1933 Act File No. 33-3164
1940 Act File No. 811-4577
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ....................................
Post-Effective Amendment No. 28 ....................... X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 21 ..............................................X
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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.
<PAGE>
Registrant has filed with the Securities and Exchange Commission a declaration
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and:
X filed the Notice required by that Rule on June 16, 1997; or intends to file
the Notice required by that Rule on or about ____________; or
during the most recent fiscal year did not sell any securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to Rule
24f-2(b)(2), need not file the Notice.
Copies To:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of FEDERATED INCOME
SECURITIES TRUST, which is comprised of two portfolios: (1) Federated Short-Term
Income Fund, (a) Institutional Shares and (b) Institutional Service Shares; and
(2) Federated Intermediate Income Fund, (a) Institutional Shares and (b)
Institutional Service Shares, relates only to the Federated 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..................................(1-2) Cover Page.
----------
Item 2. Synopsis......................(1-2) Summary of Fund Expenses;
--------
(1-2) General Information.
Item 3. Condensed Financial
Information....................(1(a), 2(a)) Financial
Highlights--Institutional Shares;
(1(b), 2(b)) Financial Highlights
--Institutional Service Shares.
Item 4. General Description of
Registrant........(1-2) General Information;
(1-2) Investment Information;
(1-2) Investment Objective;
(1-2) Investment Policies;
(1-2) Special Considerations;
(2) Weighted Average Portfolio Duration;
(1-2) Investment Limitations;
Item 5. Management of the Fund..............(1-2) Trust Information;
----------------------
(1-2) Management of the Trust;
(1(a), 2(a)) Distribution of Institutional Shares;
(1(b), 2(b)) Distribution of Institutional Service
Shares;
(1-2) Administration of the Fund;
Item 6. Capital Stock and Other
Securities..................................(1-2) Certificates
and Confirmations;
(1-2) Dividends;
(1-2) Capital
Gains; (1-2)
Shareholder
Information; (1-2)
Voting Rights;
(1-2) Tax
Information; (1-2)
Federal Income
Tax; (1-2) State
and Local Taxes;
(1-2) Other
Classes of Shares.
<PAGE>
Item 7. Purchase of Securities Being
Offered.................................(1-2) Net Asset Value;
(1(a), 2(a))
Investing in
Institutional
Shares; (1(b),
2(b)) Investing in
Institutional
Service Shares;
(1-2) Share
Purchases; (1-2)
Minimum Investment
Required; (1-2)
What Shares Cost;
(2) Exchanging
Securities for
Fund Shares; (1-2)
Exchange
Privilege.
Item 8. Redemption or Repurchase.............(1(a), 2(a)) Redeeming
Institutional Shares;
-----------------------
(1(b), 2(b)) Redeeming
Institutional Service
Shares;
(1-2) Telephone Redemption;
(1-2) Redeeming Shares By Mail;
(1-2) Accounts with Low Balances.
Item 9. Pending Legal Proceedings None.
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page..................................(1-2) Cover Page.
----------
Item 11. Table of Contents (1-2) Table of Contents.
Item 12. General Information and
History............................(1-2) General Information
About the Fund; (1-2)
About Federated Investors.
Item 13. Investment Objectives and
Policies..........................(1-2) Investment Objective
and Policies.
Item 14. Management of the Fund............(1-2) Federated
Income Securities Trust
Management.
----------------------
Item 15. Control Persons and Principal
Holders of Securities (1-2) Fund Ownership.
Item 16. Investment Advisory and Other
Services.................................(1-2) Investment
Advisory Services;
(1-2) Other Services.
Item 17. Brokerage Allocation (1-2) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.............(1-2) Purchasing Shares;
(1-2) Determining Net Asset Value;
(1-2) Redeeming Shares.
Item 20. Tax Status (1-2) Tax Status.
Item 21. Underwriters Not applicable
Item 22. Calculation of Performance
Data........................(1-2) Total Return; (1-2) Yield;
(1-2) Performance Comparisons.
Item 23 Financial Statements........(1) (Filed in Part A);
--------------------
(2) Financial Statements
(Financial Statements are
incorporated by reference to
the Annual Report of Registrant
dated April 30, 1997; File Nos.
33-3164 and 811-4577).
FEDERATED INTERMEDIATE INCOME FUND
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Intermediate Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio in Federated Income Securities Trust
(the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference. The Fund has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1997, with
the Securities and Exchange Commission ("SEC"). 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 or
a paper copy of this prospectus, if you have received it electronically, free of
charge by calling 1-800-341-7400. To obtain other information or to make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus. The Statement of Additional Information, material incorporated
by reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights-- Institutional Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Special Considerations 11
Weighted Average Portfolio Duration 11
Investment Limitations 12
Trust Information 12
Management of the Trust 12
Distribution of Institutional Shares 13
Administration of the Fund 13
Administrative Services 13
Net Asset Value 14
Investing in Institutional Shares 14
Share Purchases 14
Minimum Investment Required 14
What Shares Cost 14
Exchanging Securities for Fund Shares 14
Exchange Privilege 15
Certificates and Confirmations 15
Dividends 15
Capital Gains 15
Redeeming Institutional Shares 15
Telephone Redemption 15
Redeeming Shares by Mail 16
Accounts with Low Balances 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes Inside Back Cover
Performance Information Inside Back Cover
Other Classes of Shares Inside Back Cover
</TABLE>
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge 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
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.18%
12b-1 Fee None
Shareholder Services Fee (after waiver)(2) 0.00%
Total Other Expenses 0.37%
Total Operating Expenses (after waivers)(3) 0.55%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.50%.
(2) The shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole discretion.
The maximum shareholder services fee is 0.25%.
(3) The total operating expenses would have been 1.12% absent the voluntary
waivers of a portion of the management fee and the shareholder services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Institutional Shares of the Trust
will bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Trust Information" and "Investing in
Institutional Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
EXAMPLE
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>
<S> <C>
1 Year $ 6
3 Years $18
5 Years $31
10 Years $69
</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.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated June 13, 1997, on the Funds' financial
statements for the year ended April 30, 1997, and on the following table for the
periods presented, is included in the Fund's Annual Report to shareholders dated
April 30, 1997, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's financial statements and notes thereto,
which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.77 $ 9.55 $ 9.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.63 0.66 0.66 0.23
Net realized and unrealized gain (loss) on 0.03 0.22 0.02 (0.47)
investments
Total from investment operations 0.66 0.88 0.68 (0.24)
LESS DISTRIBUTIONS
Distributions from net investment income (0.63) (0.66) (0.66) (0.23)
Distributions from net realized gain on investments (0.01) -- -- --
Total distributions (0.64) (0.66) (0.66) (0.23)
NET ASSET VALUE, END OF PERIOD $ 9.79 $ 9.77 $ 9.55 $ 9.53
TOTAL RETURN(B) 7.00% 9.13% 7.53% (2.48%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.55% 0.55% 0.48% 0.00%*
Net investment income 6.48% 6.52% 7.12% 6.36%*
Expense waiver/reimbursement(c) 0.57% 0.85% 1.22% 1.40%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $121,307 $87,493 $32,508 $17,702
Portfolio turnover 55% 66% 88% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1997, which can be obtained
free of charge. GENERAL INFORMATION The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated January 24,
1986. The Trust may offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. As of the date of this
prospectus the Board of Trustees ("Trustees") have established two classes of
shares of the Fund: Institutional Shares and Institutional Service Shares. This
prospectus relates only to Institutional Shares of the Fund. Institutional
Shares ("Shares") are sold primarily to accounts for which financial
institutions act in a fiduciary or agency capacity, or other accounts where the
financial institution maintains master accounts with an aggregate investment of
at least $400 million in certain funds which are advised or distributed by
affiliates of Federated Investors. Shares are also made available to financial
intermediaries, and public and private organizations. An investment in the Fund
serves 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 $25,000 over a 90-day period is
required. Shares are currently sold and redeemed at net asset value ("NAV")
without a sales charge imposed by the Fund. INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide 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 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 ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Rating
Service ("Duff & Phelps") 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 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;
* domestic and foreign issues of corporate and sovereign 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
("CCP")) 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 S&P, or F-1 or F-2 by Fitch;
* municipal securities;
* foreign currency transactions (including spot, futures, options and
swaps);
* convertible securities;
* preferred securities (such as trust preferred capital securities and step
up perpetual subordinated securities);
* surplus notes (or surplus debentures or certificates of contribution); *
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.
CORPORATE OBLIGATIONS
The Fund invests in corporate obligations, including corporate bonds, notes, and
debentures, which may have floating or fixed rates of interest. Certain
obligations in which the fund invests may involve both debt and equity
characteristics including, but not limited to convertible securities, preferred
securities (such as trust preferred or capital securities and step up perpetual
subordinated securities), and surplus notes.
FLOATING RATE CORPORATE 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 obligations in which the Fund may invest
include floating rate corporate securities issued by savings associations 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 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 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. Payments on mortgage-backed securities are also affected by
other factors, such as the frequency with which people sell their homes or elect
to make unscheduled payments on their mortgages. All asset-backed securities are
subject to similar prepayment risks, although they may be more or less sensitive
to certain factors. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original 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
("ARMS"), collateralized mortgage obligations (CMOs"), real estate mortgage
investment conduits ("REMICs"), 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 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 or
Veterans Administration, 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.
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 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 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, as amended. 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, ARMS
which use indices that lag changes in market rates should experience greater
price volatility than ARMS 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 may invest 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 CMOs and
mortgage pass-through securities, which are described above. Also, these
securities may be issued either by non-governmental entities and carry no
direct or indirect governmental guarantees, or by governmental entities
(i.e., Small Business Administration) and carry varying degrees of
governmental support.
Non-mortgage related asset backed securities have structural characteristics
similar to mortgage-related asset-backed securities but have underlying
assets that are not mortgage loans or interests in mortgage loans. The Fund
may invest in non-mortgage related asset-backed securities including, but not
limited to, interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. These
securities may be in the form of pass-through instruments or asset-backed
bonds. The securities are issued by non-governmental entities and carry no
direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Although non-mortgage related
asset-backed securities generally are less likely to experience substantial
prepayments than are mortgage-related asset-backed securities, certain of the
factors that affect the rate of prepayments on mortgage-related asset-backed
securities also affect the rate of prepayments on non-mortgage related
asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and
is then reregistered because the owner and obligor moves to another state,
such registration could defeat the original security interest in the vehicle
in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and
Eurodollar Time Deposits ("ETDs").
FOREIGN SECURITIES
ECDs, ETDs, Yankee CDs, CCP, Eurobonds and Europaper are subject to somewhat
different risks than domestic obligations of domestic issuers. Examples of these
risks include international, economic and political developments, foreign
governmental restrictions that may adversely affect the payment of principal or
interest, foreign withholdings or other taxes on interest income, difficulties
in obtaining or enforcing a judgment against the issuing bank, and the possible
impact of interruptions of the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and record keeping and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund. INTEREST RATE SWAPS,
CAPS AND FLOORS The Fund may enter into interest rate swaps and may purchase
or sell (i.e., write) interest rate caps and floors. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest (e.g., an exchange of floating rate payments for
fixed-rate payments) on a notional principal amount. The principal amount of an
interest rate swap is notional in that it only provides the basis for
determining the amount of interest payments under the swap agreement, and does
not represent an actual loan. For example, a $10 million LIBOR swap would
require one party to pay the equivalent of the LIBOR 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 NAV 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 NAV 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 NAV 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.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including CMOs, it will only do so in a manner
consistent with its investment objectives, policies and limitations.
REPURCHASE AGREEMENTS
Certain of the securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. The Fund or its
custodian will take possession of the securities subject to repurchase
agreements and these securities will be marked to market daily. To the extent
that the original seller does not repurchase the securities from the Fund, the
Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, certain interest rate swaps, caps and
floors determined by the Fund's investment adviser to be illiquid, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or a long-term basis, or both, up to one-third of the value of
its total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the investment adviser has determined are
creditworthy under guidelines established by the Trustees. In these loan
arrangements, the Fund will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. 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. 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 NAV, 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 NAV. 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
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 0.50%
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.
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. With over $110 billion invested across more than 300
funds under management and/or administration by its subsidiaries, as of
December 31, 1996, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company in
1955. Federated funds are presently at work in and through 4,500 financial
institutions nationwide.
Joseph M. Balestrino has been the Fund's portfolio manager since January
1994. Mr. Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Fund's investment adviser since 1995. Mr. Balestrino served
as an Assistant Vice President of the investment adviser from 1991 to 1995.
Mr. Balestrino is a Chartered Financial Analyst and received his Master's
Degree in Urban and Regional Planning from the University of Pittsburgh.
John T. Gentry will be a portfolio manager of the Fund effective August
1997. Mr. Gentry joined Federated Investors in 1995 as an Investment Analyst
and has been an Assistant Vice President of the Fund's adviser since April
1997. Mr. Gentry served as a Senior Treasury Analyst at Sun Company, Inc.
from 1991 to 1995. Mr. Gentry earned his M.B.A., with concentrations in
Finance and Accounting, from Cornell University.
Susan M. Nason has been the Fund's portfolio manager since the Fund's
inception in December 1993. Ms. Nason joined Federated Investors in 1987 and
has been a Vice President of the Fund's investment adviser since 1993. Ms.
Nason served as an Assistant Vice President of the investment adviser from
1990 until 1992. Ms. Nason is a Chartered Financial Analyst and received her
M.S. in Industrial Administration from Carnegie Mellon University.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Trustees, and could
result in severe penalties.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% 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 Services Company may choose voluntarily to waive a portion of its fee.
SHAREHOLDER SERVICES
The Trust has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Trust
may make payments up to 0.25% of the average daily NAV of Shares to obtain
certain personal services for shareholders and to maintain shareholder accounts.
From time to time and for such periods as deemed appropriate, the amount stated
above may be reduced voluntarily. Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's Adviser or its affiliates.
NET ASSET VALUE
The Fund's NAV per share fluctuates. The NAV 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.
INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or by mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Intermediate Income Fund -- Institutional Shares; Fund Number (this
number can be found on the account statement or by contacting the Fund); Group
Number or Order Number; Nominee or Institution Name; ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted. Questions on wire purchases should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
BY MAIL
To purchase Shares of the Fund by mail, send a check made payable to Federated
Intermediate Income Fund --Institutional Shares to: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8600,
Boston, MA 02266-8600. Orders by mail are considered received after payment by
check is converted by the transfer agent's bank, State Street Bank and Trust
Company ("State Street Bank"), into federal funds. This is normally the next
business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any financial
intermediary's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a financial intermediary
may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their NAV next determined after an order is received. There
is no sales charge imposed by the Fund. Investors who purchase Shares through a
financial intermediary may be charged a service fee by that financial
intermediary.
The NAV is determined as of the close of trading (normally 4:00 p.m. Eastern
time) on the New York Stock Exchange, 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 NAV 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, Martin Luther King
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund and must have a readily ascertainable market value. 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 NAV 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.
EXCHANGE PRIVILEGE
Shares in certain Federated funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares of the Fund at NAV
(plus a sales charge, if applicable). The exchange is subject to any initial or
subsequent investment amounts of the fund being acquired. Prior to any exchange,
the shareholder must receive a copy of the current prospectus of the fund or
class thereof into which an exchange is to be effected. A shareholder may obtain
further information on the exchange privilege by calling Federated Securities
Corp. or the shareholder's financial institution. CERTIFICATES AND
CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a Share account for each shareholder. Share certificates are not issued unless
requested by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining NAV. If an order for Shares is placed on the preceding business
day, Shares purchased by wire begin earning dividends on the business day wire
payment is received by State Street Bank. If the order for Shares and payment by
wire are received on the same day, Shares begin earning dividends on the next
business day. Shares purchased by check begin earning dividends on the business
day after the check is converted upon instruction of the transfer agent into
federal funds. Dividends are automatically reinvested on payment dates in
additional Shares of the Fund unless cash payments are requested by contacting
the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their NAV next determined after the Fund receives the
redemption request. Investors who redeem Shares through a financial intermediary
may be charged a service fee by that financial intermediary. Redemptions will be
made on days on which the Fund computes its NAV. Redemption requests must be
received in proper form and can be made by telephone request or by written
request. TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following business day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Redeeming Shares by Mail," should be considered.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the Share class designation
the account name as registered with the Fund; the account number; and the number
of Shares to be redeemed or the dollar amount requested. All owners of the
account must sign the request exactly as the Shares are registered. Normally, a
check for the proceeds is mailed within one business day, but in no event more
than seven days, after the receipt of a proper written redemption request.
Dividends are paid up to and including the day that a redemption request is
processed. Shareholders requesting a redemption of any amount to be sent to
an address other than that on record with the Fund or a redemption payable other
than to the shareholder of record must have their signatures guaranteed by a
commercial or savings bank, trust company or savings association whose deposits
are insured by an organization which is administered by the FDIC; a member firm
of a domestic stock exchange; or any other "eligible guarantor institution," as
defined in the Securities Exchange Act of 1934. The Fund does not accept
signatures guaranteed by a notary public. ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's NAV. Before
Shares are redeemed to close an account, the shareholder is notified in writing
and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust for vote. All shares of
each portfolio in the Trust have equal voting rights, except that, in matters
affecting only a particular Fund or class, only shares of that particular Fund
or class are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by 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.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares. Information on
the tax status of dividends and distributions is provided annually.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly and Meck, counsel to the Trust, Fund Shares
may be subject to personal property taxes imposed by counties, municipalities,
and school districts in Pennsylvania to the extent that the portfolio securities
in the Fund would be subject to such taxes if owned directly by residents of
those jurisdictions. Shareholders are urged to consult their own tax
advisers regarding the status of their accounts under state and local laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in 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 Shares is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by Shares over a thirty-day period by the
maximum offering price per Share of 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 Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Shares and
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 the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Service
Shares.
Institutional Service Shares are sold primarily to banks and other institutions
that hold assets in an agency capacity. Institutional Service Shares are sold at
NAV and 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.
Shares and Institutional Service Shares are subject to certain of the same
expenses. Expense differences, however, between Shares and Institutional Service
Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service
Shares, investors may call 1-800-341-7400 or contact their financial
institution.
FEDERATED INTERMEDIATE INCOME FUND
Institutional Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
FEDERATED
INTERMEDIATE INCOME
FUND
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
PROSPECTUS
JUNE 30, 1997
A Diversified Portfolio of Federated Income
Securities Trust, An Open-End,
Management Investment Company
Federated Securities Corp., Distributor
Cusip 31420C407
3090804A-IS (6/97)
[Graphic]
FEDERATED INTERMEDIATE INCOME FUND
(A Portfolio of Federated Income Securities Trust)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Intermediate Income Fund (the
"Fund") offered by this prospectus represent interests in a diversified
portfolio of securities which is an investment portfolio in Federated Income
Securities Trust (the "Trust"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to provide current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference. The Fund has also filed a Statement of Additional
Information for Institutional Shares and Institutional Service Shares dated June
30, 1997, with the Securities and Exchange Commission ("SEC"). 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 or a paper copy of this prospectus, if you have received
it electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus. The Statement of Additional Information,
material incorporated by reference into this document, and other information
regarding the Fund is maintained electronically with the SEC at Internet Web
site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights - Institutional Service Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Special Considerations 11
Weighted Average Portfolio Duration 11
Investment Limitations 12
Trust Information 12
Management of the Trust 12
Distribution of Institutional Service Shares 13
Administration of the Fund 14
Administrative Services 14
Net Asset Value 14
Investing in Institutional Service Shares 14
Share Purchases 14
Minimum Investment Required 14
What Shares Cost 14
Exchanging Securities for Fund Shares 15
Exchange Privilege 15
Certificates and Confirmations 15
Dividends 15
Capital Gains 15
Redeeming Institutional Service Shares 15
Telephone Redemption 15
Redeeming Shares by Mail 16
Accounts with Low Balances 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes Inside Back Cover
Performance Information Inside Back Cover
Other Classes of Shares Inside Back Cover
</TABLE>
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge 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
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.18%
12b-1 Fee (after waiver)(2) 0.16%
Shareholder Services Fee (after waiver)(3) 0.09%
Total Other Expenses 0.46%
Total Operating Expenses (after waivers)(4) 0.80%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.50%.
(2) The 12b-1 Fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder service
provider can terminate this voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.
(4) The total operating expenses would have been 1.37% absent the voluntary
waivers of portions of the management fee, 12b-1 fee and shareholder
services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Institutional Service Shares of the
Trust will bear, either directly or indirectly. For more complete descriptions
of the various costs and expenses, see "Trust Information" and "Investing in
Institutional Service Shares." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
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>
<S> <C>
1 Year $ 8
3 Years $26
5 Years $44
10 Years $99
</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.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated June 13, 1997, on the Funds' financial
statements for the year ended April 30, 1997, and on the following table for the
periods presented, is included in the Fund's Annual Report to shareholders dated
April 30, 1997, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's financial statements and notes thereto,
which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.55 $ 9.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.61 0.63 0.64 0.22
Net realized and unrealized gain (loss) on investments 0.04 0.21 0.02 (0.47)
Total from investment operations 0.65 0.84 0.66 (0.25)
LESS DISTRIBUTIONS
Distributions from net investment income (0.61) (0.63) (0.64) (0.22)
Distributions from net realized gain on investments (0.01) -- -- --
Total distributions (0.62) (0.63) (0.64) (0.22)
NET ASSET VALUE, END OF PERIOD $ 9.79 $ 9.76 $ 9.55 $ 9.53
TOTAL RETURN(B) 6.73% 8.86% 7.27% (2.57%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.72% 0.25%*
Net investment income 6.21% 6.31% 6.85% 6.12%*
Expense waiver/reimbursement(c) 0.57% 0.85% 1.22% 1.40%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $790 $508 $276 $225
Portfolio turnover 55% 66% 88% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1997, which can be obtained
free of charge. GENERAL INFORMATION The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated January 24,
1986. The Trust may offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. As of the date of this
prospectus, the Board of Trustees ("Trustees") have established two classes of
shares of the Fund: Institutional Service Shares and Institutional Shares. This
prospectus relates only to Institutional Service Shares of the Fund.
Institutional Service Shares ("Shares") are designed primarily for retail and
private banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $25,000 over a
90-day period is required. Shares are currently sold and redeemed at net
asset value ("NAV") without a sales charge imposed by the Fund. INVESTMENT
INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide 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 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 ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Rating
Service ("Duff & Phelps") 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 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;
* domestic and foreign issues of corporate and soverign 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
("CCP")) 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 S&P, or F-1 or F-2 by Fitch;
* municipal securities;
* foreign currency transactions (including spot, futures, options and
swaps);
* convertible securities;
* preferred securities (such as trust preferred capital securities and step
up perpetual subordinated securities);
* surplus notes (or surplus debentures or certificates of contribution); *
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.
CORPORATE OBLIGATIONS
The Fund invests in corporate obligations, including corporate bonds, notes, and
debentures, which may have floating or fixed rates of interest. Certain
obligations in which the fund invests may involve both debt and equity
characteristics including, but not limited to convertible securities, preferred
securities (such as trust preferred or capital securities and step up perpetual
subordinated securities), and surplus notes.
FLOATING RATE CORPORATE 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 obligations in which the Fund may invest
include floating rate corporate securities issued by savings associations 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 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 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 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 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 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
("ARMS"), collateralized mortgage obligations ("CMOs"), real estate mortgage
investment conduits ("REMICs"), 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 of 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 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 or
Veterans Administration, 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 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 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, as amended. 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, ARMS
which use indices that lag changes in market rates should experience greater
price volatility than ARMS 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 CMOs and
mortgage pass-through securities, which are described above. Also, these
securities may be issued either by non-governmental entities and carry no
direct or indirect governmental guarantees, or by governmental entities
(i.e., Small Business Administration) and carry varying degrees of
governmental support.
Non-mortgage related asset-backed securities have structural characteristics
similar to mortgage-related asset-backed securities but have underlying
assets that are not mortgage loans or interests in mortgage loans. The Fund
may invest in non-mortgage related asset-backed securities including, but not
limited to, interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. These
securities may be in the form of pass-through instruments or asset-backed
bonds. The securities are issued by non-governmental entities and carry no
direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Although non-mortgage related
asset-backed securities generally are less likely to experience substantial
prepayments than are mortgage-related asset-backed securities, certain of the
factors that affect the rate of prepayments on mortgage-related asset-backed
securities also affect the rate of prepayments on non-mortgage related
asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and
is then reregistered because the owner and obligor moves to another state,
such registration could defeat the original security interest in the vehicle
in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and
Eurodollar Time Deposits ("ETDs").
FOREIGN SECURITIES
ECDs, ETDs, Yankee CDs, CCP, Eurobonds and Europaper are subject to somewhat
different risks than domestic obligations of domestic issuers. Examples of these
risks include international, economic and political developments, foreign
governmental restrictions that may adversely affect the payment of principal or
interest, foreign withholdings or other taxes on interest income, difficulties
in obtaining or enforcing a judgment against the issuing bank, and the possible
impact of interruptions of the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and record keeping and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund. INTEREST RATE SWAPS,
CAPS AND FLOORS The Fund may enter into interest rate swaps and may purchase
or sell (i.e., write) interest rate caps and floors. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest (e.g., an exchange of floating rate payments for
fixed-rate payments) on a notional principal amount. The principal amount of an
interest rate swap is notional in that it only provides the basis for
determining the amount of interest payments under the swap agreement, and does
not represent an actual loan. For example, a $10 million LIBOR swap would
require one party to pay the equivalent of the LIBORon $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 NAV 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 NAV 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 NAV 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.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including CMOs, it will only do so in a manner
consistent with its investment objectives, policies and limitations.
REPURCHASE AGREEMENTS
Certain of the securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. The Fund or its
custodian will take possession of the securities subject to repurchase
agreements and these securities will be marked to market daily. To the extent
that the original seller does not repurchase the securities from the Fund, the
Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, certain interest rate swaps, caps and
floors determined by the Fund's investment adviser to be illiquid, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or a long-term basis, or both, up to one-third of the value of
its total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the investment adviser has determined are
creditworthy under guidelines established by the Trustees. In these loan
arrangements, the Fund will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future time. 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.
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 NAV, 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 NAV. WEIGHTED
AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date, and the level of market interest
rates for similar debt securities. Generally, debt securities with lower coupons
or longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a remaining duration commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest rate.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the value
of its total assets to secure such borrowings;
* with respect to 75% of its assets, invest more than 5% of the value of its
total assets in securities of one issuer (except U.S. government obligations),
or purchase more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
* invest more than 15% of the value of its net assets in illiquid securities,
including repurchase agreements providing for settlement more than seven days
after notice, non-negotiable time deposits, certain interest rate swaps, caps
and floors determined by the investment adviser to be illiquid, and certain
restricted securities not determined by the Trustees to be liquid.
FEDERATED INCOME SECURITIES TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Pursuant to an investment advisory contract with the Trust, investment decisions
for the Fund are made by Federated Management, the Fund's investment adviser
(the "Adviser"), subject to direction by the Trustees. The Adviser continually
conducts investment research and supervision for the Fund and is responsible for
the purchase or sale of portfolio instruments, for which it receives an annual
fee from the Fund.
ADVISORY FEES
The Fund's Adviser receives an annual investment advisory fee equal to 0.50%
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.
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. With over $110 billion invested across more than 300
funds under management and/or administration by its subsidiaries, as of
December 31, 1996, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company in
1955. Federated funds are presently at work in and through 4,500 financial
institutions nationwide.
Joseph M. Balestrino has been the Fund's portfolio manager since January
1994. Mr. Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Fund's investment adviser since 1995. Mr. Balestrino served
as an Assistant Vice President of the investment adviser from 1991 to 1995.
Mr. Balestrino is a Chartered Financial Analyst and received his Master's
Degree in Urban and Regional Planning from the University of Pittsburgh.
John T. Gentry will be a portfolio manager of the Fund effective August
1997. Mr. Gentry joined Federated Investors in 1995 as an Investment Analyst
and has been an Assistant Vice President of the Fund's adviser since April
1997. Mr. Gentry served as a Senior Treasury Analyst at Sun Company, Inc.
from 1991 to 1995. Mr. Gentry earned his M.B.A., with concentrations in
Finance and Accounting, from Cornell University.
Susan M. Nason has been the Fund's portfolio manager since the Fund's
inception in December 1993. 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. Ms. Nason is a Chartered Financial Analyst and
received her M.S. in Industrial Administration from Carnegie Mellon
University.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Trustees, and could
result in severe penalties.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940, (the "Plan"), the distributor may be paid a fee
by the Fund in an amount, computed at an annual rate of 0.25% of the average
daily NAV of Shares. The distributor may select financial institutions such as
banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. The Plan is a
compensation-type plan. As such, the Fund makes no payments to the distributor
expect as described above. Therefore, the Fund does not pay for unreimbursed
expenses of the distributor, including amounts expended by the distributor in
excess of amounts received by it from the Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able to recover
such amount or may earn a profit from future payments made by the Fund under the
Plan. In addition, the Trust has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Trust may make payments up to 0.25% of the average
daily NAV of Shares to obtain certain personal services for shareholders and to
maintain shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. Under the
Shareholder Services Agreement Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Trust and Federated Shareholder Services. SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS In addition to payments made pursuant to the
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. The support may
include sponsoring sales, educational and training seminars for their employees,
providing sales literature and engineering computer software programs that
emphasize the attributes of the Fund. Such assistance will be predicated upon
the amount of Shares the financial institution sells or may sell, and/or upon
the type and nature of sales or marketing support furnished by the financial
institution. Any payments made by the distributor may be reimbursed by the
Fund's Adviser or its affiliates. ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% 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 Services Company may choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
The Fund's NAV per Share fluctuates. The NAV 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.
INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or by mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE
To purchase Shares of the Fund by Federal Reserve wire, call the Fund before
4:00 p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Intermediate Income Fund--Institutional Service Shares; Fund Number
(this number can be found on the account statement or by contacting the Fund);
Group Number or Order Number; Nominee or Institution Name; ABA Number 011000028.
Shares cannot be purchased by wire on holidays when wire transfers are
restricted. Questions on wire purchases should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
BY MAIL
To purchase Shares of the Fund by mail, send a check made payable to Federated
Intermediate Income Fund -- Institutional Service Shares to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by
mail are considered received after payment by check is converted by the transfer
agent's bank, State Street Bank and Trust Company ("State Street Bank"), into
federal funds. This is normally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $25,000 plus any financial
intermediary's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a financial intermediary
may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their NAV next determined after an order is received. There
is no sales charge imposed by the Fund. Investors who purchase Shares through a
financial intermediary may be charged a service fee by that financial
intermediary.
The NAV is determined as of the close of trading (normally 4:00 p.m. Eastern
time) on the New York Stock Exchange, 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 NAV 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, Martin Luther King
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund and must have a readily ascertainable market value. 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 NAV 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.
EXCHANGE PRIVILEGE
Shares in certain Federated funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares of the Fund at NAV
(plus a sales charge, if applicable. The exchange is subject to any minimum
initial or subsequent investment amounts of the fund being acquired. Prior to
any exchange, the shareholder must receive a copy of the current prospectus of
the fund or class thereof into which an exchange is to be effected. A
shareholder may obtain further information on the exchange privilege by calling
Federated Securities Corp. or the shareholder's financial institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a Share account for each shareholder. Share certificates are not issued unless
requested by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining NAV. If an order for Shares is placed on the preceding business
day, Shares purchased by wire begin earning dividends on the business day wire
payment is received by State Street Bank. If the order for Shares and payment by
wire are received on the same day, Shares begin earning dividends on the next
business day. Shares purchased by check begin earning dividends on the business
day after the check is converted upon instruction of the transfer agent into
federal funds. Dividends are automatically reinvested on payment dates in
additional Shares of the Fund unless cash payments are requested by contacting
the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SERVICE SHARES
The Fund redeems Shares at their NAV next determined after the Fund receives the
redemption request. Redemptions will be made on days on which the Fund computes
its NAV. Redemption requests must be received in proper form and can be made by
telephone request or by written request. Investors who redeem Shares through a
financial intermediary may be charged a service fee by that financial
intermediary. TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following business day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Redeeming Shares by Mail," should be considered.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
The written request should state: the Fund name and Share class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the FDIC; a member firm of a
domestic stock exchange; or any other "eligible guarantor institution," as
defined in the Securities Exchange Act of 1934. The Fund does not accept
signatures guaranteed by a notary public. ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's NAV. Before
Shares are redeemed to close an account, the shareholder is notified in writing
and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust for vote. All shares of
each portfolio in the Trust have equal voting rights, except that, in matters
affecting only a particular fund or class, only shares of that particular fund
or class are entitled to vote.
As 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 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.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares. Information on
the tax status of dividends and distributions is provided annually.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly and Meck, counsel to the Trust, Fund Shares
may be subject to personal property taxes imposed by counties, municipalities,
and school districts in Pennsylvania to the extent that the portfolio securities
in the Fund would be subject to such taxes if owned directly by residents of
those jurisdictions. Shareholders are urged to consult their own tax
advisers regarding the status of their accounts under state and local laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in 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 Shares is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by Shares over a thirty-day period by the
maximum offering price per Share of 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 Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The Shares are sold without any sales charge or other similar non-recurring
charges other than a Rule 12b-1 fee.
Total return and yield will be calculated separately for Shares and
Institutional Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional 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 NAV and are distributed without a Rule 12b-1
Plan.
Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences, however, between Shares and Institutional Shares may affect
the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400 or contact their financial institution.
FEDERATED INTERMEDIATE
INCOME FUND
Institutional Service Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
FEDERATED INTERMEDIATE
INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
JUNE 30, 1997
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
Federated Securities Corp., Distributor
[Graphic]
Cusip 31420C506
3090804A-SS (6/97)
Federated Intermediate Income Fund
Institutional Shares
Institutional Service Shares
(A Portfolio of Federated Income Securities Trust)
Statement of Additional Information
This Statement of Additional Information should be read with the prospectuses of
Federated Intermediate Income Fund (the "Fund"), a portfolio of Federated Income
Securities Trust (the "Trust") dated June 30, 1997. This Statement is not a
prospectus. You may request a copy of a prospectus or a paper copy of this
Statement, if you have received it electronically, free of charge by calling
1-800-341-7400.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated June 30, 1997
Cusip 31420C407
Cusip 31420C506
3090804B (6/97)
<PAGE>
Table of Contents
- -------------------------------------------------------------------------
General Information About the Fund 4
Investment Objective and Policies 4
Collateralized Mortgage Obligations 4
Convertible Securities 4
Surplus Notes 5
Trust Preferred or Capital Securities 5
Step Up Perpetual Subordinated Securities 5
Medium Term Notes and Deposit Notes 5
Average Life 5
Weighted Average Portfolio Maturity 5
Weighted Average Portfolio Duration 6
When-Issued and Delayed Delivery Transactions 6
Foreign Currency Transactions 6
Lending of Portfolio Securities 8
Restricted and Illiquid Securities 8
Repurchase Agreements 8
Portfolio Turnover 9
Reverse Repurchase Agreements 9
Investment Limitations 9
Federated Income Securities Trust Management 11
Fund Ownership 15
Trustee's Compensation 16
Trustee Liability 16
Investment Advisory Services 16
Adviser to the Fund 16
Brokerage Transactions 17
Other Services 17
Fund Administration 17
Custodian and Portfolio Accountant 17
Transfer Agent 17
Independent Auditors 17
Purchasing Shares 18
Distribution Plan (Institutional Service
Shares only) and Shareholder Services 18
Determining Net Asset Value 18
Determining Value of Securities 18
Redeeming Shares 18
Redemption in Kind 18
Tax Status 19
The Fund's Tax Status 19
Shareholders' Tax Status 19
Total Return 19
Yield 20
Performance Comparisons 20
Economic and Market Information 21
About Federated Investors 21
Mutual Fund Market 21
Institutional Clients 21
Bank Marketing 21
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 21
Appendix 22
<PAGE>
General Information About the Fund
- ----------------------------------------------------------------------------
The Fund is a portfolio of Federated Income Securities Trust, which was
established as a Massachusetts business trust under a Declaration of Trust dated
January 24, 1986. On December 31, 1991, the shareholders voted to permit the
Trust to offer one or more separate series and classes of shares. On February
26, 1996, the Board of Trustees ("Trustees") approved changing the name of
Intermediate Income Fund to Federated Intermediate Income Fund. Shares of the
Fund are offered in two classes: Institutional Shares and Institutional Service
Shares. This Statement of Additional Information relates to the Institutional
Shares and Institutional Service Shares (individually and collectively referred
to as the "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 Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
Collateralized Mortgage Obligations ("CMOs")
The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs. Most of the CMOs in which the Fund may invest 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.
Convertible Securities
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as DECS
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security), LYONS (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock (an
equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES (Preferred Redeemable
Increased Dividend Securities (which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common up to the first call price.
They are effectively capped at that point unless the common rises above a second
price point, at which time they participate with unlimited upside potential.
Surplus Notes
Surplus notes, or surplus debentures or certificates of contribution, are
subordinated debt instruments issued by mutual and stock insurance companies.
Mutual insurance companies are owned by their policyholders and cannot raise
equity capital by issuing shares of common or preferred stock and thus,
generally issue surplus notes to raise capital. Stock insurance companies
primarily issue surplus notes in the context of transactions with affiliates.
Though technically debt, surplus notes are treated by insurers as equity
capital, or "surplus," for regulatory reporting purposes. Insurance regulators
maintain control over the insurer's ability to repay principal and interest as
it comes due and have the right to approve or disapprove each payment. Surplus
notes typically are subordinated to any other debt. Surplus notes are subject to
certain investment risks including the financial stability of the issuer,
subordination to all other claims, and regulatory risk as a result of required
approval of principal and interest payments from insurance regulators prior to
making any payments. The financial stability of the issuer may be subject to
catastrophic losses or obligations to policy holders which may lead to issuer
default.
Trust Preferred or Capital Securities
Trust preferred or capital securities are junior subordinated securities with
generally a 30-50 year final maturity and a minimum 5 year call protection.
Dividend payments generally can be deferred by the issuer for up to 5 years.
These securities generally are unsecured and subordinated to all senior
indebtedness. Trust preferred or capital securities are subject to certain
investment risks. Because these securities are unsecured and subordinated to all
senior securities, principal and interest payments are subject to a greater risk
of issuer default then senior debt securities.
Step Up Perpetual Subordinated Securities
Step up perpetual subordinated securities ("step ups") generally are structured
as perpetual preferred securities (with no stated maturity) with a 10-year call
option. If the issue is not called, however, the coupon increases or "steps up,"
generally 150 to 250 basis points depending on the issue and its country of
jurisdiction. The step up interest rate acts as a punitive rate which would
typically compel the issuer to call the security. Thus, these securities
generally are priced as 10-year securities. The principal risks inherent in
investments in step up notes include credit, liquidity, and financial risks.
Credit risk arises from the possibility that the issuer may default on its
obligations. Liquidity risk arises in connection with the issuer's need to repay
liabilities as they mature and to raise funds at appropriate maturities as part
of the issuer's financing, trading, and investment activities. Financial risk is
the risk to which the issuer's future earnings and financial position are
exposed as a result of potential changes in the issuer's financial condition.
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 nine 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 treat (a) asset-
backed securities as having a maturity equal to their estimated weighted-
average maturity and (b) variable and floating rate instruments as having a
remaining maturity commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of 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 a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a remaining duration commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest rate.
Duration is calculated by dividing the sum of the time-weighted 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.
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.
Mathematically, duration is measured as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3) + ............... + PVCFn(n)
-------- -------- -------- --------
PVTCF PVTCF PVCTF PVCTF
where
</TABLE>
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
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. Duration calculated
in this manner, commonly referred to as "effective duration," allows for
changing prepayment rates as interest rates change and expected future cash
flows are affected. The calculation of effective duration will depend upon the
investment adviser's assumed prepayment rate.
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%
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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o 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:
o take advantage of short-term differentials in yields or market values;
o take advantage of new investment opportunities;
o respond to changes in the creditworthiness of an issuer; or
o 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. For the fiscal years ended
April 30, 1997, and 1996, the portfolio turnover rates were 55% and 66%,
respectively.
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 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.
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 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."
The Fund has not borrowed money or invested in reverse repurchase agreements
during the last fiscal year and has no present intent to do so in the coming
fiscal year.
Federated Income Securities Trust Management
- -------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Income Securities Trust, and principal occupations.
- ----------------------------------------------------------------------
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Company.
- -----------------------------------------------------------------------
Thomas G. Bigley
15 Old Timber TrailPittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
- ------------------------------------------------------------------------------
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; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
- ---------------------------------------------------------------------------
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.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
- ----------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
- -----------------------------------------------------------------------------
<PAGE>
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, 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 or Trustee of the Funds.
- -------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
- -------------------------------------------------------------------------
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
- --------------------------------------------------------------------------
Gregor F. Meyer
203 Kensington Court
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Former Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the Funds.
- ---------------------------------------------------------------------------
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
- ---------------------------------------------------------------------------
<PAGE>
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
- --------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; Director or Trustee 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.
- ------------------------------------------------------------------
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Trustee of the Company.
- ---------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------
<PAGE>
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
- -----------------------------------------------------------------------------
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 some of the
Funds; Director or Trustee of some of the Funds.
------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940. @ Member of the Executive Committee.
The Executive Committee of the Board of Trustees handles the
responsibilities of the Board between meetings of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Bay Funds; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust;
Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, Inc.; High Yield Cash Trust; Independence One Mutual
Funds; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty U.S. Government Money
Market Trust; Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Obligations Trust II; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds;
Star Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Biltmore
Funds; The Biltmore Municipal Funds; The Monitor Funds; The Planters Funds; The
Starburst Funds; The Starburst Funds II; The Virtus Funds; Tower Mutual 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 Group of Funds, Inc.; Wesmark Funds; and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwrite for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
Fund Ownership
Officers and Trustees as a group own less than 1% of the Fund's outstanding
shares.
As of June 9, 1997, the following shareholders of record owned 5% or more of the
Institutional Shares of the Fund: Moce & Co., Mattoon, Illinois, owned
approximately 705,665 shares (5.57%); Union Planters National Bank, Memphis,
Tennessee, owned approximately 710,892 shares (5.61%); Stockyard Bank & Trust,
Louisville, Kentucky, owned approximately 711,533 shares (5.62%); Pitco c/o
Marshall & Ilsley Trust Co., Milwaukee, Wisconsin, owned approximately 1,197,874
shares (9.46%); Keystone Financial, Inc., Altoona, Pennsylvania, owned
approximately 1,267,882 shares (10.01%); and Parcol & Co. c/o Firstmerit Trust
Securities, Akron, Ohio, owned approximately 1,970,764 shares (15.57%).
As of June 9, 1997, the following shareholders of record owned 5% or more of the
Institutional Service Shares of the Fund: Resources Trust Company TTEE for the
benefit of Arthur Morris, Denver, Colorado, owned approximately 5,713 shares
(7.03%); Fort Wayne National Bank RPO Nemco 401(k) Opportunity Plan, Fort Wayne,
Indiana, owned approximately 6,239 shares (7.67%); Firstco Great Bend, First
United National Bank and Trust Co., Great Bend, Kansas, owned approximately
7,269 shares (8.94%); Richfield Bank & Trust Co., Richfield, Minnesota, owned
approximately 9,300 shares (11.44%); Vermont National Bank, Rutland, Vermont,
owned approximately 11,323 shares (13.92%); and Kenneth J. Cummins TTEE for the
benefit of Manuel Salazar, Newport Beach, CA owned approximately 18,218 shares
(22.40%).
<PAGE>
Trustee Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX
<S> <C> <C>
John F. Donahue $0 $0 for the Trust and
Chairman and Trustee 56 other investment companies in the Fund Complex
Thomas G. BigleyE $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $637.35 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland $637.35 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
James E. Dowd $637.35 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $637.35 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Gregor F. Meyer $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr. $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts $579.32 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended April 30, 1997.
# 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.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in each prospectus. For the fiscal years
ended April 30, 1997, 1996, and 1995, the Fund's Adviser earned
$539,952, $283,938 and $134,734, respectively, of which $344,689,
$283,938, and $134,734 was waived, respectively, because of
undertakings to limit the Fund's expenses. In addition, the Adviser
reimbursed other operating expenses of $0, $55,252, and $192,851 ,
respectively, for the same periods.
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
guidelines established 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. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. 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 commissions provided. During the fiscal
years ended April 30, 1997, 1996, and 1995 no brokerage commissions were paid by
the Fund.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
Other Services
- --------------------------------------------------------------------------
Fund Administration
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in each
prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Fund's
Administrator. For purposes of this Statement of Additional information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
April 30, 1997, 1996, and 1995, the Administrators earned $155,001, $155,000,
and $141,836, respectively.
Custodian and Portfolio Accountant
State Street Bank and Trust Company ("State Street Bank"), Boston, MA, is
custodian for the securities and cash of the Fund. Federated Services Company,
Pittsburgh, PA, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. 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.
Transfer Agent
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based upon the level of the
Fund's average net assets for the period plus out-of-pocket expenses.
Independent Auditors
The independent auditors for the Fund are Ernst and Young LLP.
Purchasing Shares
- --------------------------------------------------------------------------
Shares are sold at their net asset value ("NAV") without a sales charge on days
on which the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Fund is explained in the respective prospectuses under
"Investing in Institutional Shares" and "Investing in Institutional Service
Shares."
Distribution Plan (Institutional Service Shares only) and Shareholder Services
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Plan (Institutional Service Shares only), the Trustees expects
that the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the Fund in pursuing its investment objective.
By identifying potential investors whose needs are served by the Fund's
objective, and properly servicing these accounts, it may be possible to curb
sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended April 30, 1997, payments in the amount of $1,835 were
made pursuant to the Plan (Institutional Service Shares only), of which $662 was
waived. In addition, for this period, the Fund's Institutional Shares and
Institutional Service Shares paid shareholder services fees in the amount of
$268,141 and $1,835, respectively, of which $268,141 and $1,173, respectively,
were waived.
Determining Net Asset Value
- -----------------------------------------------------------------------------
NAV generally changes each day. The days on which the NAV is calculated by the
Fund are described in the respective prospectuses.
Determining Value of Securities
The values of the Fund's portfolio securities are determined as follows:
o 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
o for short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost unless the Trustees determine that
particular circumstances of the security indicate otherwise.
Redeeming Shares
- ------------------------------------------------------------------------------
The Fund redeems Shares at the next computed NAV after the Fund receives the
redemption request. Redemption procedures are explained in the respective
prospectuses under "Redeeming Institutional Shares" and "Redeeming Institutional
Service Shares." Although State Street Bank does not charge for telephone
redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund 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 SEC rules, taking
such securities at the same value employed in determining NAV 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 NAV
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:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o 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:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether
they are taken in cash or reinvested, and regardless of the length of
time the shareholder has owned the Shares.
Total Return
- ----------------------------------------------------------------------------
The Fund's average annual total returns for the one-year period ended April 30,
1997, and for the period from December 15, 1993 (date of initial public
offering) to April 30, 1997, were 7.00% and 6.20%, respectively, for
Institutional Shares, and 6.73% and 5.94%, respectively, for Institutional
Service Shares.
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 NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, adjusted over the period by any additional Shares,
assuming the monthly reinvestment of all dividends and distributions.
Yield
- ---------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended April 30, 1997 was 7.14% and
6.89% for Institutional Shares and Institutional Service Shares, respectively.
The yield for both classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the SEC) earned by either class
of Shares over a thirty-day period by the maximum offering price per Share of
either class of Shares on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each month
over a twelve-month period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by the Fund because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, performance will be reduced for those shareholders paying those
fees.
Performance Comparisons
- -----------------------------------------------------------------------------
The performance of both classes of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or either class of Shares' expenses; and
o various other factors.
Either class of Shares' performance fluctuates on a daily basis largely because
net earnings and the maximum offering price per Share fluctuate daily. Both net
earnings and offering price 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:
o 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 over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "short-term
investment grade debt funds" category in advertising and sales literature.
o Merrill Lynch Total Return Investment Grade Corporate Index (Short- Term
1-2.99 Years) is comprised of over 400 issues of investment grade
corporate debt securities with remaining maturities from 1 to 2.99 years.
o 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 maximum rating is five stars, and ratings are effective for
two weeks.
o Lehman Brothers Government/Corporate Total Index is comprised of
approximately 5,000 issues which include nonconvertible 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 Shearson Lehman Brothers, Inc.
the index calculates total returns for one month, three month, twelve
month, and ten year periods and year-to-date.
Advertisements and other sales literature for both classes of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in the
either class of Shares based on monthly reinvestment of dividends over a
specified period of time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills. Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
About Federated Investors
- ------------------------------------------------------------------------------
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making--structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. These traders handle trillions of dollars
in annual trading volume.
In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds, and 17 bond funds with assets approximating $17.2
billion, and $4.0 billion, respectively. Federated Investors' corporate bond
decision making--based on intensive, diligent credit analysis, is backed by over
21 years of experience in the corporate bond sector. In 1972, Federated
Investors introduced one of the first high-yield bond funds in the industry. In
1983, Federated was one of the first fund managers to participate in the
asset-backed securities market, a market totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international and global portfolios.
Mutual Fund Market
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated funds are available to consumers through major brokerage firms
nationwide -- we have over 2.200 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement.. The marketing effort to these firms is headed by James F.
Getz, President, Federated Securities Corp..
* source: Investment Company Institute.
<PAGE>
Appendix
- ------------------------------------------------------------------------------
Standard & Poor's Ratings Group ("S&P") Long Term Debt Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Moody's Investors Service, Inc. Corporate Bond Rating Definitions
AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-1--Issuers 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:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
P-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 more 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
F-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+.
F-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. Moody's Investors Service, Inc.
Commercial Paper Ratings
Duff & Phelps Rating Service (Duff &Phelps) Long-Term Debt Ratings
AAA--Highest credit quality. The risd factors are negligible, being only
slightly more than for U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A--Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB--Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
1. Financial Statements (Incorporated by reference to
the Annual Report of the Registrant dated April 30,
1997). (File Nos. 33-3164 and 811-4577).
2. Exhibits:
a) Conformed copy of Declaration of Trust of
the Registrant;(1)
(i) Conformed copy of Amendment No. 2 to
the Declaration of Trust;(6)
(ii) Conformed copy of Amendment No. 3 to
the Declaration of Trust;(9)
b) Copy of Amended and Restated By-Laws of the
Registrant as of December 31, 1991;(6)
c) Not applicable;
d) Copy of Specimen Certificate for Shares of
Beneficial Interest of the Registrant:
Federated Intermediate Income Fund;(8)
e) (i) Conformed copy of Investment Advisory
Contract of the Registrant;(5)
(ii) Conformed copy of Exhibit to
Investment Advisory Contract of the
Registrant;(9)
f) (i) Conformed copy of Distributor's
Contract, through and including
Exhibit B; (3)
(ii) Conformed copy of Exhibit C to
Distributor's Contract;(7)
(iii) Conformed copy of Exhibit D to
Distributor's Contract;(7)
(iv) The Registrant hereby incorporates
the conformed copy of the specimen
Mutual Funds Sales and Service
Agreement; Mutual Funds Service
Agreement; Mutual Funds Service
Agreement from Item 24(b)(6) of the Cash
Trust Series II Registration Statement
on Form N-1A, filed with the Commission on
July 24, 1995. (File Nos.33-38550 and
811-6269);
g) Not applicable;
h) Conformed copy of Custodian Contract of the
Registrant;(10)
- --------------------------------------------------------------
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).
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).
5. 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).
6. 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. 19 on Form N-1A filed October 12, 1993. (File
Nos. 33-3164 and 811-4577).
8. 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).
9. 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).
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 on Form N-1A filed June 23, 1995. (File
Nos. 33-3164 and 811-4577).
<PAGE>
(9) (i) Conformed copy of Agreement for Fund Accounting Services,
Administrative Services, Transfer Agency Services, and
Custody Services Procurement;(11)
(ii) Conformed copy of Shareholder Services Agreement;(10)
(iii) The responses and exhibits described in Item 24(b)(6) are
hereby incorporated by reference;
(iv) The Registrant hereby incorporates the conformed copy of
the Shareholder Services Sub-Contract between Fidelity and
Federated Shareholder Services from Item 24(b)(9)(iii) of
the Federated GNMA Trust Registration Statement on Form N-1A,
filed with the Commission on March 25, 1996.
(File Nos. 2-75670 and 811-3375);
(10) Not applicable;
(11) Conformed copy of Consent of Independent Auditors;(+)
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i) Conformed copy of Rule 12b-1
Distribution Plan of the Registrant;(5) (ii)
Conformed copy of Exhibit B to Rule 12b-1
Distribution Plan of the Registrant;(7)
(iii) The responses described in Item
24(b)(6) are hereby incorporated by
reference;
(16) Copy of Schedule of Computation of Funds Performance Data:
Federated Intermediate Income Fund;(8)
(17) Copy of Financial Data Schedules;(+)
(18) The Registrant hereby incorporates the conformed copy of the
specimen Multiple Class Plan from
Item 24(b)(18) of the World Investment Series, Inc. Registration
Statement on Form N-1A, filed
with the Commission on January 26, 1996. (File Nos. 33-52149 and
811-07141);
(19) Conformed copy of Power of Attorney.(+)
- --------------------------------------------------------------
+ All exhibits have been filed electronically.
5. 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).
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 on Form N-1A filed October 12, 1993. (File
Nos. 33-3164 and 811-4577).
8. 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).
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 24 on Form N-1A filed June 23, 1995. (File
Nos. 33-3164 and 811-4577).
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed June 27, 1996. (File
Nos. 33-3164 and 811-4577).
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of June 9, 1997
-------------- --------------------
Shares of Beneficial Interest
(no par value)
Federated Short-Term Income Fund
Institutional Shares 2,328
Institutional Service Shares 292
Federated Intermediate Income Fund
Institutional Shares 413
Institutional Service Shares 372
Item 27. Indemnification: (4)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser,
see the section entitled "Trust Information Management of the
Trust" in Part A. The affiliations with the Registrant of four of
the Trustees and one of the Officers of the investment adviser are
included in Part B of this Registration Statement under "Federated
Income Securities Trust Management." The remaining Trustee of the
investment adviser, his position with the investment adviser, and,
in parentheses, his principal occupation is: Mark D. Olson
(Partner, Wilson, Halbrook & Bayard), 107 W. Market Street,
Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are: William D.
Dawson,III, Henry A. Frantzen, and J. Thomas Madden, Executive Vice Presidents;
Peter R. Anderson, Drew J. Collins, Jonathan C. Conley, Deborah A. Cunningham,
Mark E. Durbiano, J. Alan Minteer, Susan M. Nason, and Mary Jo Ochson, Senior
Vice Presidents; J. Scott Albrecht, Joseph M. Balestrino, Randall S. Bauer,
David F. Belton, Christine A. Bosio, David A. Briggs, Kenneth J. Cody, Alexandre
de Bethmann, Michael J. Donnelly, Michael P. Donnelly, Linda A. Duessel, Donald
T. Ellenberger, Kathleen M. Foody-Malus, Thomas M. Franks; Edward C. Gonzales,
James E. Grefenstette, Susan R. Hill, Stephen A. Keen, Robert K. Kinsey, Robert
M. Kowit, Jeff A. Kozemchak, Marian R. Marinack, Sandra L. McInerney, Robert J.
Ostrowski, Charles A. Ritter, Scott B. Schermerhorn, Frank Semack, Aash M. Shah,
William F. Stotz, Tracy P.Stouffer, Edward J. Tiedge, Paige M. Wilhelm, Jolanta
M. Wysocka, Vice Presidents; Todd A. Abraham, Stafanie L. Bachhuber, Arthur J.
Barry, Michael W. Casey, Robert E. Cauley, Donna M. Fabiano, John T. Gentry,
William R. Jamison, Constantine Kartsonsas, Robert M. Marsh, Joseph M. Natoli,
Keith J. Sabol, Michael W. Sirianni, and Gregg Tenser, Assistant Vice
Presidents; Stephen A. Keen, Secretary; Thomas R. Donahue, Treasurer and
Assistant Secretary; Richard B. Fisher, Assistant Secretary and Assistant
Treasurer; Christine I. McGonigle, Assistant Secretary. The business address of
each of the Officers of the investment adviser is Federated Investors Tower,
Pittsburgh, Pennsylvania 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.
- --------------------------------------------------------------
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed June 25, 1991. (File
Nos. 33-3164 and 811-4577).
<PAGE>
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: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; BayFunds; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for
U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Investment Portfolios; Federated Investment Trust; Federated Master Trust;
Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities
Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.;
Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return Series,
Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated
U.S. Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Obligations Trust II; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds;
SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Biltmore Funds; The Biltmore Municipal Funds; The Monitor
Funds; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Tower Mutual 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 Group of Funds, Inc.; Wesmark 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.
<PAGE>
(b)
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
<S> <C> <C>
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary, --
Federated Investors Tower Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
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
Teresa M. Antoszyk 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
Byron F. Bowman Vice President, Secretary, --
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
Dale R. Browne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Leonard Corton, 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
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle 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
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher 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
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy 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
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III 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
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard A. Recker 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
George D. Riedel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith 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
John A. Staley 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
Richard Suder 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
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John F. Wallin 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
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Edward J. Wojnarowski 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
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush 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
Matthew S. Propelka Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
</TABLE>
(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 Shareholder Services Company P.O. Box 8600
("Transfer Agent, Dividend Boston, MA 02266-8600
Disbursing Agent and Portfolio
Recordkeeper")
Federated Services Company Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779
Federated Management Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600
Item 31. Management Services: Not applicable.
<PAGE>
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.
<PAGE>
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 24th day of June, 1997.
FEDERATED INCOME SECURITIES TRUST
BY: /s/S. Elliott Cohan
S. Elliott Cohan, Assistant Secretary
Attorney in Fact for John F. Donahue
June 24, 1997
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/S. Elliott Cohan
S. Elliott Cohan Attorney In Fact June 24, 1997
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
John W. McGonigle* Treasurer, Executive
Vice President and Secretary
(Principal Financial and
Accounting Officer)
Thomas G. Bigley Trustee
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
Exhibit 11 under Form N-1A
Exhibit 23 under Item 601/Reg. S-K
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and to the use of our report dated June 13, 1997, incorporated by
reference in Post-Effective Amendment Number 28 to the Registration Statement
(Form N-1A No. 33-3164) and the related Prospectuses of Federated Intermediate
Income Fund (a portfolio of Federated Income Securities Trust).
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
June 20, 1997
Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of FEDERATED INCOME SECURITIES
TRUST_____________________________________________________ and the Deputy
General Counsel of Federated Services Company, and each of them, their true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for them and in their names, place and stead, in any and all
capacities, to sign any and all documents to be filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, by means of the
Securities and Exchange Commission's electronic disclosure system known as
EDGAR; and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
sign and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as each of them
might or could do in person, hereby ratifying and confirming al that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE
/s/ John F. Donahue Chairman and Trustee June 3, 1997
John F. Donahue (Chief Executive Officer)
/s/ Glen R. Johnson President June 3, 1997
- --------------------------
Glen R. Johnson
/s/ John W. McGonigle Treasurer, Executive June 3, 1997
John W. McGonigle Vice President and Secretary
(Principal Financial and
Accounting Officer)
/s/ Thomas G. Bigley Trustee June 3, 1997
- --------------------------
Thomas G. Bigley
/s/ John T. Conroy Trustee June 3, 1997
- --------------------------
John T. Conroy
/s/ William J. Copeland Trustee June 3, 1997
- --------------------------
William J. Copeland
/s/ James E. Dowd Trustee June 3, 1997
- ---------------------------
James E. Dowd
/s/ Lawrence D. Ellis, M.D. Trustee June 3, 1997
Lawrence D. Ellis, M.D.
/s/ Edward L. Flaherty, Jr. Trustee June 3, 1997
- ---------------------------
Edward L. Flaherty, Jr.
/s/ Peter E. Madden Trustee June 3, 1997
- ---------------------------
Peter E. Madden
/s/ Gregor F. Meyer Trustee June 3, 1997
- ---------------------------
Gregor F. Meyer
/s/ John E. Murray, Jr. Trustee June 3, 1997
- ---------------------------
John E. Murray
/s/ Wesley W. Posvar Trustee June 3, 1997
- ---------------------------
Wesley W. Posvar
/s/ Marjorie P. Smuts Trustee June 3, 1997
- ---------------------------
Marjorie P. Smuts
Sworn to and subscribed before me this 3rd day of June , 1997
-------- ----------
/s/ Marie M. Hamm
Notarial Seal
Marie Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Oct. 9, 2000
Member, Pennsylvania Association of Notaries
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> Federated Income Securities Trust
Federated Intermediate Income Fund
Institutional Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1997
<PERIOD-END> Apr-30-1997
<INVESTMENTS-AT-COST> 121,346,732
<INVESTMENTS-AT-VALUE> 120,647,775
<RECEIVABLES> 2,362,263
<ASSETS-OTHER> 16,603
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,026,641
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 929,674
<TOTAL-LIABILITIES> 929,674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 123,164,139
<SHARES-COMMON-STOCK> 12,386,311
<SHARES-COMMON-PRIOR> 8,959,874
<ACCUMULATED-NII-CURRENT> 12,086
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (380,301)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (698,957)
<NET-ASSETS> 121,306,743
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,598,796
<OTHER-INCOME> 0
<EXPENSES-NET> 600,534
<NET-INVESTMENT-INCOME> 6,998,262
<REALIZED-GAINS-CURRENT> (380,854)
<APPREC-INCREASE-CURRENT> 356,638
<NET-CHANGE-FROM-OPS> 6,974,046
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,940,716
<DISTRIBUTIONS-OF-GAINS> 56,910
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,046,674
<NUMBER-OF-SHARES-REDEEMED> 3,741,544
<SHARES-REINVESTED> 121,307
<NET-CHANGE-IN-ASSETS> 34,095,721
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57,997
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 539,952
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,215,199
<AVERAGE-NET-ASSETS> 107,749,893
<PER-SHARE-NAV-BEGIN> 9.770
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> 0.030
<PER-SHARE-DIVIDEND> 0.630
<PER-SHARE-DISTRIBUTIONS> 0.010
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.790
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Federated Income Securities Trust
Federated Intermediate Income Fund
Institutional Service Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1997
<PERIOD-END> Apr-30-1997
<INVESTMENTS-AT-COST> 121,346,732
<INVESTMENTS-AT-VALUE> 120,647,775
<RECEIVABLES> 2,362,263
<ASSETS-OTHER> 16,603
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,026,641
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 929,674
<TOTAL-LIABILITIES> 929,674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 123,164,139
<SHARES-COMMON-STOCK> 80,688
<SHARES-COMMON-PRIOR> 52,011
<ACCUMULATED-NII-CURRENT> 12,086
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (380,301)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (698,957)
<NET-ASSETS> 790,224
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,598,796
<OTHER-INCOME> 0
<EXPENSES-NET> 600,534
<NET-INVESTMENT-INCOME> 6,998,262
<REALIZED-GAINS-CURRENT> (380,854)
<APPREC-INCREASE-CURRENT> 356,638
<NET-CHANGE-FROM-OPS> 6,974,046
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 45,460
<DISTRIBUTIONS-OF-GAINS> 534
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 95,657
<NUMBER-OF-SHARES-REDEEMED> 70,216
<SHARES-REINVESTED> 3,236
<NET-CHANGE-IN-ASSETS> 34,095,721
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 57,997
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 539,952
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,215,199
<AVERAGE-NET-ASSETS> 107,749,893
<PER-SHARE-NAV-BEGIN> 9.760
<PER-SHARE-NII> 0.610
<PER-SHARE-GAIN-APPREC> 0.040
<PER-SHARE-DIVIDEND> 0.610
<PER-SHARE-DISTRIBUTIONS> 0.010
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.790
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
FEDERATED INCOME SECURITIES TRUST
Federated Investors
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(412) 288-1900
June 24, 1997
EDGAR Operations Branch
Securities and Exchange Commission
Division of Investment Management
450 Fifth Street, Northwest
Washington, DC 20549
RE: FEDERATED INCOME SECURITIES TRUST (the "Trust")
Federated Intermediate Income Fund (the "Fund")
1933 Act File No. 33-3164
1940 Act File No. 811-4577
Dear Sir or Madam:
Post-Effective Amendment No. 28 under the Securities Act of 1933 and
Amendment No. 21 under the Investment Company Act of 1940 to the Registration
Statement of Federated Intermediate Income Fund, a portfolio of the
above-referenced Trust, is hereby electronically transmitted. This filing has
been electronically redlined to indicate the changes from the Fund's currently
effective Prospectuses and Statement of Additional Information.
As indicated on the facing page of the amendment, the Registrant has
specified that it is to become effective sixty (60) days after filing pursuant
to the provisions of Rule 485(a)(i) under the Securities Act of 1933. A Rule
485(a) filing is being made to add convertible securities, preferred securities,
and surplus notes disclosure. Please note that the disclosure changes with
respect to convertible securities identified below are substantially the same as
the convertible securities disclosure found in Federated Bond Fund (a portfolio
of Investment Series Funds, Inc.) filed pursuant to Rule 485(a)(i) on February
18, 1997 (File Nos. 33-48847 and 811-07021).
Changes in this amendment:
1. The Fund has added convertible securities to the "Acceptable
Investments" section of the currently effective Prospectuses with a
corresponding section in the Statement of Additional Information;
2. The Fund has added preferred securities (trust preferred capital
securities and step up perpetual subordinated securities) to the "Acceptable
Investments" section of the currently effective Prospectuses with corresponding
sections in the Statement of Additional Information;
3. The Fund has added surplus notes to the "Acceptable Investments"
section of the currently effective Prospectuses with a corresponding section in
the Statement of Additional Information.
The other changes marked in this amendment represent non-material
changes.
<PAGE>
Pursuant to Investment Company Act Release No. 13,768, the Registrant
respectfully requests selective review of those sections of Parts A and B of the
Registration Statement that have been identified in numbered paragraphs 1
through 3 above.
If you have any questions regarding this filing, please call me at
(412) 288-1940.
Very truly yours,
/s/ Amy B. Gotz
Amy B. Gotz
Compliance Analyst
Enclosures
