tape recording telephone
transactions.
BY MAIL. Redemption orders can also be delivered through the mail. Mailed
redemption orders should be addressed to your local Schwab office or to Schwab
at 101 Montgomery Street, San Francisco, CA 94104. Once a redemption request is
mailed it is irrevocable and may not be modified or canceled.
To properly process your redemption order we will need a letter from you which
contains the following information:
your Schwab account number;
the name of the Fund and Class (Intermediate Income Fund--Schwab Shares)
from which you wish to redeem;
the number or dollar amount of Shares to be redeemed; and
a signature of one or more of the registered Schwab account holders (in
the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE. You can also place your redemption order in
person at your local Schwab office.
SCHWAB AUTOMATIC INVESTMENT PLAN
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in the Fund as well as non-money market SchwabFunds 3/4
(and certain other funds available through Schwab) automatically and
conveniently. AIP can be used as a dollar cost averaging program that saves you
time and expense associated with writing checks or wiring funds.
INVESTMENT MINIMUMS. You can make automatic investments in any amount, from
$100 to $50,000, once you meet a fund's investment minimum.
INVESTMENT METHODS. Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a) USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by
using the uninvested cash in your Schwab account and/or by using the
proceeds of redemption of shares of the Schwab Money Fund linked to your
Schwab account. If you elect to use these funds to make your automatic
investments, cash in your Schwab account will be used to make the
investment and, if necessary, shares of your Schwab Money Fund will be
redeemed to cover the balance of the purchase.
b) USING THE SCHWAB MONEYLINK 3/4 TRANSFER SERVICE:
for "Authorized Transfers" from a bank checking or savings account;
for "Direct Deposit" of payroll or government checks (all or a
portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab MoneyLink Transfer Service ("MoneyLink"). MoneyLink transfers money
into your Schwab account and automatic investments can be made using these
funds.
If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
INVESTMENT FREQUENCY. You can select the frequency of your automatic
investments (twice monthly, monthly or quarterly) and choose either the 5th or
the 20th of the month for your automatic investment dates. Quarterly investments
are made on the date selected in the first month of each quarter (January,
April, July and October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN. If you want to change the
fund(s) selected for your Automatic Investment Plan, you may do so by calling
your local branch or 1-800-2 NO-LOAD, 24 hours a day, or by sending written
instructions clearly outlining the changes to: Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, CA 94104. Written notification must include
the following:
1) The funds with AIP that you want to cancel;
2) The newly selected fund(s) in which you want to begin making automatic
investments and the amount to be invested in each fund;
3) The investment frequency and investment dates for your new automatic
investments.
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN. If you wish to terminate your
automatic investment plan, you may call your local branch or 1-800-2 NO-LOAD, 24
hours a day, or send written instructions to Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, CA 94104.
Note: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your Automatic Investment Plan investments.
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT. If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your automatic investment plan. You may notify Schwab by
sending written instructions to the address above or telephoning your local
branch or 1-800-2 NO-LOAD, 24 hours a day. Your automatic investments will
continue using Schwab account assets if Schwab does not receive notification to
terminate your automatic investments as well.
TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST TEN DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's Shares if, as a result of redemptions, the aggregate
value of a shareholder's holdings in the Fund drops below the Fund's $500
minimum balance requirement ($250 in the case of custodial accounts, IRAs and
other retirement plans). Shareholders will be notified in writing 30 days before
the Fund takes such action to allow them to increase their holdings to at least
the minimum level. Also note that, because they can only be held in Schwab
accounts, shares of the Fund will be automatically redeemed should the Schwab
account in which they are carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco, CA 94104 to that effect.
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information on wire transfers. A $15 service fee
will be charged against your Schwab account for each wire sent.
SHAREHOLDER INFORMATION
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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 , 1995,
owned % of the voting securities of 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 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
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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
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From time to time, the Fund advertises its total return and yield for Schwab
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Schwab 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 Schwab Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
Schwab Shares over a thirty-day period by the maximum offering price per share
of Schwab 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 Schwab Shares and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
The Schwab Shares are sold without any sales charge or other similar
non-recurring charges.
Total return and yield will be calculated separately for Schwab Shares,
Institutional Service Shares and Institutional Shares. Because Institutional
Service Shares are subject to 12b- 1 fees, total return and yield of Schwab
Shares and Institutional Shares, for the same period, will exceed that of
Institutional Service Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare its
performance to certain indices.
OTHER CLASSES OF SHARES
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As of the date of this prospectus, the Fund may be offered in three separate
classes of shares: Schwab Shares, Institutional Service Shares, and
Institutional Shares. This prospectus relates only to Schwab 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.
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 Schwab Shares and 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 all classes of the Fund.
ADDRESSES
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<TABLE>
<S> <C> <C>
Intermediate Income Fund Federated Investors Tower
Schwab Shares Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
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</TABLE>
INTERMEDIATE
INCOME FUND
SCHWAB SHARES
PROSPECTUS
June 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
G00183-01
INTERMEDIATE INCOME FUND
SCHWAB SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus for Schwab Shares dated June 30, 1995. This Statement is
not a prospectus itself. To receive a copy of the prospectus, contact
Charles Schwab & Co., Inc. at 1-800-2 NO-LOAD, 24 hours a day, or 101
Montgomery Street, San Francisco, CA 94104.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated June 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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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 4
Reverse Repurchase Agreements 5
Investment Limitations 5
TRUST MANAGEMENT 7
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Officers and Trustees 7
The Funds 10
Fund Ownership 11
Trustees' Compensation 11
Trustee Liability 11
INVESTMENT ADVISORY SERVICES 12
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Adviser to the Fund 12
Other Advisory Services 12
Other Related Services 12
ADMINISTRATIVE SERVICES 12
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Transfer Agent and Dividend
Disbursing Agent 12
BROKERAGE TRANSACTIONS 13
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PURCHASING SCHWAB SHARES 13
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Shareholder Services Plan 13
Other Payments to Financial Institutions 13
Exchanging Securities For
Fund Shares 13
DETERMINING NET ASSET VALUE 14
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Determining Value of Securities 14
REDEEMING SCHWAB SHARES 14
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Redemption in Kind 14
TAX STATUS 14
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The Fund's Tax Status 14
Shareholders' Tax Status 15
TOTAL RETURN 15
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YIELD 15
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PERFORMANCE COMPARISONS 16
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APPENDIX 17
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Schwab Shares of Intermediate Income Fund (the "Fund") represent interests
in a diversified investment portfolio in Federated Income Securities Trust (the
"Trust").
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 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 three classes, Schwab Shares, Institutional
Shares and Institutional Service Shares. This Statement of Additional
Information relates only to Schwab Shares ("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 made to secure what is considered to be an advantageous
price or yield for the Fund. 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 on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 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
during the past five years, birth dates 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).
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated
Advisers, Federated Management, and Federated Research; 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.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; General Partner or Trustee in private real estate ventures in
Southwest Florida; Director, Trustee, or Managing General Partner of the Funds;
formerly, President, Naples Property Management Inc.
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A. and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue
Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center--Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
Henny, Koehuba, Meyer & Flaherty
Two Gateway Center--Suite 674
Pittsburgh, PA 15222-1004
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------
John E. Murray, Jr., J.D., S.J.D.
President
Duquesne University
Pittsburgh, PA 15282
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Gregor F. Meyer
Henny, Koehuba, Meyer & Flaherty
Two Gateway Center--Suite 674
Pittsburgh, PA 15222-1004
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, Online Computer Library 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
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp. and Federated Administrative Services,
Inc.
- --------------------------------------------------------------------------------
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President
President and Trustee, Federated Investors; Federated Advisers, Federated
Management, and Federated Research; Director and President, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, 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
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of the Funds;
Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, 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
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary and Trustee, Federated Advisers, Federated Management,
and Federated Research; Trustee, Federated Services Company; Executive Vice
President, Secretary, and Director, 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.
- --------------------------------------------------------------------------------
*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
As used in the table above, "the Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; 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; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds;
New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; 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; The Virtus Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees as a group own less than 1% of the Trust's outstanding
shares.
TRUSTEES' COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, POSITION COMPENSATION TOTAL COMPENSATION PAID
WITH TRUST FROM TRUST*+ FROM FUND COMPLEX**
<S> <C> <C>
John F. Donahue $-- $-0- for the Trust and 68 other investment
Trustee companies in the Fund Complex
John T. Conroy, Jr. $-- $117,202 for the Trust and 64 other investment
Trustee companies in the Fund Complex
William J. Copeland $-- $117,202 for the Trust and 64 other investment
Trustee companies in the Fund Complex
James E. Dowd $-- $117,202 for the Trust and 64 other investment
Trustee companies in the Fund Complex
Lawrence D. Ellis, M.D. $-- $106,460 for the Trust and 64 other investment
Trustee companies in the Fund Complex
Edward L. Flaherty, Jr. $-- $117,202 for the Trust and 64 other investment
Trustee companies in the Fund Complex
Peter E. Madden $-- $90,563 for the Trust and 64 other investment
Trustee companies in the Fund Complex
Gregor F. Meyer $-- $106,460 for the Trust and 64 other investment
Trustee companies in the Fund Complex
John E. Murray, Jr. $-- $-0- for the Trust and 68 other investment
Trustee companies in the Fund Complex
Wesley W. Posvar $-- $106,460 for the Trust and 64 other investment
Trustee companies in the Fund Complex
Marjorie P. Smuts $-- $106,460 for the Trust and 64 other investment
Trustee companies in the Complex
</TABLE>
* Information is furnished for the fiscal year ended April 30, 1995.
+ The aggregate compensation is provided for the Trust which is comprised of
two portfolios.
** The information is provided for the last calendar year.
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.
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.
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. Dr.
Henry J. Gailliot, an officer of Federated Management, the adviser to the Trust,
holds approximately 20% of the outstanding common stock and serves as a director
of Commercial Data Services, Inc., a company which provides computer processing
services to the Administrators.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based upon the size,
type and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
paid for this service is based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
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 SCHWAB 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 Schwab
Shares."
SHAREHOLDER SERVICES PLAN
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to financial institutions (including Charles Schwab & Co.,
Inc.) 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.
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.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS
The administrative services for which the distributor will pay financial
institutions (including Charles Schwab & Co., Inc.) 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.
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.
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 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 SCHWAB 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 Schwab Shares." Although the Fund 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.
The average annual total return for the fiscal year ended April 30, 1995, and
for the period from December 8, 1993 (date of effectiveness) to April 30, 1995
was __% for Institutional Shares and _______ for Institutional Service Shares.
YIELD
- --------------------------------------------------------------------------------
The yield for Shares is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per Share 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 Shares,
performance will be reduced for those shareholders paying those fees.
The yield for the seven-day period ended April 30, 1995 was ___% for
Institutional Shares and ___% for Institional Service Shares.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance 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 any class of share's expenses; and
.various other factors.
The performance of Shares 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.
.MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximim rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for 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 Shares based on
monthly reinvestment of dividends over a specified period of time.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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 RATINGS GROUP 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.
G00183-02 (4/95)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (to be filed by Amendment for all
classes of all Funds);
(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 ; (8.)
(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; (8.)
(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; (8.)
(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);
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)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed June 24, 1994. (File Nos. 33-3164
and 811-4577)
(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; (8.)
(10) Not applicable;
(11) Not applicable;
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i) Copy of Distribution Plan of the
Registrant (4.);
(ii) Rule 12b-1 Agreement of the Registrant (4.);
(iii) 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 (8.)
(17) Not Applicable (Financial Data Schedules)
(18) Conformed copy of Power of Attorney +
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
_______________
+ All exhibits have been filed electronically.
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)
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)
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)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed June 24, 1994. (File Nos. 33-3164
and 811-4577)
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of April 11, 1995
Shares of Beneficial Interest
(no par value)
Federated Short-Term Income Fund
Institutional Shares 3471
Institutional Service Shares 382
Intermediate Income Fund
Institutional Shares 466
Institutional Service Shares 319
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 three 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.
____________
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)
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, and J. Alan Minteer,
Senior Vice Presidents; Randall A.Bauer, David A. Briggs;
Jonathan C. Conley, Deborah A. Cunningham, Mark Durbiano,
Kathleen M. Foody-Malus, Thomas M. Franks, Edward C.
Gonzales, Jeff A. Kozemchak, Marian R. Marinack; John W.
McGonigle, Susan M. Nason, Mary Jo Ochson, Robert J.
Ostrowski, Frederick L. Plautz, Jr.; Charles A. Ritter; James
D. Roberge; Sandra L. Weber; 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; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; 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 Institutional 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; 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;
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 U.S. Government Money Market
Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; The
Monitor Funds; Municipal Securities Income Trust; Newpoint
Funds; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; RIMCO Monument Funds;
The Shawmut Funds; Short-Term Municipal Trust; 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.;
The Virtus Funds; 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 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
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
Solon A. Person, IV 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
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson 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
Joseph L. Epstein 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
Michael D. Fitzgerald 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
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Stephen A. LaVersa 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
Richard C. Mihm 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
Robert D. Oehlschlager 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
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
John C. Shelar, Jr. 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
Jamie M. Teschner 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
Paul A. Uhlman 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
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
S. Elliott Cohan Secretary, Assistant
Federated Investors Tower Federated 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, has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania,
on the 21st day of April, 1995.
FEDERATED INCOME SECURITIES TRUST
BY: /s/ Victor R. Siclari
Victor R. Siclari, Assistant Secretary
Attorney in Fact for John F. Donahue
April 21, 1995
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 April 21, 1995
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
John E. Murray, Jr+ Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of (**SEE BELOW**) 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
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 attorney-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 attorney-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 April 13, 1995
John F. Donahue (Chief Executive Officer)
/s/ Glen R. Johnson President April 13, 1995
Glen R. Johnson
/s/ Edward C. Gonzales Vice President and Treasurer April 13, 1995
Edward C. Gonzales (Principal Financial and
Accounting Officer)
/s/ John T. Conroy, Jr. Trustee April 13, 1995
John T. Conroy, Jr.
/s/ William J. Copeland Trustee April 13, 1995
William J. Copeland
**FEDERATED INCOME SECURITIES TRUST
SIGNATURES TITLE DATE
/s/ Jame E. Dowd Trustee April 13, 1995
James E. Dowd
/s/ Lawrence D. Ellis, M.D. Trustee April 13, 1995
Lawrence D. Ellis, M.D.
/s/ Edward L. Flaherty, Jr. Trustee April 13, 1995
Edward L. Flaherty, Jr.
/s/ Peter E. Madden Trustee April 13, 1995
Peter E. Madden
/s/ Gregor F. Meyer Trustee April 13, 1995
Gregor F. Meyer
/s/ John E. Murray, Jr. Trustee April 13, 1995
John E. Murray, Jr.
/s/ Wesley W. Posvar Trustee April 13, 1995
Wesley W. Posvar
/s/ Marjorie P. Smuts Trustee April 13, 1995
Marjorie P. Smuts
Sworn to and subscribed before me this 13th day of April, 1995.
/s/ Marie M. Hamm
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Sept. 16, 1996
Member, Pennsylvania Association of Notaries
