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. 29 .................... X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 22 ...................................... 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). X on June 30, 1997
pursuant to paragraph (b).
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 Short-Term 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), 1(b), 2(a)) Financial
Highlights--Institutional Shares;
(1(a), 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) Federated Income
Securities
Trust Management.
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 Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Short-Term Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio in Federated Income Securities Trust
(the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to seek to provide current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS NOR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED NOR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference. The Fund has also filed a Statement of Additional Information for
Institutional Shares 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 your prospectus
electronically, free of charge by calling 1-800-341-7400. To obtain other
information, or 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
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
Portfolio Turnover 11
Investment Limitations 11
Trust Information 12
Management of the Trust 12
Distribution of Institutional Shares 13
Administration of the Fund 13
Net Asset Value 13
Investing in Institutional Shares 13
Share Purchases 13
Minimum Investment Required 14
What Shares Cost 14
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
Redeeming Institutional Shares 14
Telephone Redemption 14
Redeeming Shares by Mail 15
Accounts with Low Balances 15
Shareholder Information 15
Voting Rights 15
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 16
Financial Highlights -- Institutional Service Shares 17
Financial Statements 18
Report of Ernst & Young LLP,
Independent Auditors Inside Back Cover
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <S> 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) 0.37%
12b-1 Fee None
Shareholder Services Fee (after waiver)(2) 0.00%
Total Other Expenses 0.19%
Total Operating Expenses (after waivers)(3) 0.56%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) The 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 0.84% 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 Institutional Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Trust Information" and "Investing in
Institutional Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
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.
1 Year $ 6
3 Years $18
5 Years $31
10 Years $70
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)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A) 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment income 0.54 0.57 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94
Net realized and
unrealized gain
(loss) on investments 0.01 0.07 (0.24) (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42)
Total from investment 0.55 0.64 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52
operations
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.57) (0.54) (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94)
Distributions in excess
of net
investment income(b) (0.01) -- -- -- -- (0.02) (0.01) -- -- --
Total distributions (0.55) (0.57) (0.54) (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94)
NET ASSET VALUE, $ 8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $9.56
END OF PERIOD
TOTAL RETURN(C) 6.53% 7.51% 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.56% 0.56% 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50%
Net investment income 6.21% 6.43% 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59%
Expense 0.28% 0.29% 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59%
waiver/reimbursement(d)
SUPPLEMENTAL DATA
Net assets, end of
period
(000 omitted) $214,438 $216,675 $219,649 $353,106 $144,129 $36,047 $47,223 $65,429 $69,904 $90,581
Portfolio turnover 55% 77% 38% 44% 62% 114% 23% 34% 38% 77%
</TABLE>
(a) On December 31, 1991, the shareholders approved a change in the fundamental
investment policies which state that the Fund will be invested in high-grade
as opposed to lower-rated debt securities, and as a result, investment
income per share is lower.
(b) Distributions in excess of net investment income for the years ended April
30, 1997, 1992 and 1991, were a result of certain book and tax timing
differences. These distributions did not represent a return of capital for
federal income tax purposes for the year ended April 30, 1997, 1992 and
1991.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus the Board of Trustees ("Trustees") has
established two classes of shares, 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 corporate debt 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 seek to provide current income. This
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
INVESTMENT POLICIES
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies regarding
the Fund's average dollar-weighted portfolio maturity and duration. This
investment policy may not be changed without the prior approval of the Fund's
shareholders. Unless indicated otherwise, the other investment policies
described in this prospectus may be changed by the Trustees without the approval
of the Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS
The high grade debt securities in which the Fund invests include medium and
long-term instruments rated by one or more nationally recognized statistical
rating organizations ("NRSROs") in one of their three highest rating categories
(e.g., AAA, AA or A by Standard & Poor's Ratings Group ("S&P"), Fitch Investors
Service, Inc. ("Fitch"), or Duff & Phelps Rating Service ("Duff & Phelps"), or
Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's") and short-term
instruments rated by one or more NRSROs in one of their two highest categories
(e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by
Fitch). Although the Fund may invest in unrated debt securities that are
determined by the Fund's investment adviser to be of comparable quality to
instruments having such ratings, as a matter of operating policy, the Fund will
invest only in rated securities. Downgraded securities will be evaluated on a
case by case basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold.
Acceptable investments currently include the following:
* corporate debt obligations, including medium-term notes and variable rate
demand notes;
* asset-backed securities;
* commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
* certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and other
deposit institutions ("Bank Instruments");
* interest rate swaps, caps and floors;
* medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
* auction rate securities (see below);
* obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
* other money market instruments.
The Fund invests only in instruments denominated and payable in U.S.
dollars.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term corporate debt instruments that have
variable or floating interest rates and provide the Fund with the right to
tender the security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is intended to
cause the securities to trade at par. The interest rate may float or be adjusted
at regular intervals (ranging from daily to annually), and is normally based on
published interest rate or interest rate index. Many variable rate demand notes
allow the Fund to demand the repurchase of the security on not more than seven
days' prior notice. Other notes only permit the Fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features."
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain governmental,
government-related, private loans, receivables or other lender assets into
pools. Interests in these pools are sold as individual securities. Payments from
the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled payments on their mortgages. All
asset-backed securities are subject to similar prepayment risks, although they
may be more or less sensitive to certain factors. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original asset-backed security. As a consequence, mortgage securities may be
a less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of securities
ahead of other tranches, in order to reduce the risk of prepayment for the other
tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
MORTGAGE-RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities
("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/or principal. The interest portion of these payments will be
distributed by the Fund as income, and the capital portion will be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES
ARMS are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. Typically, the ARMS in which the
Fund invests are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS
may be collateralized by whole loans or private pass-through securities. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration 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.
The following example illustrates how mortgage cash flows are prioritized in
the case of CMOs. Most of the CMOs in which the Fund invests use the same
basic structure.
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of securities:
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date; the final tranche (Z bond) typically receives
any excess income from the underlying investments after payments are made to
the other tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all remaining
principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A bonds).
When those securities are completely retired, all principal payments are then
directed to the next-shortest-maturity security tranche (or B bond). This
process continues until all of the tranches have been completely retired.
Because the cash flow is distributed sequentially instead of pro rata, as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. One or more of the
tranches often bear interest at an adjustable rate. The interest portion of
these payments is distributed by the Fund as income, and the principal portion
is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS
REMICs 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
London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to have somewhat
less volatile interest rates. To the extent that the adjusted interest
rate on the mortgage security reflects current market rates, the market value
of an ARMS 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 possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Further, if a vehicle is registered in one
state and is then reregistered because the owner and obligor moves to another
state, such reregistration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
BANK INSTRUMENTS
The Fund only invests in Bank Instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by the Bank
Insurance Fund or the Savings Association Insurance Fund. Bank Instruments may
include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of
Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). FOREIGN
INVESTMENTS ECDs, ETDs, Yankee CDs, CCP and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions in the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for the Fund. CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment. Revolving credit facilities are borrowing
arrangements in which the lender agrees to make loans up to a maximum amount
upon demand by the borrower during a specified term. As the borrower repays the
loan, an amount equal to the repayment may be borrowed again during the term of
the facility. The Fund generally acquires a participation interest in a
revolving credit facility from a bank or other financial institution. The terms
of the participation 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.
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. AUCTION RATE SECURITIES The Fund may invest in auction
rate municipal securities and auction rate preferred securities, (collectively,
"auction rate securities"). Provided that the auction mechanism is successful,
auction rate securities usually permit the holder to sell the securities in an
auction at par value at specified intervals. The interest rate or dividend is
reset by "Dutch" auction in which bids are made by broker/dealers and other
institutions for a certain amount of securities at a specified minimum yield.
The interest rate or dividend rate set by the auction is the lowest interest or
dividend rate that covers all securities offered for sale. While this process is
designed to permit auction rate securities to be traded at par value, there is
some risk that an auction will fail due to insufficient demand for the
securities. If so, the securities may become illiquid and subject to the Fund's
15% limitation on illiquid securities.
AVERAGE PORTFOLIO MATURITY AND DURATION
Although the Fund will not maintain a stable NAV, the adviser will seek to
limit, to the extent consistent with the Fund's investment objective of current
income, the magnitude of fluctuations in the Fund's NAV by limiting the
dollar-weighted average maturity and duration of the Fund's portfolio.
Securities with shorter maturities and durations generally have less volatile
prices than securities of comparable quality with longer maturities or
durations. The Fund should be expected to maintain a higher average maturity and
duration during periods of lower expected market volatility, and a lower average
maturity and duration during periods of higher expected market volatility. In
any event, the Fund's dollar-weighted average maturity will not exceed three
years, and its dollar-weighted average duration will not exceed three years.
Duration is a commonly used measure of the potential volatility of the
price of a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will not treat credit
enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted and illiquid securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% of its net
assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
REPURCHASE AGREEMENTS
Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. Government
Securities or other securities in which the Fund may invest to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. This policy may not be changed without the approval of the Fund's
shareholders.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, or both, up to one-third of the value of its
total assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will limit the amount of portfolio securities it may lend
to not more than one-third of its total assets. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral equal to at least 100% of the value
of the securities loaned. This policy may not be changed without the approval of
the Fund's shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. 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 will limit its purchase of
securities on a when-issued or delayed delivery basis to no more than 20% of the
value of its total assets. This policy may not be changed without the approval
of the Fund's shareholders. 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 securites 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. PORTFOLIO
TURNOVER
While the Fund does not intend to engage in substantial short-term trading, from
time to time it may sell portfolio securities for investment reasons without
considering how long they have been held. For example, the Fund would do this:
* to take advantage of short-term differentials in yields or market values;
* to take advantage of new investment opportunities;
* to respond to changes in the creditworthiness of an issuer; or
* to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value
of its total assets to secure such borrowings;
* lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
* sell securities short except, under strict limitations, the Fund may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions;
* invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or
* with respect to 75% of its assets, invest more than 5% of the value of its
total assets in securities of one issuer (except U.S. government obligations),
or purchase more than 10% of the outstanding voting securities of any one
issuer. For these purposes the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of priorities, series,
designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
* invest more than 15% of the value of its net assets in illiquid securities,
including repurchase agreements providing for settlement more than seven days
after notice, non-negotiable time deposits, certain interest rate swaps, caps
and floors determined by the investment adviser to be illiquid, and certain
restricted securities not determined by the Trustees to be liquid.
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Pursuant to an investment advisory contract with the Trust, investment decisions
for the Fund are made by Federated Management, the Fund's investment adviser
(the "Adviser"), subject to direction by the Trustees. The Adviser continually
conducts investment research and supervision for the Fund and is responsible for
the purchase or sale of portfolio instruments, for which it receives an annual
fee from the Fund.
ADVISORY FEES
The Fund's Adviser receives an annual investment advisory fee equal to 0.40%
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 at 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.
Randall S. Bauer has been the Fund's portfolio manager since October 1995.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's investment adviser since 1994. Mr. Bauer was an Assistant Vice
President of the Fund's investment adviser from 1989 to 1993. Mr. Bauer is a
Chartered Financial Analyst and received his M.B.A. in Finance from The
Pennsylvania State University.
Robert K. Kinsey will be a portfolio manager of the Fund effective July
1997. Mr. Kinsey joined Federated in 1995 as a Vice President of a Federated
advisory subsidiary. He has been a Vice President of the Fund's adviser
since March 1997. From 1992 to 1995, he served as a Portfolio Manager for
Harris Investment Management Co., Inc. Mr. Kinsey received his M.B.A. in
Finance from U.C.L.A.
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:
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
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
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, computed at an
annual rate, 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. 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, MA; Attention: EDGEWIRE; For Credit to: Federated
Short-Term Income Fund -- Institutional Shares; Fund Number (this number can be
found on the account statement or by contacting the Fund); Group Number or Order
Number; Nominee or Institution Name; and ABA Number 011000028. 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
Short-Term 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.
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 by the transfer agent into
federal funds. Dividends are automatically reinvested on payment dates in
additional Shares of the Fund unless cash payments are requested by contacting
the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their 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 Share class name; 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 Federal Deposit Insurance
Corporation; 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 of May 9, 1997, Trust Company of St. Joseph,
St. Joseph, MO, owned 39.35% of the voting securities of the Fund's
Institutional Service Shares, and, therefore, may, for certain purposes, be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting 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. STATE AND LOCAL TAXES In the
opinion of Houston, Donnelly and Meck, counsel to the 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
NAV 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.
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.
Shares and Institutional Service Shares are subject to certain of the same
expenses; however, Institutional Service Shares are distributed under a 12b-1
Plan adopted by the Trust. Expense differences, 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.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.54 0.52 0.48 0.52 0.15
Net realized and unrealized gain (loss) on -- 0.07 (0.24) (0.32) 0.19 (0.10)
investments
Total from investment operations 0.53 0.61 0.28 0.16 0.71 0.05
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.54) (0.52) (0.48) (0.52) (0.15)
NET ASSET VALUE, END OF PERIOD $ 8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98
TOTAL RETURN(B) 6.27% 7.25% 3.29% 1.78% 8.12% 0.69%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.81% 0.81% 0.81% 0.81% 0.76% 0.78%*
Net investment income 5.96% 6.17% 5.90% 5.30% 5.82% 6.37%*
Expense waiver/reimbursement(c) 0.28% 0.29% 0.27% 0.13% 0.45% 0.98%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $17,586 $16,346 $17,091 $39,649 $15,673 $778
Portfolio turnover 55% 77% 38% 44% 62% 114%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 21, 1992 (date of initial
public investment) to April 30, 1992.
(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.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS/ASSET-BACKED SECURITIES -- 66.4%
AUTOMOTIVE -- 15.2%
<C> <S> <C>
$ 2,212,633 Chevy Chase Auto Trust 1995-1, Class A, 6.00%, 12/15/2001 $ 2,217,147
1,300,000 Chrysler Corp., 10.95%, 8/1/2017 1,388,920
1,348,132 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 1,347,862
5/15/2002
3,000,000 Ford Motor Credit Corp., MTN, 5.83%, 6/29/1998 2,984,805
3,773,437 Honda Auto Receivables Grantor Trust 1995-A, Class A, 3,766,457
6.20%, 12/15/2000
6,000,000 Navistar Dealer Note Trust 1990-A, Class A-3, Floating Rate
Pass Thru Certificate,
6.548%, 1/25/2003 6,082,800
1,946,028 Navistar Financial Owner Trust 1995-A, Class B, 6.85%, 1,953,384
11/20/2001
4,860,885 Olympic Auto Receivables Trust 1995-B, Class A-2, 7.35%, 4,910,369
10/15/2001
5,000,000 Olympic Auto Receivables Trust 1996-C, Class A-5, 7.00%, 5,047,350
3/15/2004
3,000,000 Premier Auto Trust 1995-3, Class B, 6.25%, 8/6/2001 2,958,030
2,655,000 (a)World Omni Auto Lease Securitization Trust 1996-A, Class 2,662,062
A-1, 6.30%, 6/25/2002
Total 35,319,186
BANKING -- 9.9%
3,000,000 (b)Banco Nacional de Mexico S.A., Credit Card Merchant
Voucher Receivables Master Trust
1996-A, Class A-1, 6.25%, 12/1/2003 2,916,570
3,000,000 (a)BankAmerica Corp., FRN, 5.50%, 6/25/2003 2,921,250
2,083,333 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 2,088,708
7.40%, 5/15/2000
2,000,000 Chemical Master Credit Card Trust 1995-3, Class A, 6.23%, 1,952,540
4/15/2005
5,000,000 (a)Citicorp Sub., FRN, 5.538%, 10/25/2005 4,924,250
1,000,000 (a)J.P. Morgan & Co., Inc., FRN, 5.379%, 8/19/2002 979,400
3,000,000 Standard Credit Card Master Trust 1994-4, Class A, 8.25%, 3,151,620
11/7/2003
4,000,000 Toronto-Dominion Bank, Sub. Note, 7.875%, 8/15/2004 4,077,200
Total 23,011,538
FINANCE - COMMERICIAL -- 2.1%
5,000,000 CSXT Trade Receivables Master Trust 1993-1, Class A, 5.05%, 4,921,950
9/25/1999
FINANCE - RETAIL -- 13.0%
5,000,000 Bridgestone/Firestone Master Trust 1996-1, Class B, 6.49%, 4,909,950
7/1/2003
2,500,000 Dayton Hudson Credit Card Master Trust 1995-1, Class A, 2,500,325
6.10%, 2/25/2002
5,000,000 Discover Credit Card Trust 1992-B, Class A, 6.80%, 5,024,750
6/16/2000
4,000,000 (a)First USA Credit Card Master Trust, 1994-3, Class B, 4,008,720
5.838%, 12/15/1999
4,000,000 Household Affinity Credit Card Master Trust 1993-1, Class 3,907,400
B, 5.30%, 9/15/2000
</TABLE>
Federated Short-Term Income Fund
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
FINANCE - RETAIL -- CONTINUED
<C> <S> <C>
$ 7,000,000 Household Private Label Credit Card Master Trust 1994-1, $ 7,009,170
Class B, 7.55%, 6/20/2001
2,800,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 2,901,276
Total 30,261,591
GAS & ELECTRIC UTILITIES -- 2.8%
1,000,000 Big Rivers Electric Corp., Trust Certificate, 10.70%, 1,071,600
9/15/2017
1,750,000 Kansas Electric Power Cooperative, Trust Certificate, 1,872,308
9.73%, 12/15/2017
2,000,000 Pennsylvania Power & Light Company, 9.25%, 10/1/2019 2,125,380
1,300,000 Philadelphia Electric Co., 8.625%, 6/1/2022 1,349,478
Total 6,418,766
GOVERNMENT AGENCY -- 3.9%
5,000,000 Province of Manitoba, 9.50%, 10/1/2000 5,418,100
3,380,000 Swedish Export Credit Corp., 9.875%, 3/15/2038 3,632,317
Total 9,050,417
HOME EQUITY RECEIVABLES -- 6.8%
1,588,574 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 1,584,809
8/15/2007
2,928,951 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 2,960,086
9/25/2008
4,554,691 CWABS 1996-1, Class A-2, 6.525%, 2/25/2014 4,501,583
640,694 GE Capital Home Equity Loan Trust 1991-1, Class A, 7.20%, 637,427
9/15/2011
2,684,952 (a)Merril Lynch Home Equity Loan Trust 1991-2, Class B, 2,691,664
6.313%, 4/15/2006
3,316,806 (a)Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 3,340,355
6.50%, 2/15/2003
Total 15,715,924
INSURANCE -- 3.4%
4,000,000 American General Corp., 9.625%, 2/1/2018 4,340,120
3,346,000 American Reinsurance Corp., 10.875%, 9/15/2004 3,568,542
Total 7,908,662
MANUFACTURED HOUSING RECEIVABLES -- 6.6%
3,000,000 Associates Manufactured Housing Certificates 1996-1, Class 2,941,170
A-2, 6.05%, 6/15/2027
3,750,000 Associates Manufactured Housing Certificates 1996-1, Class 3,762,675
A-2, 6.70%, 3/15/2027
5,691,914 (b)Merrill Lynch Mortgage Investments, Inc. 1991-A, Class 5,688,385
B, 9.25%, 5/15/2011
2,508,287 Merrill Lynch Mortgage Investments, Inc. 1991-I, Class A, 2,516,138
7.65%, 1/15/2012
373,501 Merrill Lynch Mortgage Investments, Inc. 1992-B, Class B, 382,910
8.50%, 4/15/2012
Total 15,291,278
</TABLE>
Federated Short-Term Income Fund
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
RECREATIONAL VEHICLE RECEIVABLES -- 0.4%
<C> <S> <C>
$ 961,798 Fleetwood Credit Corp. 1992-A, Class A, 7.10%, 2/15/2007 $ 960,173
TELECOMMUNICATIONS -- 2.3%
2,000,000 British Telecommunication Finance, PLC, 9.625%, 2/15/2019 2,172,100
3,000,000 Southwestern Bell Capital Corp., MTN, 8.81%, 12/16/2004 3,168,450
Total 5,340,550
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST $155,407,412) 154,200,035
MORTGAGE-BACKED SECURITIES -- 26.9%
COMMERCIAL MORTGAGE BACKED SECURITIES -- 1.8%
4,000,000 (b)K Mart CMBS Financing, Inc., Series 1997-1, Class C, 4,007,520
6.075%, 2/1/2007
GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 5.8%
2,591,980 GNMA Pool 354754, 7.50%, 2/15/2024 2,574,640
9,087,285 GNMA Pool 780360, 11.00%, 9/15/2015 10,186,301
50,071,857 Vendee Mortgage Trust 1995-1C, Class 3IO, .2925%, 2/15/2025 782,623
Total 13,543,564
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 19.3% 5,729,328
(b)C-BASS ABS, LLC, Series 1997-1, Class A-1, 7.05%, 5,749,037
2/1/2017
3,261,641 GE Capital Mortgage Services, Inc., 1995-7, Class A-1, 3,269,925
7.50%, 9/25/2025
1,496,100 (a)Glendale Federal Bank 1988-1, Class A, 7.402%, 1,497,970
11/25/2027
2,303,347 (a)(b)Greenwich Capital Acceptance 1991-4, Class B-1A, 2,306,940
8.478%, 7/1/2019
22,339,211 (a)Greenwich Capital Acceptance 1993-AFCI, Class B-1, 2,297,549
7.618%, 9/25/2023
3,264,921 (a)Greenwich Capital Acceptance 1993-LB2, Class A-1, 7.92%, 3,274,096
8/25/2023
1,669,486 Greenwich Capital Acceptance 1993-LB3, Class A-1, 7.68%, 1,673,659
1/25/2024
7,694,368 (a)Greenwich Capital Acceptance 1994-B, Class A, 7.72%, 7,759,309
7/1/2018
466,090 (b)Long Beach Federal Savings Bank 1992-3, Class A, 9.60%, 471,477
6/15/2022
2,500,000 Prudential Home Mortgage Securities, Inc., 1992-32, Class 2,503,175
A-6, 7.50%, 10/25/2022
5,014,872 Prudential Home Mortgage Securities, Inc., 1992-5, Class 4,960,912
A-6, 7.50%, 4/25/2007
4,039,443 Residential Accredit Loans, Inc., 1996-QS8, Class A-3, 3,996,544
7.05%, 12/25/2026
2,850,000 Residential Accredit Loans, Inc., 1997-QS2, Class A-3, 2,841,992
7.25%, 3/31/2027
194,480 Residential Funding Mortgage Securities, Inc., 1993-S18, 194,354
Class A-2, 7.50%, 5/25/2023
2,000,018 (a)Resolution Trust Corp. 1992-12, Class B-3, 7.851%, 1,983,458
1/25/2025
Total 44,780,397
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST 62,331,481
$62,306,041)
</TABLE>
Federated Short-Term Income Fund
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(C)REPURCHASE AGREEMENT -- 6.4%
<C> <S> <C>
$14,860,000 BT Securities Corporation, 5.43%, dated 4/30/1997, due $ 14,860,000
5/1/1997 (AT AMORTIZED COST)
TOTAL INVESTMENTS (IDENTIFIED COST $232,573,453)(D) $ 231,391,516
</TABLE>
(a) Denotes variable rate and floating rate obligations for which the current
rate is shown.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At the end of the period, these securities
amounted to $21,139,929, which represents 9.1% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $232,573,453.
The net unrealized depreciation of investments on a federal tax basis
amounts to $1,181,937 which is comprised of $795,349 appreciation and
$1,977,286 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($232,023,577) at April 30, 1997.
The following acronyms are used throughout this portfolio:
FRN -- Floating Rate Note
GNMA -- Government National Mortgage Association
LLC -- Limited Liability Company
MTN -- Medium Term Note
PLC -- Public Limited Corporation
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 231,391,516
$232,573,453)
Income receivable 1,732,136
Receivable for investments sold 118,827
Receivable for shares sold 424,844
Total assets $ 233,667,323
LIABILITIES:
Payable for shares redeemed $ 214,460
Income distribution payable 1,147,753
Payable to the Bank 251,955
Accrued expenses 29,578
Total liabilities 1,643,746
NET ASSETS for 26,717,976 shares outstanding $ 232,023,577
NET ASSETS CONSIST OF:
Paid-in capital $ 258,040,526
Net unrealized depreciation of investments (1,181,937)
Accumulated net realized loss on investments (24,605,883)
Distributions in excess of net investment income (229,129)
Total Net Assets $ 232,023,577
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$214,437,974 / 24,692,959 shares outstanding $8.68
INSTITUTIONAL SERVICE SHARES:
$17,585,603 / 2,025,017 shares outstanding $8.68
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED SHORT-TERM INCOME FUND
YEAR ENDED APRIL 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $16,204,039
EXPENSES:
Investment advisory fee $ 957,140
Administrative personnel and services fee 180,791
Custodian fees 36,965
Transfer and dividend disbursing agent fees and expenses 64,903
Directors'/Trustees' fees 7,903
Auditing fees 17,478
Legal fees 3,997
Portfolio accounting fees 86,082
Distribution services fee -- Institutional Service Shares 40,701
Shareholder services fee -- Institutional Shares 557,524
Shareholder services fee -- Institutional Service Shares 40,704
Share registration costs 28,724
Printing and postage 23,097
Insurance premiums 4,859
Taxes 3,697
Miscellaneous 7,592
Total expenses 2,062,157
Waivers --
Waiver of investment advisory fee $ (72,703)
Waiver of distribution services fee -- Institutional (39,073)
Service Shares
Waiver of shareholder services fee -- Institutional (557,524)
Shares
Waiver of shareholder services fee -- Institutional (1,628)
Service Shares
Total waivers (670,928)
Net expenses 1,391,229
Net investment income 14,812,810
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (629,217)
Net change in unrealized depreciation of investments 928,955
Net realized and unrealized gain on investments 299,738
Change in net assets resulting from operations $15,112,548
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 14,812,810 $ 14,529,558
Net realized gain (loss) on investments ($1,566,031 net
loss and $10,784,773 net loss,
respectively, as computed for federal tax purposes) (629,217) (2,061,785)
Net change in unrealized appreciation/depreciation 928,955 4,045,498
Change in net assets resulting from operations 15,112,548 16,513,271
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Institutional Shares (13,841,711) (13,302,550)
Institutional Service Shares (971,099) (1,227,008)
Distributions in excess of net investment income
Institutional Shares (229,129) --
Change in net assets resulting from distributions to (15,041,939) (14,529,558)
shareholders
SHARE TRANSACTIONS --
Proceeds from sale of shares 139,918,706 109,565,191
Net asset value of shares issued to shareholders in 3,262,307 2,706,717
payment of distributions declared
Cost of shares redeemed (144,248,869) (117,974,583)
Change in net assets resulting from share transactions (1,067,856) (5,702,675)
Change in net assets (997,247) (3,718,962)
NET ASSETS:
Beginning of period 233,020,824 236,739,786
End of period $ 232,023,577 $ 233,020,824
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED SHORT-TERM INCOME FUND
ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of two diversified portfolios.
The financial statements included herein are only those of Federated Short-Term
Income Fund (the "Fund"), a diversified portfolio. The financial statements of
the other portfolio are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The investment objective of the Fund is to seek to provide
current income. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, other fixed income and
asset-backed securities, unlisted securities and private placement securities
are generally valued at the mean of the latest bid and asked price as furnished
by an independent pricing service. Short-term securities are valued at the
prices provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
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 the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for expiring capital
loss carryforwards. The following reclassifications have been made to the
financial statements.
INCREASE (DECREASE)
ACCUMULATED
PAID-IN CAPITAL NET REALIZED LOSS
($3,077,752) $3,077,752
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At April 30, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $24,147,796, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
1998 $ 316,627
1999 1,132,354
2000 4,105,766
2002 669,532
2003 5,572,713
2004 10,784,773
2005 1,566,031
Additionally, net capital losses of $458,087 attributable to security
transactions incurred after October 31, 1996 are treated as arising on the first
day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
In some cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resales. The Fund's restricted securities
are valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee.
Additional information on each restricted security held at April 30, 1997 is as
follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Banco Nacional de Mexico, 1996-A 1/9/1997 $ 2,935,781
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/1994 5,781,739
K Mart CMBS Financing, Inc., Series 1997-1 2/27/1997 4,000,000
C-BASS ABS, LLC, Series 1997-1 2/25/1997 5,752,603
Greenwich Capital Acceptance 1991-4, Class B-1A 1/7/1993 2,338,480
Long Beach Federal Savings Bank Series 1992-3, Class A 6/29/1992 717,099
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 15,252,983 $ 132,739,529 10,873,366 $ 95,413,085
Shares issued to 321,221 2,792,262 238,773 2,094,178
shareholders in payment
of distributions
declared
Shares redeemed (15,832,329) (137,838,962) (11,665,688) (102,282,720)
Net change resulting (258,125) $ (2,307,171) (553,549) $ (4,775,457)
from Institutional
Shares transactions
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SERVICE SHARES AMOUNT SHARES AMOUNT
SHARES
<S> <C> <C> <C> <C>
Shares sold 825,563 $ 7,179,177 1,615,112 $ 14,152,106
Shares issued to 54,067 470,045 69,892 612,539
shareholders in payment
of distributions
declared
Shares redeemed (736,958) (6,409,907) (1,787,163) (15,691,863)
Net change resulting
from Institutional
Service Shares
transactions 142,672 $ 1,239,315 (102,159) $ (927,218)
Net change resulting (115,453) $ (1,067,856) (655,708) $ (5,702,675)
from Fund share
transactions
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser, (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee. The Adviser can modify or terminate this voluntary waiver at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25% of the average daily net assets of Instutional
Service Shares annually, to compensate FSC. The distributor may voluntarily
choose to waive any portion of its fee. The distributor can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of daily average net assets
of the Fund shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1997, were as follows:
PURCHASES $125,993,771
SALES $130,814,892
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
FEDERATED SHORT-TERM INCOME FUND (a portfolio of Federated Income Securities
Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Short-Term Income Fund (one of the
portfolios comprising Federated Income Securities Trust), as of April 30, 1997,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended and
the financial highlights (see page 2 and 17 of this prospectus) for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term Income Fund, a portfolio of Federated Income Securities
Trust, at April 30, 1997, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 13, 1997
[Graphic]Federated Investors
Federated Short-Term 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 SHORT-TERM INCOME FUND
Institutional Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securites 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 Federated Investors Tower Pittsburgh, PA 15222-3779
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Cusip 31420C209
1111903A-IS (6/97)[Graphic]
Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Short-Term Income Fund (the
"Fund") offered by this prospectus represent interests in a diversified
portfolio of securities which is an investment portfolio in Federated Income
Securities Trust (the "Trust"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek to provide current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS NOR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED NOR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional 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
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information, or 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
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
Portfolio Turnover 11
Investment Limitations 11
Trust Information 12
Management of the Trust 12
Distribution of Institutional Service Shares 13
Administration of the Fund 13
Net Asset Value 14
Investing in Institutional Service Shares 14
Share Purchases 14
Exchange Privilege 14
Minimum Investment Required 14
What Shares Cost 14
Certificates and Confirmations 15
Dividends 15
Capital Gains 15
Redeeming Institutional Service Shares 15
Telephone Redemption 15
Redeeming Shares by Mail 15
Accounts with Low Balances 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 17
Financial Highlights -- Institutional Shares 18
Financial Statements 19
Report of Ernst & Young LLP, Independent Auditors 30
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
<TABLE>
<CAPTION> SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
None price) Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage None of offering price) 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
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.37%
12b-1 Fee (after waiver)(2) 0.01%
Shareholder Services Fee (after waiver)(3) 0.24%
Total Other Expenses 0.43%
Total Operating Expenses (after waivers)(4) 0.81%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) The 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 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 1.09% absent the voluntary
waivers of portions of the management fee, 12b-1 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 Institutional Service Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Trust Information" and "Investing in
Institutional Service Shares." Wire-transferred redemptions of less than $5,000
may be subject to additional fees. LONG-TERM SHAREHOLDERS MAY PAY MORE THAN
THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES 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.
1 Year $ 8
3 Years $ 26
5 Years $ 45
10 Years $100
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)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 30.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.54 0.52 0.48 0.52 0.15
Net realized and unrealized gain (loss) on -- 0.07 (0.24) (0.32) 0.19 (0.10)
investments
Total from investment operations 0.53 0.61 0.28 0.16 0.71 0.05
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.54) (0.52) (0.48) (0.52) (0.15)
NET ASSET VALUE, END OF PERIOD $8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98
TOTAL RETURN(B) 6.27% 7.25% 3.29% 1.78% 8.12% 0.69%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.81% 0.81% 0.81% 0.81% 0.76% 0.78%*
Net investment income 5.96% 6.17% 5.90% 5.30% 5.82% 6.37%*
Expense waiver/reimbursement(c) 0.28% 0.29% 0.27% 0.13% 0.45% 0.98%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $17,586 $16,346 $17,091 $39,649 $15,673 $778
Portfolio turnover 55% 77% 38% 44% 62% 114%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 21, 1992 (date of initial
public investment) to April 30, 1992.
(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.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus the Board of Trustees ("Trustees") has
established two classes of shares, 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 seek to provide current income. This
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
INVESTMENT POLICIES
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies regarding
the Fund's average dollar-weighted portfolio maturity and duration. This
investment policy may not be changed without the prior approval of the Fund's
shareholders. Unless indicated otherwise, the other investment policies
described in this prospectus may be changed by the Trustees without the approval
of the Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS
The high grade debt securities in which the Fund invests include medium and
long-term instruments rated by one or more nationally recognized statistical
rating organizations ("NRSROs") in one of their three highest rating categories
(e.g., AAA, AA or A by Standard & Poor's Ratings Group ("S&P"), Fitch Investors
Service, Inc. ("Fitch"), or Duff & Phelps Rating Service ("Duff and Phelps"), or
Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's")) and short-term
instruments rated by one or more NRSROs in one of their two highest categories
(e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by
Fitch). Although the Fund may invest in unrated debt securities that are
determined by the Fund's investment adviser to be of comparable quality to
instruments having such ratings, as a matter of operating policy, the Fund will
invest only in rated securities. Downgraded securities will be evaluated on a
case by case basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold. Acceptable investments currently include the following: * corporate
debt obligations, including medium-term notes and variable rate
demand notes;
* asset-backed securities;
* commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);
* certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and other
deposit institutions ("Bank Instruments");
* medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
* interest rate swaps, caps and floors;
* auction rate securities (see below);
* obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
* other money market instruments.
The Fund invests only in instruments denominated and payable in U.S.
dollars.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term corporate debt instruments that have
variable or floating interest rates and provide the Fund with the right to
tender the security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is intended to
cause the securities to trade at par. The interest rate may float or be adjusted
at regular intervals (ranging from daily to annually), and is normally based on
a published interest rate or interest rate index. Many variable rate demand
notes allow the Fund to demand the repurchase of the security on not more than
seven days' prior notice. Other notes only permit the Fund to tender the
security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features."
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain governmental,
government-related, private loans, receivables or other lender assets into
pools. Interests in these pools are sold as individual securities. Payments from
the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled payments on their mortgages. All
asset-backed securities are subject to similar prepayment risks, although they
may be more or less sensitive to certain factors. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original asset-backed security. As a consequence, mortgage securities may be
a less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of securities
ahead of other tranches, in order to reduce the risk of prepayment for the other
tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement provided to such
securities.
MORTGAGE-RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities
("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 invests are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS
may be collateralized by whole loans or private pass-through securities. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration 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.
The following example illustrates how mortgage cash flows are prioritized in
the case of CMOs. Most of the CMOs in which the Fund invests use the same
basic structure.
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of securities:
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date; the final tranche (Z bond) typically receives
any excess income from the underlying investments after payments are made to
the other tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all remaining
principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A bonds).
When those securities are completely retired, all principal payments are then
directed to the next-shortest-maturity security tranche (or B bond). This
process continues until all of the tranches have been completely retired.
Because the cash flow is distributed sequentially instead of pro rata, as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. One or more of the
tranches often bear interest at an adjustable rate. The interest portion of
these payments is distributed by the Fund as income, and the principal portion
is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS
REMICs 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
London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to have somewhat
less volatile interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate mortgage
security will tend to be less sensitive to interest rate changes than a fixed
rate debt security of the same stated maturity. Hence, 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 CMO's may have adjustable interest rates that deviate significantly from
prevailing market rates, even after the interest rate is reset, and are
subject to correspondingly increased price volatility. In the event that the
Fund purchases such residual interest mortgage securities, it will factor in
the increased interest and price volatility of such securities when
determining its dollar-weighted average portfolio maturity and duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in
which the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change
up or down: (1) per reset or adjustment interval and (2) over the life of the
loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund 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 nongovernmental entities and carry no direct or indirect
governmental guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage-related asset-backed securities have structural characteristics
similar to mortgage-related asset-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. The Fund may
invest in non-mortgage-related asset-backed securities including, but not
limited to, interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. These securities
may be in the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no direct or
indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Although non-mortgage-related
asset-backed securities generally are less likely to experience substantial
prepayments than are mortgage-related asset-backed securities, certain of the
factors that affect the rate of prepayments on mortgage-related asset-backed
securities also affect the rate of prepayments on non-mortgage-related
asset-backed securities.
Non-mortgage-related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
reregistered because the owner and obligor moves to another state, such
registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved
in a typical issuance and technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile receivables
may not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
BANK INSTRUMENTS
The Fund only invests in Bank Instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by the Bank
Insurance Fund or the Savings Association Insurance Fund. Bank Instruments may
include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of
Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs").
FOREIGN INVESTMENTS
ECDs, ETDs, Yankee CDs, CCP and Europaper are subject to somewhat different
risks than domestic obligations of domestic issuers. Examples of these risks
include international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and the possible
impact of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan limitations, examinations, accounting,
auditing, and recordkeeping, and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment. Revolving credit facilities are borrowing
arrangements in which the lender agrees to make loans up to a maximum amount
upon demand by the borrower during a specified term. As the borrower repays the
loan, an amount equal to the repayment may be borrowed again during the term of
the facility. The Fund generally acquires a participation interest in a
revolving credit facility from a bank or other financial institution. The terms
of the participation 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.
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. AUCTION RATE SECURITIES The Fund may invest in auction
rate municipal securities and auction rate preferred securities (collectively,
"auction rate securities"). Provided that the auction mechanism is successful,
auction rate securities usually permit the holder to sell the securities in an
auction at par value at specified intervals. The interest rate or dividend is
reset by "Dutch" auction in which bids are made by broker/dealers and other
institutions for a certain amount of securities at a specified minimum yield.
The interest rate or dividend rate set by the auction is the lowest interest or
dividend rate that covers all securities offered for sale. While this process is
designed to permit auction rate securities to be traded at par value, there is
some risk that an auction will fail due to insufficient demand for the
securities. If so, the securities may become illiquid and subject to the Fund's
15% limitation on illiquid securities. AVERAGE PORTFOLIO MATURITY AND
DURATION Although the Fund will not maintain a stable NAV, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
current income, the magnitude of fluctuations in the Fund's NAV by limiting the
dollar-weighted average maturity and duration of the Fund's portfolio.
Securities with shorter maturities and durations generally have less volatile
prices than securities of comparable quality with longer maturities or
durations. The Fund should be expected to maintain a higher average maturity and
duration during periods of lower expected market volatility, and a lower average
maturity and duration during periods of higher expected market volatility. In
any event, the Fund's dollar-weighted average maturity will not exceed three
years, and its dollar-weighted average duration will not exceed three years.
Duration is a commonly used measure of the potential volatility of the
price of a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest.
CREDIT ENHANCEMENT
Certain of the Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will not treat credit
enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted and illiquid securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 15% of its net
assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
REPURCHASE AGREEMENTS
Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. Government
Securities or other securities in which the Fund may invest to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. This policy may not be changed without the approval of the Fund's
shareholders.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-term or long-term basis, or both, up to one-third of the value of its
total assets, to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will limit the amount of portfolio securities it may lend
to not more than one-third of its total assets. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees and will receive collateral equal to at least 100% of the value
of the securities loaned. This policy may not be changed without the approval of
the Fund's shareholders. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. 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 will limit its purchase of
securities on a when-issued or delayed delivery basis to no more than 20% of the
value of its total assets. This policy may not be changed without the approval
of the Fund's shareholders. 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 securites 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. PORTFOLIO
TURNOVER
While the Fund does not intend to engage in substantial short-term trading, from
time to time it may sell portfolio securities for investment reasons without
considering how long they have been held. For example, the Fund would do this:
* to take advantage of short-term differentials in yields or market values;
* to take advantage of new investment opportunities;
* to respond to changes in the creditworthiness of an issuer; or
* to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective.
INVESTMENT LIMITATIONS
The Fund will not:
* borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
its total assets to secure such borrowings;
* lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
* sell securities short except, under strict limitations, the Fund may maintain
open short positions so long as not more than 10% of the value of its net assets
is held as collateral for those positions;
* invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or
* with respect to 75% of its assets, invest more than 5% of the value of its
total assets in securities of one issuer (except U.S. government obligations),
or purchase more than 10% of the outstanding voting securities of any one
issuer. For these purposes the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of priorities, series,
designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
* invest more than 15% of the value of its net assets in illiquid securities,
including repurchase agreements providing for settlement more than seven days
after notice, non-negotiable time deposits, certain interest rate swaps, caps
and floors determined by the investment adviser to be illiquid, and certain
restricted securities not determined by the Trustees to be liquid.
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. The Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Pursuant to an investment advisory contract with the Trust, investment decisions
for the Fund are made by Federated Management, the Fund's investment adviser
(the "Adviser"), subject to direction by the Trustees. The Adviser continually
conducts investment research and supervision for the Fund and is responsible for
the purchase or sale of portfolio instruments, for which it receives an annual
fee from the Fund.
ADVISORY FEES
The Fund's Adviser receives an annual investment advisory fee equal to 0.40%
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 at 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.
Randall S. Bauer has been the Fund's portfolio manager since October 1995.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's investment adviser since 1994. Mr. Bauer was an Assistant Vice
President of the Fund's investment adviser from 1989 to 1993. Mr. Bauer is a
Chartered Financial Analyst and received his M.B.A. in Finance from The
Pennsylvania State University.
Robert K. Kinsey will be a portfolio manager of the Fund effective July
1997. Mr. Kinsey joined Federated in 1995 as a Vice President of a Federated
advisory subsidiary. He has been a Vice President of the Fund's adviser
since March 1997. From 1992 to 1995, he served as a Portfolio Manager for
Harris Investment Management Co., Inc. Mr. Kinsey received his M.B.A. in
Finance from U.C.L.A.
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 net assets of the 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 except as described above. Therefore, the Fund does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Plan. In addition, the Trust has entered into a Shareholder
Services Agreement with Federated Shareholder Services, a subsidiary of
Federated Investors, under which the Fund 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
Distribution Plan and 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:
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
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
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. 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, MA; Attention: EDGEWIRE; For Credit to: Federated
Short-Term Income Fund -- Institutional Service Shares; Fund Number (this number
can be found on the account statement or by contacting the Fund); Group Number
or Order Number; Nominee or Institution Name; and ABA Number 011000028. 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
Short-Term Income Fund -- Institutional Service 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. EXCHANGE PRIVILEGE
Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors may exchange their shares for
Institutional Shares of the Trust.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their NAV next determined after an order is received. There
is no sales charge imposed by the Fund. Investors who purchase Shares through a
non-affiliated bank or broker may be charged an additional service fee by that
bank or broker.
The 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.
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.
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 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 name; 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 signatures on written redemption requests
guaranteed by a commercial or savings bank, trust company or savings association
whose deposits are insured by an organization which is administered by the
Federal Deposit Insurance Corporation; 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 of May 9, 1997, Trust Company of St. Joseph,
St. Joseph, MO, owned 39.35% of the voting securities of the Fund's
Institutional Service Shares, and, therefore, may, for certain purposes, be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting 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.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly and Meck, counsel to the 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.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 30.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A) 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.54 0.57 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94
Net realized and
unrealized gain
(loss) on investments 0.01 0.07 (0.24) (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42)
Total from investment 0.55 0.64 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52
operations
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.57) (0.54) (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94)
Distributions in excess
of net
investment income(b) (0.01) -- -- -- -- (0.02) (0.01) -- -- --
Total distributions (0.55) (0.57) (0.54) (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94)
NET ASSET VALUE, END OF $ 8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56
PERIOD
TOTAL RETURN(C) 6.53% 7.51% 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.56% 0.56% 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50%
Net investment income 6.21% 6.43% 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59%
Expense 0.28% 0.29% 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59%
waiver/reimbursement(d)
SUPPLEMENTAL DATA
Net assets, end of
period
(000 omitted) $214,438 $216,675 $219,649 $353,106 $144,129 $36,047 $47,223 $65,429 $69,904 $90,581
Portfolio turnover 55% 77% 38% 44% 62% 114% 23% 34% 38% 77%
</TABLE>
(a) On December 31, 1991, the shareholders approved a change in the fundamental
investment policies which state that the Fund will be invested in high-grade
as opposed to lower-rated debt securities, and as a result, investment
income per share is lower.
(b) Distributions in excess of net investment income for the years ended April
30, 1997, 1992 and 1991, were a result of certain book and tax timing
differences. These distributions did not represent a return of capital for
federal income tax purposes for the year ended April 30, 1997, 1992 and
1991.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES -- 66.4%
AUTOMOTIVE -- 15.2%
$ 2,212,633 Chevy Chase Auto Trust 1995-1, Class A, 6.00%, 12/15/2001 $ 2,217,147
1,300,000 Chrysler Corp., 10.95%, 8/1/2017 1,388,920
1,348,132 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 5/15/2002 1,347,862
3,000,000 Ford Motor Credit Corp., MTN, 5.83%, 6/29/1998 2,984,805
3,773,437 Honda Auto Receivables Grantor Trust 1995-A, Class A, 6.20%, 3,766,457
12/15/2000
6,000,000 Navistar Dealer Note Trust 1990-A, Class A-3, Floating Rate Pass Thru
Certificate,
6.548%, 1/25/2003 6,082,800
1,946,028 Navistar Financial Owner Trust 1995-A, Class B, 6.85%, 11/20/2001 1,953,384
4,860,885 Olympic Auto Receivables Trust 1995-B, Class A-2, 7.35%, 10/15/2001 4,910,369
5,000,000 Olympic Auto Receivables Trust 1996-C, Class A-5, 7.00%, 3/15/2004 5,047,350
3,000,000 Premier Auto Trust 1995-3, Class B, 6.25%, 8/6/2001 2,958,030
2,655,000 (a)World Omni Auto Lease Securitization Trust 1996-A, Class A-1, 2,662,062
6.30%, 6/25/2002
Total 35,319,186
BANKING -- 9.9%
3,000,000 (b)Banco Nacional de Mexico S.A., Credit Card Merchant Voucher
Receivables Master Trust
1996-A, Class A-1, 6.25%, 12/1/2003 2,916,570
3,000,000 (a)BankAmerica Corp., FRN, 5.50%, 6/25/2003 2,921,250
2,083,333 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 7.40%, 2,088,708
5/15/2000
2,000,000 Chemical Master Credit Card Trust 1995-3, Class A, 6.23%, 4/15/2005 1,952,540
5,000,000 (a)Citicorp Sub., FRN, 5.538%, 10/25/2005 4,924,250
1,000,000 (a)J.P. Morgan & Co., Inc., FRN, 5.379%, 8/19/2002 979,400
3,000,000 Standard Credit Card Master Trust 1994-4, Class A, 8.25%, 11/7/2003 3,151,620
4,000,000 Toronto-Dominion Bank, Sub. Note, 7.875%, 8/15/2004 4,077,200
Total 23,011,538
FINANCE - COMMERICIAL -- 2.1%
5,000,000 CSXT Trade Receivables Master Trust 1993-1, Class A, 5.05%, 9/25/1999 4,921,950
FINANCE - RETAIL -- 13.0%
5,000,000 Bridgestone/Firestone Master Trust 1996-1, Class B, 6.49%, 7/1/2003 4,909,950
2,500,000 Dayton Hudson Credit Card Master Trust 1995-1, Class A, 6.10%, 2,500,325
2/25/2002
5,000,000 Discover Credit Card Trust 1992-B, Class A, 6.80%, 6/16/2000 5,024,750
4,000,000 (a)First USA Credit Card Master Trust, 1994-3, Class B, 5.838%, 4,008,720
12/15/1999
4,000,000 Household Affinity Credit Card Master Trust 1993-1, Class B, 5.30%, 3,907,400
9/15/2000
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
FINANCE - RETAIL -- CONTINUED
$ 7,000,000 Household Private Label Credit Card Master Trust 1994-1, Class B, $ 7,009,170
7.55%, 6/20/2001
2,800,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 2,901,276
Total 30,261,591
GAS & ELECTRIC UTILITIES -- 2.8%
1,000,000 Big Rivers Electric Corp., Trust Certificate, 10.70%, 9/15/2017 1,071,600
1,750,000 Kansas Electric Power Cooperative, Trust Certificate, 9.73%, 1,872,308
12/15/2017
2,000,000 Pennsylvania Power & Light Company, 9.25%, 10/1/2019 2,125,380
1,300,000 Philadelphia Electric Co., 8.625%, 6/1/2022 1,349,478
Total 6,418,766
GOVERNMENT AGENCY -- 3.9%
5,000,000 Province of Manitoba, 9.50%, 10/1/2000 5,418,100
3,380,000 Swedish Export Credit Corp., 9.875%, 3/15/2038 3,632,317
Total 9,050,417
HOME EQUITY RECEIVABLES -- 6.8%
1,588,574 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 8/15/2007 1,584,809
2,928,951 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 2,960,086
4,554,691 CWABS 1996-1, Class A-2, 6.525%, 2/25/2014 4,501,583
640,694 GE Capital Home Equity Loan Trust 1991-1, Class A, 7.20%, 9/15/2011 637,427
2,684,952 (a)Merril Lynch Home Equity Loan Trust 1991-2, Class B, 6.313%, 2,691,664
4/15/2006
3,316,806 (a)Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 6.50%, 3,340,355
2/15/2003
Total 15,715,924
INSURANCE -- 3.4%
4,000,000 American General Corp., 9.625%, 2/1/2018 4,340,120
3,346,000 American Reinsurance Corp., 10.875%, 9/15/2004 3,568,542
Total 7,908,662
MANUFACTURED HOUSING RECEIVABLES -- 6.6%
3,000,000 Associates Manufactured Housing Certificates 1996-1, Class A-2, 6.05%, 2,941,170
6/15/2027
3,750,000 Associates Manufactured Housing Certificates 1996-1, Class A-2, 6.70%, 3,762,675
3/15/2027
5,691,914 (b)Merrill Lynch Mortgage Investments, Inc. 1991-A, Class B, 9.25%, 5,688,385
5/15/2011
2,508,287 Merrill Lynch Mortgage Investments, Inc. 1991-I, Class A, 7.65%, 2,516,138
1/15/2012
373,501 Merrill Lynch Mortgage Investments, Inc. 1992-B, Class B, 8.50%, 382,910
4/15/2012
Total 15,291,278
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
RECREATIONAL VEHICLE RECEIVABLES -- 0.4%
$ 961,798 Fleetwood Credit Corp. 1992-A, Class A, 7.10%, 2/15/2007 $ 960,173
TELECOMMUNICATIONS -- 2.3%
2,000,000 British Telecommunication Finance, PLC, 9.625%, 2/15/2019 2,172,100
3,000,000 Southwestern Bell Capital Corp., MTN, 8.81%, 12/16/2004 3,168,450
Total 5,340,550
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES (IDENTIFIED COST 154,200,035
$155,407,412)
MORTGAGE-BACKED SECURITIES -- 26.9%
COMMERCIAL MORTGAGE BACKED SECURITIES -- 1.8%
4,000,000 (b)K Mart CMBS Financing, Inc., Series 1997-1, Class C, 6.075%, 4,007,520
2/1/2007
GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 5.8%
2,591,980 GNMA Pool 354754, 7.50%, 2/15/2024 2,574,640
9,087,285 GNMA Pool 780360, 11.00%, 9/15/2015 10,186,301
50,071,857 Vendee Mortgage Trust 1995-1C, Class 3IO, .2925%, 2/15/2025 782,623
Total 13,543,564
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 19.3%
5,729,328 (b)C-BASS ABS, LLC, Series 1997-1, Class A-1, 7.05%, 2/1/2017 5,749,037
3,261,641 GE Capital Mortgage Services, Inc., 1995-7, Class A-1, 7.50%, 3,269,925
9/25/2025
1,496,100 (a)Glendale Federal Bank 1988-1, Class A, 7.402%, 11/25/2027 1,497,970
2,303,347 (a)(b)Greenwich Capital Acceptance 1991-4, Class B-1A, 8.478%, 2,306,940
7/1/2019
22,339,211 (a)Greenwich Capital Acceptance 1993-AFCI, Class B-1, 7.618%, 2,297,549
9/25/2023
3,264,921 (a)Greenwich Capital Acceptance 1993-LB2, Class A-1, 7.92%,
8/25/2023 3,274,096 1,669,486 Greenwich Capital Acceptance 1993-LB3, Class
A-1, 7.68%, 1/25/2024 1,673,659 7,694,368 (a)Greenwich Capital Acceptance
1994-B, Class A, 7.72%, 7/1/2018 7,759,309
466,090 (b)Long Beach Federal Savings Bank 1992-3, Class A, 9.60%,
6/15/2022 471,477 2,500,000 Prudential Home Mortgage Securities, Inc.,
1992-32, Class A-6, 7.50%, 2,503,175
10/25/2022
5,014,872 Prudential Home Mortgage Securities, Inc., 1992-5, Class A-6, 7.50%, 4,960,912
4/25/2007
4,039,443 Residential Accredit Loans, Inc., 1996-QS8, Class A-3, 7.05%, 3,996,544
12/25/2026
2,850,000 Residential Accredit Loans, Inc., 1997-QS2, Class A-3, 7.25%, 2,841,992
3/31/2027
194,480 Residential Funding Mortgage Securities, Inc., 1993-S18, Class A-2, 194,354
7.50%, 5/25/2023
2,000,018 (a)Resolution Trust Corp. 1992-12, Class B-3, 7.851%, 1/25/2025 1,983,458
Total 44,780,397
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $62,306,041) 62,331,481
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(C)REPURCHASE AGREEMENT -- 6.4%
$ 14,860,000 BT Securities Corporation, 5.43%, dated 4/30/1997, due 5/1/1997 (AT $ 14,860,000
AMORTIZED COST)
TOTAL INVESTMENTS (IDENTIFIED COST $232,573,453)(D) $ 231,391,516
</TABLE>
(a) Denotes variable rate and floating rate obligations for which the current
rate is shown.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At the end of the period, these securities
amounted to $21,139,929, which represents 9.1% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $232,573,453.
The net unrealized depreciation of investments on a federal tax basis
amounts to $1,181,937 which is comprised of $795,349 appreciation and
$1,977,286 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($232,023,577) at April 30, 1997.
The following acronyms are used throughout this portfolio:
FRN -- Floating Rate Note
GNMA -- Government National Mortgage Association LLC -- Limited Liability
Company MTN -- Medium Term Note PLC -- Public Limited Corporation (See
Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 231,391,516
$232,573,453)
Income receivable 1,732,136
Receivable for investments sold 118,827
Receivable for shares sold 424,844
Total assets $ 233,667,323
LIABILITIES:
Payable for shares redeemed $ 214,460
Income distribution payable 1,147,753
Payable to the Bank 251,955
Accrued expenses 29,578
Total liabilities 1,643,746
NET ASSETS for 26,717,976 shares outstanding $ 232,023,577
NET ASSETS CONSIST OF:
Paid-in capital $ 258,040,526
Net unrealized depreciation of investments (1,181,937)
Accumulated net realized loss on investments (24,605,883)
Distributions in excess of net investment income (229,129)
Total Net Assets $ 232,023,577
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$214,437,974 / 24,692,959 shares outstanding $8.68
INSTITUTIONAL SERVICE SHARES:
$17,585,603 / 2,025,017 shares outstanding $8.68
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED SHORT-TERM INCOME FUND
YEAR ENDED APRIL 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $16,204,039
EXPENSES:
Investment advisory fee $ 957,140
Administrative personnel and services fee 180,791
Custodian fees 36,965
Transfer and dividend disbursing agent fees and expenses 64,903
Directors'/Trustees' fees 7,903
Auditing fees 17,478
Legal fees 3,997
Portfolio accounting fees 86,082
Distribution services fee -- Institutional Service Shares 40,701
Shareholder services fee -- Institutional Shares 557,524
Shareholder services fee -- Institutional Service Shares 40,704
Share registration costs 28,724
Printing and postage 23,097
Insurance premiums 4,859
Taxes 3,697
Miscellaneous 7,592
Total expenses 2,062,157
Waivers --
Waiver of investment advisory fee $ (72,703)
Waiver of distribution services fee -- Institutional (39,073)
Service Shares
Waiver of shareholder services fee -- Institutional (557,524)
Shares
Waiver of shareholder services fee -- Institutional (1,628)
Service Shares
Total waivers (670,928)
Net expenses 1,391,229
Net investment income 14,812,810
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (629,217)
Net change in unrealized depreciation of investments 928,955
Net realized and unrealized gain on investments 299,738
Change in net assets resulting from operations $15,112,548
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 14,812,810 $ 14,529,558
Net realized gain (loss) on investments ($1,566,031
net loss and $10,784,773 net loss,
respectively, as computed for federal tax purposes) (629,217) (2,061,785)
Net change in unrealized appreciation/depreciation 928,955 4,045,498
Change in net assets resulting from operations 15,112,548 16,513,271
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Institutional Shares (13,841,711) (13,302,550)
Institutional Service Shares (971,099) (1,227,008)
Distributions in excess of net investment income
Institutional Shares (229,129) --
Change in net assets resulting from distributions (15,041,939) (14,529,558)
to shareholders
SHARE TRANSACTIONS --
Proceeds from sale of shares 139,918,706 109,565,191
Net asset value of shares issued to shareholders in 3,262,307 2,706,717
payment of distributions declared
Cost of shares redeemed (144,248,869) (117,974,583)
Change in net assets resulting from share (1,067,856) (5,702,675)
transactions
Change in net assets (997,247) (3,718,962)
NET ASSETS:
Beginning of period 233,020,824 236,739,786
End of period $ 232,023,577 $ 233,020,824
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED SHORT-TERM INCOME FUND
ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of two diversified portfolios.
The financial statements included herein are only those of Federated Short-Term
Income Fund (the "Fund"), a diversified portfolio. The financial statements of
the other portfolio are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The investment objective of the Fund is to seek to provide
current income. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, other fixed income and
asset-backed securities, unlisted securities and private placement securities
are generally valued at the mean of the latest bid and asked price as furnished
by an independent pricing service. Short-term securities are valued at the
prices provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
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 the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
expiring capital loss carryforwards. The following reclassifications have been
made to the financial statements.
INCREASE (DECREASE)
ACCUMULATED
PAID-IN CAPITAL NET REALIZED LOSS
($3,077,752) $3,077,752
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary. At April 30, 1997, the Fund, for federal tax purposes, had a
capital loss carryforward of $24,147,796, which will reduce the Fund's taxable
income arising from future net realized gain on investments, if any, to the
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve the
Fund of any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
1998 $ 316,627
1999 1,132,354
2000 4,105,766
2002 669,532
2003 5,572,713
2004 10,784,773
2005 1,566,031
Additionally, net capital losses of $458,087 attributable to security
transactions incurred after October 31, 1996 are treated as arising on the
first day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
In some cases, the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resales. The Fund's restricted securities
are valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee.
Additional information on each restricted security held at April 30, 1997 is as
follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Banco Nacional de Mexico, 1996-A 1/9/1997 $2,935,781
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/1994 5,781,739
K Mart CMBS Financing, Inc., Series 1997-1 2/27/1997 4,000,000
C-BASS ABS, LLC, Series 1997-1 2/25/1997 5,752,603
Greenwich Capital Acceptance 1991-4, Class B-1A 1/7/1993 2,338,480
Long Beach Federal Savings Bank Series 1992-3, Class A 6/29/1992 717,099
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SHARES AMOUNT SHARES AMOUNT SHARES
<S> <C> <C> <C> <C>
Shares sold 15,252,983 $ 132,739,529 10,873,366 $ 95,413,085
Shares issued 321,221 2,792,262 238,773 2,094,178
to shareholders
in payment of
distributions
declared Shares (15,832,329) (137,838,962) (11,665,688) (102,282,720)
redeemed
Net change (258,125) $ (2,307,171) (553,549) $ (4,775,457)
resulting from
Institutional
Shares transactions
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 825,563 $ 7,179,177 1,615,112 $ 14,152,106
Shares issued 54,067 470,045 69,892 612,539
to shareholders
in payment of
distributions
declared Shares (736,958) (6,409,907) (1,787,163) (15,691,863)
redeemed
Net change
resulting from
Institutional
Service Shares
transactions 142,672 $ 1,239,315 (102,159) $ (927,218)
Net change (115,453) $ (1,067,856) (655,708) $ (5,702,675)
resulting from Fund
share transactions
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser, (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee. The Adviser can modify or terminate this voluntary waiver at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25% of the average daily net assets of Instutional
Service Shares annually, to compensate FSC. The distributor may voluntarily
choose to waive any portion of its fee. The distributor can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of daily average net assets
of the Fund shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1997, were as follows:
PURCHASES $125,993,771
SALES $130,814,892
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
FEDERATED SHORT-TERM INCOME FUND (a portfolio of Federated Income Securities
Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Short-Term Income Fund (one of the
portfolios comprising Federated Income Securities Trust), as of April 30, 1997,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then ended and
the financial highlights (see pages 2 and 18 of this prospectus) for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term Income Fund, a portfolio of Federated Income Securities
Trust, at April 30, 1997, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended, and financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 13, 1997
NOTES
Federated Short-Term 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 SHORT-TERM INCOME FUND
Institutional Service Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securites 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
Federated Investors Tower
Pittsburgh, PA 15222-3779
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
Federated Securities Corp., Distributor
Cusip 31420C308
1111903A-SS (6/97)
[Graphic]
FEDERATED SHORT-TERM 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 Short-Term 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
[Graphic]Federated Investors
Federated Securities Corp., Distributor
Cusip 31420C209
Cusip 31420C308
G00181-04 (6/97) [Graphic]
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
U.S. Government Securities 1
Weighted Average Portfolio Maturity 1
Weighted Average Portfolio Duration 2
When-Issued and Delayed Delivery Transactions 2
Repurchase Agreements 2
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Privately Issued Mortgage-Related Securities 3
Portfolio Turnover 3
Investment Limitations 3
FEDERATED INCOME SECURITIES TRUST MANAGEMENT 5
Fund Ownership 9
Trustee Compensation 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Accountant 11
Transfer Agent 11
Independent Auditors 11
PURCHASING SHARES 11
Distribution Plan (Institutional Service Shares only) and Shareholder
Services 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
Determining Value of Securities 12
REDEEMING SHARES 12
Redemption in Kind 12
TAX STATUS 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 13
YIELD 13
PERFORMANCE COMPARISONS 13
Ecomonic and Market Information 14
ABOUT FEDERATED INVESTORS 14
Mutual Fund Market 15
Institutional Clients 15
Bank Marketing 15
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 15
APPENDIX 16
Standard & Poor's Ratings Group ("S&P")
Long-Term Debt Rating Definitions 16
Moody's Investors Service, Inc.
Corporate Bond Rating Definitions 16
Fitch Investors Service, Inc.
Long-Term Debt Ratings 16
Moody's Investors Service, Inc.
Commercial Paper Ratings 16
Standard & Poor's Ratings Group
Commercial Paper Ratings 16
Fitch Investors Service, Inc.
Commercial Paper Ratings Definitions 17
Duff & Phelps Rating Service
(Duff & Pehlps) Long-Term Debt Ratings 17
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. Shares of the
Fund are offered in two classes, Institutional Shares and Institutional Service
Shares (individually and collectively referred to as "Shares"). This Statement
of Additional Information relates to both classes of Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek to provide current income. The Fund
will pursue this objective by investing primarily in a diversified portfolio of
short- and medium-term high grade debt securities. The foregoing investment
objective and policy may not be changed without the prior approval of the Fund's
shareholders.
U.S. GOVERNMENT SECURITIES
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities may be
backed by:
* the full faith and credit of the U.S. Treasury;
* the issuer's right to borrow from the U.S. Treasury;
* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
* the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
* Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
* Federal Home Loan Banks;
* The Student Loan Marketing Association;
* Federal Home Loan Mortgage Corporation; and
* Federal National Mortgage Association.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity of each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) asset-backed
securities as having a maturity equal to their estimated weighted-average
maturity and (b) variable and floating rate instruments as having a remaining
maturity commensurate with the period remaining until the next scheduled
adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of the principal prepayments
weighted by the period until such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be treated as
floating or variable rate securities based upon the interest rate index of the
swap or cap; floating and variable rate securities hedged with interest rate
swaps or floors will be treated as having a maturity equal to the term of the
swap or floor. In the event that the Fund holds an interest rate swap, cap or
floor that is not hedging another portfolio security, the swap, cap or floor
will be treated as having a maturity equal to its term and a weight equal to its
notional principal amount for such term.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a remaining duration commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest rate.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows.
The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.
Mathematically, duration is measured as follows:
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3) + ............. + PVCFn(n)
PVTCF PVTCF PVCTF PVCTF
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity
Certain debt securities, such as mortgage-backed and 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
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, not for investment leverage. These transactions are made
to secure what is considered to be an advantageous price 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.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the Fund's adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
REVERSE REPURCHASE AGREEMENTS
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid.
PORTFOLIO TURNOVER
For the fiscal years ended April 30, 1997, and 1996, the portfolio turnover
rates were 55% and 77%, respectively.
INVESTMENT LIMITATIONS
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if as a result of such purchase 25% or
more of the value of its total assets would be invested in any one industry.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts,
including futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited partnership
interests in real estate, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as are necessary for the clearance of transactions.
SELLING SHORT
The Fund will not sell securities short unless: during the time the short
position is open, it owns an equal amount of the securities sold or
securities readily and freely convertible into or exchangeable, without
payment of additional consideration, for securities of the same issue as, and
equal in amount to, the securities sold short; and not more than 10% of the
Fund's net assets (taken at current value) is held as collateral for such
sales at any one time.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-third
of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings, other than reverse repurchase agreements,
are outstanding. During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion of the
reverse repurchase agreements, the Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
total assets at the time of the borrowing.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements or
other transactions which are permitted by the Fund's investment objective and
policies or Declaration of Trust. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which
investment adviser has determined are creditworthy under guidelines
established by the Trustees and will receive collateral equal to at least
100% of the value of the securities loaned.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase the
securities of issuers which invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of companies, including their predecessors, that have been in
operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST The Fund will not purchase or retain the securities of any
issuer if the officers and Trustees of the Fund or its investment adviser
owning individually more than 0.5% of the issuer's securities together own
more
than 5% of the issuer's securities.
DIVERSIFICATION OF INVESTMENTS
The Fund will not purchase the securities of any one issuer (other than the
U.S. government, its agencies, or instrumentalities or instruments secured by
the securities of such issuers, such as repurchase agreements) if, as a
result, more than 5% of the value of its assets would be invested in the
securities of such issuer with respect to 75% of its total assets, or acquire
more than 10% of any class of voting securities of any issuer. For these
purposes the Fund takes all common stock and all preferred stock of an issuer
each as a single class, regardless of priorities, series, designations, or
other differences.
ACQUIRING SECURITIES
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company, will
not invest more than 5% of its total assets in any one investment company, or
invest more than 10% of its total assets in investment companies in general.
However, these limitations are not applicable if the securities are acquired
in a merger, consolidation, or acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. During the fiscal year ended April 30, 1997, the Fund did not
borrow money, invest in reverse repurchase agreements or sell securities short
in excess of 5% of the value of its net assets. The Fund does not intend to
borrow money, invest in reverse repurchase agreements, or sell securities short
in excess of 5% of the value of its net assets during the coming year. 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 association having capital surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."
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 Trail
Pittsburgh, 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.
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.
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.
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.
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 own less than 1% of the Fund's outstanding Shares. As
of May 9, 1997, the following shareholders of record owned 5% or more of the
outstanding Institutional Shares of the Fund: First Federal Savings & Loan,
Defiance, Ohio, owned approximately 1,720,183 shares (7.29%); Charles Schwab &
Co., Inc., San Francisco, California, owned approximately 1,776,499 shares
(7.53%). As of May 9, 1997, the following shareholders of record owned 5% or
more of the outstanding Institutional Service Shares of the Fund: Heritage Trust
Company, Grand Junction, Colorado, owned approximately 116,255 shares (5.63%);
A. Martin Johnson, Bloomfield Hills, Michigan, owned approximately 116,447
shares (5.64%); Balsa & Co., New York, New York, owned approximately 144,945
shares (7.02%); Charles Schwab & Co., Inc., San Francisco, California, owned
approximately 160,013 shares (7.75%); Moce & Co., Mattoon, Illinois, owned
approximately 200,459 shares (9.71%); and Trust Company of St. Joseph, St.
Joseph, Missouri, owned approximately 811,975 shares (39.35%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue $0 $ 0 for the Trust and
Chairman and Trustee 56 other investment companies in the Fund Complex
Thomas G. Bigley $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
James E. Dowd $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Gregor F. Meyer $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr. $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts $712.24 $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. During the fiscal years ended April 30,
1997, 1996, and 1995, the Fund's Adviser earned $957,140, $907,666, and
$1,212,210, respectively. Fees of $72,703, $82,939 and $84,776, respectively
for 1997, 1996 and 1995, were waived because of undertakings to limit the
Fund's expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser 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 by affiliates of Federated Investors in
advising Federated Funds and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The Adviser and its
affiliates exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are reasonable
in relationship to the value of the brokerage and research services provided.
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 $180,791, $171,686,
and $229,413, 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 Trust. Federated Services Company,
Pittsburgh, PA, provides certain accounting and recordkeeping services with
respect to the Trust's portfolio investments. The fee paid for this service is
based upon the level of the Trust'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
Trust's average net assets for the period plus out-of-pocket expenses.
INDEPENDENT AUDITORS
The independent auditors for the Trust 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 prospectus 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 expect
that the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the Fund in pursuing its investment objectives.
By identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to curb
sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended April 30, 1997, payments in the amount of $40,701 were
made pursuant to the Distribution Plan (Institutional Service Shares only), all
of which was paid to financial institutions. In addition, for this period, the
Trust paid shareholder service fees in the amount of $557,524 (Institutional
Shares) and $40,704 (Institutional Service Shares) of which $557,524
(Institutional Shares) and $1,628 (Institutional Service Shares) were waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
NAV generally changes each day. The days on which the NAV is calculated by the
Fund are described in the prospectus.
DETERMINING VALUE OF SECURITIES
The values of the Fund's portfolio securities are determined as follows:
* according to prices provided by independent pricing services, which may be
determined without exclusive reliance on quoted prices from dealers but which
use market prices when most representative, and which may take into account
appropriate factors such as yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data employed in determining
valuations for such securities; or
* for short-term obligations with remaining maturities of 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 Securities and Exchange Commission ("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:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* derive less than 30% of its gross income from gains on the sale of securities
held less than three months;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. No portion of any income dividend paid by
the Fund is expected to be eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
CAPITAL GAINS
Fixed income securities offering the current income sought by the Fund are
often purchased at a discount from par value. Because the total yield on such
securities when held to maturity and retired may include an element of
capital gain, the Fund may achieve capital gains. However, the Fund will not
hold securities to maturity for the purpose of realizing capital gains unless
current yields on those securities remain attractive.
Capital gains or losses may also be realized on the sale of securities. Sales
would generally be made because of:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; or
* an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
TOTAL RETURN
The Fund's average annual total returns for the one-year, five-year, and
ten-year periods ended April 30, 1997 were 6.53%, 5.58%, and 6.42%,
respectively, for Institutional Shares. The Fund's average annual total returns
for the one-year and five-year periods ended April 30, 1997, and for the period
from January 24, 1992 (start of performance) to April 30, 1997, were 6.27%,
5.31% and 5.17%, respectively, for Institutional Service Shares.
The average annual total return for both classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the 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 6.45% and 6.20% 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:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's or either class of Share's expenses; and
* various other factors.
Either class of 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:
* 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 NAV over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "short-term investment
grade debt funds" category in advertising and sales literature.
* MERRILL LYNCH TOTAL RETURN INVESTMENT GRADE 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.
* 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.
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 Fund. 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's
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 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's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
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 mutual 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.
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:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternative liquidity; high rates of
return on funds employed; and leading market positions in well established
industries.
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. DUFF & PHELPS RATING SERVICE
(DUFF & PHELPS) LONG-TERM DEBT RATINGS
AAA -- Highest credit quality. The risk 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:
Financial Statements (Filed in Part A).
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 Short-Term 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 Short-Term 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)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, 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
(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, certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the
25th 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 25, 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 25, 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, in Post-Effective
Amendment Number 29 to the Registration Statement (Form N-1A No. 33-3164) and
the related Prospectuses of Federated Short-Term Income Fund (a portfolio of
Federated Income Securities Trust).
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
June 23, 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> 011
<NAME> Federated Income Securities Trust
Federated Short-Term Income Fund
Institutional Shares
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Apr-30-1997
<PERIOD-END> Apr-30-1997
<INVESTMENTS-AT-COST> 232,573,453
<INVESTMENTS-AT-VALUE> 231,391,516
<RECEIVABLES> 2,275,807
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,667,323
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,643,746
<TOTAL-LIABILITIES> 1,643,746
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 258,040,526
<SHARES-COMMON-STOCK> 24,692,959
<SHARES-COMMON-PRIOR> 24,951,084
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 229,129
<ACCUMULATED-NET-GAINS> (24,605,883)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,181,937)
<NET-ASSETS> 214,437,974
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,204,039
<OTHER-INCOME> 0
<EXPENSES-NET> 1,391,229
<NET-INVESTMENT-INCOME> 14,812,810
<REALIZED-GAINS-CURRENT> (629,217)
<APPREC-INCREASE-CURRENT> 928,955
<NET-CHANGE-FROM-OPS> 15,112,548
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14,072,936
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,252,983
<NUMBER-OF-SHARES-REDEEMED> 15,832,329
<SHARES-REINVESTED> 321,221
<NET-CHANGE-IN-ASSETS> (997,247)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (27,054,418)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 957,140
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,062,157
<AVERAGE-NET-ASSETS> 239,353,595
<PER-SHARE-NAV-BEGIN> 8.680
<PER-SHARE-NII> 0.540
<PER-SHARE-GAIN-APPREC> 0.010
<PER-SHARE-DIVIDEND> 0.550
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 8.680
<EXPENSE-RATIO> 0.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Federated Income Securities Trust
Federated Short-Term Income Fund
Institutional Service Shares
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Apr-30-1997
<PERIOD-END> Apr-30-1997
<INVESTMENTS-AT-COST> 232,573,453
<INVESTMENTS-AT-VALUE> 231,391,516
<RECEIVABLES> 2,275,807
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,667,323
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,643,746
<TOTAL-LIABILITIES> 1,643,746
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 258,040,526
<SHARES-COMMON-STOCK> 2,025,017
<SHARES-COMMON-PRIOR> 1,882,345
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 229,129
<ACCUMULATED-NET-GAINS> (24,605,883)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,181,937)
<NET-ASSETS> 17,585,603
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,204,039
<OTHER-INCOME> 0
<EXPENSES-NET> 1,391,229
<NET-INVESTMENT-INCOME> 14,812,810
<REALIZED-GAINS-CURRENT> (629,217)
<APPREC-INCREASE-CURRENT> 928,955
<NET-CHANGE-FROM-OPS> 15,112,548
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 969,003
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 825,563
<NUMBER-OF-SHARES-REDEEMED> 736,958
<SHARES-REINVESTED> 54,067
<NET-CHANGE-IN-ASSETS> (997,247)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (27,054,418)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 957,140
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,062,157
<AVERAGE-NET-ASSETS> 239,353,595
<PER-SHARE-NAV-BEGIN> 8.680
<PER-SHARE-NII> 0.530
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.530
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 8.680
<EXPENSE-RATIO> 0.81
<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 25, 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 Short-Term Income Fund (the "Fund")
1933 Act File No. 33-3164
1940 Act File No. 811-4577
Dear Sir or Madam:
Post-Effective Amendment No. 29 under the Securities Act of 1933 and
Amendment No. 22 under the Investment Company Act of 1940 to the Registration
Statement of Federated Short-Term 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 Registration Statement.
This Fund may be marketed through banks, savings associations or credit
unions.
As indicated on the facing page of the Amendment, the Registrant has
specified that it is to become effective June 30, 1997, pursuant to paragraph
(b) of Rule 485 under the Securities Act of 1933.
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
