-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rrYzcgzVvNo7OCCd15Ue4VXcdYCwNYzwYVT+tlAwrdy3gJKzQtbkBtmZqh4wD0OH DOKayK0csNQHJuV2eWMT+g== 0000789281-94-000006.txt : 19940629 0000789281-94-000006.hdr.sgml : 19940629 ACCESSION NUMBER: 0000789281-94-000006 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19940624 EFFECTIVENESS DATE: 19940624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED INCOME SECURITIES TRUST CENTRAL INDEX KEY: 0000789281 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-03164 FILM NUMBER: 94535590 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04577 FILM NUMBER: 94535591 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122881567 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED FLOATING RATE TRUST DATE OF NAME CHANGE: 19920205 485BPOS 1 FORM DOCUMENT 1933 Act File No. 33-3164 1940 Act File No. 811-4577 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. Post-Effective Amendment No. 21 X and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 17 X FEDERATED INCOME SECURITIES TRUST (Exact Name of Registrant as Specified in Charter) Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 (Address of Principal Executive Offices) (412) 288-1900 (Registrant's Telephone Number) John W. McGonigle, Esquire, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 (Name and Address of Agent for Service) It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) X on June 29, 1994 pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a) on pursuant to paragraph (a) of Rule 485. Registrant has filed with the Securities and Exchange Commission a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940, and: X filed the Notice required by that Rule on June 15, 1994; or intends to file the Notice required by that Rule on or about ____________; or during the most recent fiscal year did not sell any securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to Rule 24f-2(b)(2), need not file the Notice. Copies to: Thomas J. Donnelly, Esquire Charles H. Morin, Esquire Houston, Houston & Donnelly Dickstein, Shapiro & Morin, L.L.P. 2510 Centre City Tower 2101 L Street, N.W. 650 Smithfield Street Washington, D.C. 20037 Pittsburgh, Pennsylvania 15222 CROSS-REFERENCE SHEET This Amendment to the Registration Statement of FEDERATED INCOME SECURITIES TRUST, consists of two portfolios, (1) Federated Short-Term Income Fund, which has two classes of shares, (a) Institutional Shares and (b) Institutional Service Shares, and (2) Intermediate Income Fund, which has two classes of shares, (a) Institutional Shares and (b) Institutional Service Shares. PART A. INFORMATION REQUIRED IN A PROSPECTUS. Prospectus Heading (Rule 404(c) Cross Reference) Item 1. Cover Page (1-2) Cover Page. Item 2. Synopsis (1-2)Summary of (Institutional or Institutional Service Shares) Expenses. Item 3. Condensed Financial Information (1-2)Financial Highlights Item 4. General Description of Registrant (1-2) General Information;(1-2) Investment Information; (1-2) Investment Objective; (1-2) Investment Policies; (1-2) Interest Rate Swaps;(1-2) Restricted Securities;(1-2) Temporary Investments; (1-2) Lending of Portfolio Securities; (1-2) When-Issued and Delayed Delivery Transactions; (1-2) Portfolio Turnover; (1-2) Investment Limitations; (1-2) Other Classes of Shares; (1-2) Performance Information. Item 5. Management of the Fund (1-2) Trust Information; (1-2) Management of the Trust; (1-2) Distribution Plan; (1-2) Distribution and Shareholder Services Plan;(1(b),2(b)) Shareholder Services Plan (1(a), 2(a)) Administration of the Fund; (1-2) Expenses of the Fund and (Institutional or Institutional Service) Shares. Item 6. Capital Stock and Other Securities (1-2) Dividends; (1-2) Capital Gains; (1-2) Shareholder Information; (1-2) Voting Rights; (1-2) Massachusetts Partnership Law; (1-2) Tax Information; (1-2) Federal Income Tax; (1-2) Pennsylvania Corporate and Personal Property Taxes. Item 7. Purchase of Securities Being Offered (1-2) Net Asset Value; (1-2) Investing in (Institutional or Institutional Service) Shares; (1-2) Share Purchases; (1-2) Minimum Investment Required; (1- 2) What Shares Cost; (1-2) Subaccounting Services; (1-2) Certificates and Confirmations. Item 8. Redemption or Repurchase (1-2) Redeeming (Institutional or Institutional Service) Shares; (1-2) Telephone Redemption; (1-2) Written Requests; (1-2) Accounts With Low Balances; (1-2) Redemption in Kind. Item 9. Pending Legal Proceedings None. PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION. Item 10. Cover Page (1-2) Cover Page. Item 11. Table of Contents (1-2) Table of Contents. Item 12. General Information and History (1-2) General Information About the Fund. Item 13. Investment Objectives and Policies (1-2) Investment Objective and Policies. Item 14. Management of the Fund (1-2) Trust Management. Item 15. Control Persons and Principal Holders of Securities (1-2) Fund Ownership. Item 16. Investment Advisory and Other Services (1(b),2(b)) Distribution and Shareholder Services Plans; (1- 2) Investment Advisory Services; (1-2) Administrative Services. Item 17. Brokerage Allocation (1-2) Brokerage Transactions. Item 18. Capital Stock and Other Securities Not Applicable. Item 19. Purchase, Redemption and Pricing of Securities Being Offered (1-2) Purchasing (Institutional or Institutional Service) Shares; (1-2) Determining Net Asset Value; (1-2) Redeeming (Institutional or Institutional Service) Shares; (1-2) Redemption in Kind. Item 20. Tax Status (1-2) Tax Status. Item 21. Underwriters (1-2) Not applicable. Item 22. Calculation of Performance Data (1-2) Total Return; (1-2) Yield; (1-2) Performance Comparisons. Item 23. Financial Statements (Filed in Part A) FEDERATED SHORT-TERM INCOME FUND (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) INSTITUTIONAL SHARES PROSPECTUS The Institutional Shares of Federated Short-Term Income Fund (the "Fund") offered by this prospectus represent interests in a diversified portfolio of securities which is an investment portfolio in Federated Income Securities Trust (the "Trust"), an open-end, management investment company (a mutual fund). The investment objective of the Fund is to seek to provide current income. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS NOR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED NOR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in Institutional Shares of the Fund. Keep this prospectus for future reference. The Fund has also filed a Statement of Additional Information for Institutional Shares dated June 30, 1994, with the Securities and Exchange Commission. The information contained in the Statement of Additional Information is incorporated by reference in this prospectus. You may request a copy of the Statement of Additional Information free of charge by calling 1-800-235-4669. To obtain other information, or make inquiries about the Fund, contact the Fund at the address listed in the back of this prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated June 30, 1994 TABLE OF CONTENTS - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES 1 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 2 - ------------------------------------------------------ GENERAL INFORMATION 3 - ------------------------------------------------------ INVESTMENT INFORMATION 3 - ------------------------------------------------------ Investment Objective 3 Investment Policies 3 Acceptable Investments 3 Variable Rate Demand Notes 4 Asset-Backed Securities 4 Mortgage-Related Asset-Backed Securities 5 Adjustable Rate Mortgage Securities ("ARMS") 5 Collateralized Mortgage Obligations ("CMOs") 6 Real Estate Mortgage Investment Conduits ("REMICs") 7 Resets of Interest 7 Caps and Floors 8 Non-Mortgage Related Asset-Backed Securities 8 Bank Instruments 9 Foreign Investments 9 Credit Facilities 9 Interest Rate Swaps, Caps and Floors 10 Auction Rate Securities 11 Average Portfolio Maturity and Duration 11 Credit Enhancement 12 Demand Features 12 Restricted and Illiquid Securities 12 Repurchase Agreements 13 Reverse Repurchase Agreements 13 Lending of Portfolio Securities 13 When-Issued and Delayed Delivery Transactions 13 Special Considerations 14 Portfolio Turnover 14 Investment Limitations 14 TRUST INFORMATION 15 - ------------------------------------------------------ Management of the Trust 15 Board of Trustees 15 Investment Adviser 15 Advisory Fees 15 Adviser's Background 15 Other Payments to Financial Institutions 16 Distribution of Institutional Shares 17 Administration of the Fund 17 Administrative Services 17 Shareholder Services Plan 17 Custodian 17 Transfer Agent and Dividend Disbursing Agent 17 Legal Counsel 17 Independent Auditors 17 NET ASSET VALUE 18 - ------------------------------------------------------ INVESTING IN INSTITUTIONAL SHARES 18 - ------------------------------------------------------ Share Purchases 18 By Wire 18 By Mail 18 Minimum Investment Required 18 What Shares Cost 19 Subaccounting Services 19 Certificates and Confirmations 19 Dividends 19 Capital Gains 19 REDEEMING INSTITUTIONAL SHARES 20 - ------------------------------------------------------ Telephone Redemption 20 Written Requests 20 Signatures 20 Receiving Payment 21 Accounts with Low Balances 21 Redemption in Kind 21 SHAREHOLDER INFORMATION 21 - ------------------------------------------------------ Voting Rights 21 Massachusetts Partnership Law 22 TAX INFORMATION 22 - ------------------------------------------------------ Federal Income Tax 22 Pennsylvania Corporate and Personal Property Taxes 22 PERFORMANCE INFORMATION 23 - ------------------------------------------------------ OTHER CLASSES OF SHARES 23 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS-- INSTITUTIONAL SERVICE SHARES 24 - ------------------------------------------------------ FINANCIAL STATEMENTS 25 - ------------------------------------------------------ REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 38 - ------------------------------------------------------ ADDRESSES Inside Back Cover - ------------------------------------------------------ SUMMARY OF FUND EXPENSES--INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................................................................... None Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................................................................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable).................................................. None Redemption Fee (as a percentage of amount redeemed, if applicable)............................................................................... None Exchange Fee............................................................................................. None ANNUAL INSTITUTIONAL SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee (after waiver) (1)........................................................................ 0.32% 12b-1 Fee................................................................................................ None Total Other Expenses..................................................................................... 0.24% Shareholder Services Fee (2).............................................................. 0.00% Total Institutional Shares Operating Expenses (3)............................................... 0.56%
- --------- (1) The management fee has been reduced to reflect the voluntary waiver of a portion of the management fee. The adviser can terminate this voluntary waiver at any time at its sole discretion. The maximum management fee is 0.40%. (2) The maximum Shareholder Services Fee is 0.25%. (3) The Total Institutional Shares Operating Expenses would have been 0.64% absent the voluntary waiver of a portion of the management fee. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SHARES" AND "TRUST INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to additional fees.
EXAMPLE 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period...... $6 $18 $31 $70
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth in the foregoing table and example relates only to Institutional Shares of the Fund. The Fund also offers another class of shares called Institutional Service Shares. Institutional Shares and Institutional Service Shares are subject to certain of the same expenses; however, Institutional Service Shares are subject to a 12b-1 fee of up to 0.25%. See "Other Classes of Shares." FEDERATED SHORT-TERM INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors on page 38.
YEAR ENDED APRIL 30, 1994 1993 1992* 1991 1990 1989 1988 1987** - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 $ 10.00 - -------------------------------- INCOME FROM INVESTMENT OPERATIONS - -------------------------------- Net investment income 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74 - -------------------------------- Net realized and unrealized gain/(loss) on investments (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42) (0.02) - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72 - -------------------------------- LESS DISTRIBUTIONS - -------------------------------- Dividends to shareholders from net investment income (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94) (0.74) - -------------------------------- Distributions in excess of net investment income -- -- (0.02*** (0.01*** -- -- -- -- - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL DISTRIBUTIONS (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94) (0.74) - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL RETURN**** 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40% - -------------------------------- RATIOS TO AVERAGE NET ASSETS - -------------------------------- Expenses 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50%(b) - -------------------------------- Net investment income 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58%(b) - -------------------------------- Expense waiver/ reimbursement (a) 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60%(b) - -------------------------------- SUPPLEMENTAL DATA - -------------------------------- Net assets, end of period (000 omitted) $ 353,106 $ 144,129 $ 36,047 $ 47,223 $ 65,429 $ 69,904 $ 90,581 $ 80,073 - -------------------------------- Portfolio turnover rate 44% 62% 114% 23% 34% 38% 77% 82% - --------------------------------
* On December 31, 1991, the shareholders approved a change in the fundamental investment policies which state that the Fund will be invested in high- grade as opposed to lower-rated debt securities, and as a result, investment income per share is lower. ** Reflects operations for the period from July 1, 1986 to April 30, 1987. *** Distributions in excess of net investment income for the years ended April 30, 1992 and 1991, were a result of certain book and tax timing differences. These distributions did not represent a return of capital for federal income tax purposes for the years ended April 30, 1992 and 1991. **** Based on net asset value which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). (b) Computed on an annualized basis. Further information about the Fund's performance is contained in the Fund's annual report for the fiscal year ended April 30, 1994 which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) GENERAL INFORMATION - -------------------------------------------------------------------------------- The Trust was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to permit the Trust to offer separate series of shares of beneficial interest representing interests in separate portfolios of securities. The shares in any one portfolio may be offered in separate classes. With respect to this Fund, as of the date of this prospectus the Board of Trustees ("Trustees") have established two classes of shares, Institutional Shares and Institutional Service Shares. This prospectus relates only to Institutional Shares ("Shares") of the Fund. A minimum initial investment of $25,000 over a 90-day period is required. Shares are currently sold and redeemed at net asset value without a sales charge imposed by the Fund. INVESTMENT INFORMATION - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE The investment objective of the Fund is to seek to provide current income. This investment objective cannot be changed without the approval of the Fund's shareholders. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. INVESTMENT POLICIES The Fund will invest primarily in a diversified portfolio of short and medium-term high grade debt securities. The Fund may also invest in long-term high grade debt securities to the extent consistent with its policies regarding the Fund's average dollar-weighted portfolio maturity and duration. This investment policy may not be changed without the prior approval of the Fund's shareholders. Unless indicated otherwise, the other investment policies described in this prospectus may be changed by the Trustees without the approval of the Fund's shareholders. Shareholders will be notified before any material changes in these policies become effective. ACCEPTABLE INVESTMENTS. The high grade debt securities in which the Fund invests include medium and long-term instruments rated by one or more nationally recognized statistical rating organizations ("NRSROs") in one of their three highest rating categories (e.g., AAA, AA or A by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's") ) and short-term instruments rated by one or more NRSROs in one of their two highest categories (e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). Although the Fund may invest in unrated debt securities that are determined by the Fund's investment adviser to be of comparable quality to instruments having such ratings, as a matter of operating policy, the Fund will invest only in rated securities. Downgraded securities will be evaluated on a case by case basis by the adviser. The adviser will determine whether or not the security continues to be an acceptable investment. If not, the security will be sold. Acceptable investments currently include the following: corporate debt obligations, including medium-term notes and variable rate demand notes; asset-backed securities; commercial paper (including Canadian Commercial Paper and Europaper); certificates of deposit, demand and time deposits, bankers' acceptances, deposit notes and other instruments of domestic and foreign banks and other deposit institutions ("Bank Instruments"); interest rate swaps, caps and floors; medium and short-term credit facilities, including demand notes and participations in revolving credit facilities; auction rate securities (see below); obligations issued or guaranteed as to payment of principal and interest by the U.S. government or one of its agencies or instrumentalities ("Government Securities"); and other money market instruments. The Fund invests only in instruments denominated and payable in U.S. dollars. VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate debt instruments that have variable or floating interest rates and provide the Fund with the right to tender the security for repurchase at its stated principal amount plus accrued interest. Such securities typically bear interest at a rate that is intended to cause the securities to trade at par. The interest rate may float or be adjusted at regular intervals (ranging from daily to annually), and is normally based on published interest rate or interest rate index. Many variable rate demand notes allow the Fund to demand the repurchase of the security on not more than seven days prior notice. Other notes only permit the Fund to tender the security at the time of each interest rate adjustment or at other fixed intervals. See "Demand Features." ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of certain governmental, government related, private loans, receivables or other lender assets into pools. Interests in these pools are sold as individual securities. Payments from the asset pools may be divided into several different tranches of debt securities, with some tranches entitled to receive regular installments of principal and interest, other tranches entitled to receive regular installments of interest, with principal payable at maturity or upon specified call dates, and other tranches only entitled to receive payments of principal and accrued interest at maturity or upon specified call dates. Different tranches of securities will bear different interest rates, which may be fixed or floating. Because the loans held in the asset pool often may be prepaid without penalty or premium, asset-backed securities are generally subject to higher prepayment risks than most other types of debt instruments. Prepayment risks on mortgage-backed securities tend to increase during periods of declining mortgage interest rates, because many borrowers refinance their mortgages to take advantage of the more favorable rates. Prepayments on mortgage-backed securities are also affected by other factors, such as the frequency with which people sell their homes or elect to make unscheduled payments on their mortgages. All asset-backed securities are subject to similar prepayment risks, although they may be more or less sensitive to certain factors. Depending upon market conditions, the yield that the Fund receives from the reinvestment of such prepayments, or any scheduled principal payments, may be lower than the yield on the original asset-backed security. As a consequence, mortgage securities may be a less effective means of "locking in" interest rates than other types of debt securities having the same stated maturity and may also have less potential for capital appreciation. For certain types of asset pools, such as collateralized mortgage obligations, prepayments may be allocated to one tranche of securities ahead of other tranches, in order to reduce the risk of prepayment for the other tranches. Prepayments may result in a capital loss to the Fund to the extent that the prepaid asset-backed securities were purchased at a market premium over their stated principal amount. Conversely, the prepayment of asset-backed securities purchased at a market discount from their stated principal amount will accelerate the recognition of interest income by the Fund, which would be taxed as ordinary income when distributed to the shareholders. The credit characteristics of asset-backed securities also differ in a number of respects from those of traditional debt securities. The credit quality of most asset-backed securities depends primarily upon the credit quality of the assets underlying such securities, how well the entity issuing the securities is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement to such securities. MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in various mortgage-related asset-backed securities. These types of investments may include adjustable rate mortgage securities, collateralized mortgage obligations, real estate mortgage investment conduits, or other securities collateralized by or representing an interest in real estate mortgages (collectively, "mortgage securities"). Mortgage securities are (i)issued or guaranteed by the U.S. government or one of its agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; (iii) those issued by private issuers that represent an interest in or are collateralized by whole loans or mortgage-backed securities without a government guarantee but usually having some form of private credit enhancement; and (iv) privately issued securities which are collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government. The privately issued mortgage-related securities provide for a periodic payment consisting of both interest and/or principal. The interest portion of these payments will be distributed by the Fund as income, and the capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage securities representing interests in adjustable rather than fixed interest rate mortgages. Typically, the ARMS in which the Fund invests are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be collateralized by whole loans or private pass through securities. The underlying mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are typically conventional residential mortgages conforming to strict underwriting size and maturity constraints. Unlike conventional bonds, ARMS pay back principal over the life of the ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly scheduled payments of principal and/or interest and may receive unscheduled principal payments representing payments on the underlying mortgages. At the time that a holder of the ARMS reinvests the payments and any unscheduled prepayments of principal that it receives, the holder may receive a rate of interest which is actually lower than the rate of interest paid on the existing ARMS. As a consequence, ARMS may be a less effective means of "locking in" long-term interest rates than other types of fixed-income securities. Not unlike other fixed-income securities, the market value of ARMS will generally vary inversely with changes in market interest rates. Thus, the market value of ARMS generally declines when interest rates rise and generally rises when interest rates decline. While ARMS generally entail less risk of a decline during periods of rapidly rising rates, ARMS may also have less potential for capital appreciation than other similar investments (e.g., investments with comparable maturities) because, as interest rates decline, the likelihood increases that mortgages will be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal payments may result in some loss of a holder's principal investment to the extent of the premium paid. Conversely, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal would increase current and total returns and would accelerate the recognition of income, which would be taxed as ordinary income when distributed to shareholders. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but may be collateralized by whole loans or private pass-through securities. The CMOs in which the Fund invests may be: (a) collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government; (b) collateralized by pools of mortgages in which payment of principal and interest is guaranteed by the issuer and such guarantee is collateralized by U.S. government securities; or (c) collateralized by pools of mortgages without a government guarantee as to payment of principal and interest, but which have some form of credit enhancement. The following example illustrates how mortgage cash flows are prioritized in the case of CMOs. Most of the CMOs in which the Fund invests use the same basic structure. (1) Several classes of securities are issued against a pool of mortgage collateral. The most common structure contains four tranches of securities: The first three (A, B, and C bonds) pay interest at their stated rates beginning with the issue date; the final tranche (Z bond) typically receives any excess income from the underlying investments after payments are made to the other tranches and receives no principal or interest payments until the shorter maturity tranches have been retired, but then receives all remaining principal and interest payments. (2) The cash flows from the underlying mortgages are applied first to pay interest and then to retire securities. (3) The tranches of securities are retired sequentially. All principal payments are directed first to the shortest-maturity tranche (or A bonds). When those securities are completely retired, all principal payments are then directed to the next-shortest-maturity security tranche (or B bond.) This process continues until all of the tranches have been completely retired. Because the cash flow is distributed sequentially instead of pro rata, as with pass-through securities, the cash flows and average lives of CMOs are more predictable, and there is a period of time during which the investors in the longer-maturity classes receive no principal paydowns. One or more of the tranches often bear interest at an adjustable rate. The interest portion of these payments is distributed by the Fund as income, and the principal portion is reinvested. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings of multiple class real estate mortgage-backed securities which qualify and elect treatment as such under provisions of the Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts, partnerships, corporations, associations, or segregated pools of mortgages. Once REMIC status is elected and obtained, the entity is not subject to federal income taxation. Instead, income is passed through the entity and is taxed to the person or persons who hold interests in the REMIC. A REMIC interest must consist of one or more classes of "regular interests," some of which may offer adjustable rates of interest, and a single class of "residual interests." To qualify as a REMIC, substantially all the assets of the entity must be in assets directly or indirectly secured principally by real property. RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and REMICs in which the Fund invests will be readjusted at intervals of one year or less to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to have somewhat less volatile interest rates. To the extent that the adjusted interest rate on the mortgage security reflects current market rates, the market value of an adjustable rate mortgage security will tend to be less sensitive to interest rate changes than a fixed rate debt security of the same stated maturity. Hence, adjustable rate mortgage securities which use indices that lag changes in market rates should experience greater price volatility than adjustable rate mortgage securities that closely mirror the market. Certain residual interest tranches of CMO's may have adjustable interest rates that deviate significantly from prevailing market rates, even after the interest rate is reset, and are subject to correspondingly increased price volatility. In the event that the Fund purchases such residual interest mortgage securities, it will factor in the increased interest and price volatility of such securities when determining its dollar-weighted average portfolio maturity and duration. CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which the Fund invests will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage securities in which the Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage securities in which the Fund invests to be shorter than the maturities stated in the underlying mortgages. NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in non-mortgage related asset-backed securities, including interests in pools of receivables, such as credit card and accounts receivable and motor vehicle and other installment purchase obligations and leases. These securities may be in the form of pass-through instruments or asset-backed obligations. The securities are structured similarly to collateralized mortgage obligations and mortgage pass-through securities, which are described above. Also, these securities may be issued either by non-governmental entities and carry no direct or indirect governmental guarantees, or by governmental entities (i.e., Small Business Administration) and carry varying degrees of governmental support. Non-mortgage related asset-backed securities have structural characteristics similar to mortgage-related asset-backed securities but have underlying assets that are not mortgage loans or interests in mortgage loans. The Fund may invest in non-mortgage related asset-backed securities including, but not limited to, interests in pools of receivables, such as motor vehicle installment purchase obligations and credit card receivables. These securities may be in the form of pass-through instruments or asset-backed bonds. The securities are issued by non-governmental entities and carry no direct or indirect government guarantee. Mortgage-backed and asset-backed securities generally pay back principal and interest over the life of the security. At the time the Fund reinvests the payments and any unscheduled prepayments of principal received, the Fund may receive a rate of interest which is actually lower than the rate of interest paid on these securities ("prepayment risks"). Although non-mortgage related asset-backed securities generally are less likely to experience substantial prepayments than are mortgage-related asset-backed securities, certain of the factors that affect the rate of prepayments on mortgage-related asset-backed securities also affect the rate of prepayments on non-mortgage related asset-backed securities. Non-mortgage related asset-backed securities present certain risks that are not presented by mortgage-related asset-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of asset-backed securities backed by motor vehicle installment purchase obligations permit the servicer of such receivables to retain possession of the underlying obligations. If the servicer sells these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. Further, if a vehicle is registered in one state and is then reregistered because the owner and obligor moves to another state, such reregistration could defeat the original security interest in the vehicle in certain cases. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an institution having capital, surplus and undivided profits over $100 million or insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"). Bank Instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). FOREIGN INVESTMENTS. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are subject to somewhat different risks than domestic obligations of domestic issuers. Examples of these risks include international, economic and political developments, foreign governmental restrictions that may adversely affect the payment of principal or interest, foreign withholdings or other taxes on interest income, difficulties in obtaining or enforcing a judgment against the issuing bank, and the possible impact of interruptions in the flow of international currency transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject to the same regulatory requirements that apply to domestic banks, such as reserve requirements, loan limitations, examinations, accounting, auditing, and recordkeeping, and the public availability of information. These factors will be carefully considered by the Fund's adviser in selecting investments for the Fund. CREDIT FACILITIES. Demand notes are borrowing arrangements between a corporation and an institutional lender (such as the Fund) payable upon demand by either party. The notice period for demand typically ranges from one to seven days, and the party may demand full or partial payment. Revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. As the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the facility. The Fund generally acquires a participation interest in a revolving credit facility from a bank or other financial institution. The terms of the participation requires the Fund to make a pro rata share of all loans extended to the borrower and entitles the Fund to a pro rata share of all payments made by the borrower. Demand notes and revolving facilities usually provide for floating or variable rates of interest. INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate swaps and may purchase or sell (i.e., write) interest rate caps and floors. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed-rate payments) on a notional principal amount. The principal amount of an interest rate swap is notional in that it only provides the basis for determining the amount of interest payments under the swap agreement, and does not represent an actual loan. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate on $10 million principal amount in exchange for the right to receive the equivalent of a fixed rate of interest on $10 million principal amount. Neither party to the swap would actually advance $10 million to the other. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of the amount of excess interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of the amount of the interest shortfall on a notional principal amount from the party selling the interest rate floor. The Fund expects to enter into interest rate transactions primarily to hedge against changes in the price of other portfolio securities. For example, the Fund may hedge against changes in the market value of a fixed rate note by entering into a concurrent swap that requires the Fund to pay the same or a lower fixed rate of interest on a notional principal amount equal to the principal amount of the note in exchange for a variable rate of interest based on a market index. Interest accrued on the hedged note would then equal or exceed the Fund's obligations under the swap, while changes in the market value of the swap would largely offset any changes in the market value of the note. The Fund may also enter into swaps and caps to preserve or enhance a return or spread on a portfolio security. The Fund does not intend to use these transactions in a speculative manner. The Fund will usually enter into interest rate swaps on a net basis (i.e., the two payment streams are netted out), with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and the Fund will segregate liquid assets in an aggregate net asset value at least equal to the accrued excess, if any, on each business day. If the Fund enters into an interest rate swap on other than a net basis, the Fund will segregate liquid assets in the full amount accrued on a daily basis of the Fund's obligations with respect to the swap. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. The Fund's investment adviser has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent interest rate swaps, caps or floors are determined by the investment adviser to be illiquid, they will be included in the Fund's limitation on investments in illiquid securities. To the extent the Fund sells caps and floors, it will maintain in a segregated account cash and/or U.S. Government Securities having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Fund's obligations with respect to the caps or floors. The use of interest rate swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Fund's investment adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these investment techniques were not utilized. Moreover, even if the Fund's investment adviser is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the portfolio security being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to a default on an interest rate swap is limited to the net asset value of the swap together with the net amount of interest payments owed to the Fund by the defaulting party. A default on a portfolio security hedged by an interest rate swap would also expose the Fund to the risk of having to cover its net obligations under the swap with income from other portfolio securities. The Fund may purchase and sell caps and floors without limitation, subject to the segregated account requirement described above. AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal securities and auction rate preferred securities, (collectively, "auction rate securities"). Provided that the auction mechanism is successful, auction rate securities usually permit the holder to sell the securities in an auction at par value at specified intervals. The interest rate or dividend is reset by "Dutch" auction in which bids are made by broker-dealers and other institutions for a certain amount of securities at a specified minimum yield. The interest rate or dividend rate set by the auction is the lowest interest or dividend rate that covers all securities offered for sale. While this process is designed to permit auction rate securities to be traded at par value, there is some risk that an auction will fail due to insufficient demand for the securities. If so, the securities may become illiquid and subject to the Fund's 15% limitation on illiquid securities. AVERAGE PORTFOLIO MATURITY AND DURATION. Although the Fund will not maintain a stable net asset value, the adviser will seek to limit, to the extent consistent with the Fund's investment objective of current income, the magnitude of fluctuations in the Fund's net asset value by limiting the dollar-weighted average maturity and duration of the Fund's portfolio. Securities with shorter maturities and durations generally have less volatile prices than securities of comparable quality with longer maturities or durations. The Fund should be expected to maintain a higher average maturity and duration during periods of lower expected market volatility, and a lower average maturity and duration during periods of higher expected market volatility. In any event, the Fund's dollar-weighted average maturity will not exceed 3 years, and its dollar-weighted average duration will not exceed 3 years. Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Duration measures the magnitude of the change in the price of a debt security relative to a given change in the market rate of interest. CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been credit enhanced by a guaranty, letter of credit or insurance. The Fund typically evaluates the credit quality and ratings of credit enhanced securities based upon the financial condition and ratings of the party providing the credit enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund will not treat credit enhanced securities as having been issued by the credit enhancer for diversification purposes. However, under certain circumstances applicable regulations may require the Fund to treat the securities as having been issued by both the issuer and the credit enhancer. The bankruptcy, receivership or default of the credit enhancer will adversely affect the quality and marketability of the underlying security. DEMAND FEATURES. The Fund may acquire securities that are subject to puts and standby commitments ("demand features") to purchase the securities at their principal amount (usually with accrued interest) within a fixed period following a demand by the Fund. The demand feature may be issued by the issuer of the underlying securities, a dealer in the securities or by another third party, and may not be transferred separately from the underlying security. The Fund uses these arrangements to provide the Fund with liquidity and not to protect against changes in the market value of the underlying securities. The bankruptcy, receivership or default by the issuer of the demand feature, or a default on the underlying security or other event that terminates the demand feature before its exercise, will adversely affect the liquidity of the underlying security. Demand features that are exercisable even after a payment default on the underlying security are treated as a form of credit enhancement. RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted and illiquid securities. Restricted securities are any securities in which the Fund may otherwise invest pursuant to its investment objective and policies but which are subject to restriction on resale under federal securities law. The Fund will limit investments in illiquid securities, including certain restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, and repurchase agreements providing for settlement in more than seven days after notice, to 15% of its net assets. The Fund may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to disposition under federal securities law and is generally sold to institutional investors, such as the Fund, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(2) commercial paper is normally resold to other institutional investors like the Fund through or with the assistance of the issuer or investment dealers who make a market in Section 4(2) commercial paper, thus providing liquidity. The Fund believes that Section 4(2) commercial paper and possibly certain other restricted securities which meet the criteria for liquidity established by the Trustees are quite liquid. The Fund intends, therefore, to treat the restricted securities which meet the criteria for liquidity established by the Trustees, including Section 4(2) commercial paper, as determined by the Fund's investment adviser, as liquid and not subject to the investment limitation applicable to illiquid securities. In addition, because Section 4(2) commercial paper is liquid, the Fund intends to not subject such paper to the limitation applicable to restricted securities. REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be purchased pursuant to repurchase agreements. Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or other securities in which the Fund may invest to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase agreements. This transaction is similar to borrowing cash. In a reverse repurchase agreement the Fund transfers possession of a portfolio instrument to another person, such as a financial institution, broker, or dealer, in return for a percentage of the instrument's market value in cash, and agrees that on a stipulated date in the future the Fund will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed upon rate. When effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar amount sufficient to make payment for the obligations to be purchased, are segregated at the trade date. These securities are marked to market daily and maintained until the transaction is settled. During the period any reverse repurchase agreements are outstanding, but only to the extent necessary to assure completion of the reverse repurchase agreements, the Fund will restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreements. This policy may not be changed without the approval of the Fund's shareholders. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend portfolio securities on a short-term or long-term basis, or both, up to one-third of the value of its total assets to broker/dealers, banks, or other institutional borrowers of securities. The Fund will limit the amount of portfolio securities it may lend to not more than one-third of its total assets. The Fund will only enter into loan arrangements with broker/dealers, banks, or other institutions which the investment adviser has determined are creditworthy under guidelines established by the Trustees and will receive collateral equal to at least 100% of the value of the securities loaned. This policy may not be changed without the approval of the Fund's shareholders. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may purchase securities on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market value of the securities purchased may vary from the purchase prices. Accordingly, the Fund may pay more/less than the market value of the securities on the settlement date. The Fund will limit its purchase of securities on a when-issued or delayed delivery basis to no more than 20% of the value of its total assets. This policy may not be changed without the approval of the Fund's shareholders. SPECIAL CONSIDERATIONS In the debt market, prices move inversely to interest rates. A decline in market interest rates results in a rise in the market prices of outstanding debt obligations. Conversely, an increase in market interest rates results in a decline in market prices of outstanding debt obligations. In either case, the amount of change in market prices of debt obligations in response to changes in market interest rates generally depends on the maturity of the debt obligations: the debt obligations with the longest maturities will experience the greatest market price changes. The market value of debt obligations, and therefore the Fund's net asset value, will fluctuate due to changes in economic conditions and other market factors such as interest rates which are beyond the control of the Fund's investment adviser. The Fund's investment adviser could be incorrect in its expectations about the direction or extent of these market factors. Although debt obligations with longer maturities offer potentially greater returns, they have greater exposure to market price fluctuation. Consequently, to the extent the Fund is significantly invested in debt obligations with longer maturities, there is a greater possibility of fluctuation in the Fund's net asset value. PORTFOLIO TURNOVER While the Fund does not intend to engage in substantial short-term trading, from time to time it may sell portfolio securities for investment reasons without considering how long they have been held. For example, the Fund would do this: to take advantage of short-term differentials in yields or market values; to take advantage of new investment opportunities; to respond to changes in the creditworthiness of an issuer; or to try to preserve gains or limit losses. Any such trading would increase the Fund's portfolio turnover and its transaction costs. However, the Fund will not attempt to set or meet any arbitrary turnover rate since turnover is incidental to transactions considered necessary to achieve the Fund's investment objective. INVESTMENT LIMITATIONS The Fund will not: borrow money directly or through reverse repurchase agreements or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 10% of the value of its total assets to secure such borrowings; lend any of its assets except portfolio securities up to one-third of the value of its total assets; sell securities short except, under strict limitations, the Fund may maintain open short positions so long as not more than 10% of the value of its net assets is held as collateral for those positions; underwrite any issue of securities, except as it may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of restricted securities which the Fund may purchase pursuant to its investment objective, policies, and limitations; invest more than 5% of its total assets in securities of issuers that have records of less than three years of continuous operations; or with respect to 75% of its assets, invest more than 5% of the value of its total assets in securities of one issuer (except U.S. government obligations), or purchase more than 10% of the outstanding voting securities of any one issuer. For these purposes the Fund takes all common stock and all preferred stock of an issuer each as a single class, regardless of priorities, series, designations, or other differences. The above investment limitations cannot be changed without shareholder approval. The following limitation however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change if this limitation becomes effective. The Fund will not: invest more than 15% of the value of its net assets in illiquid securities, including repurchase agreements providing for settlement more than seven days after notice, non-negotiable time deposits, certain interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and certain restricted securities not determined by the Trustees to be liquid. TRUST INFORMATION - -------------------------------------------------------------------------------- MANAGEMENT OF THE TRUST BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The Executive Committee of the Board of Trustees handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust, investment decisions for the Fund are made by Federated Management, the Fund's investment adviser (the "Adviser"), subject to direction by the Trustees. The Adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES. The Fund's Adviser receives an annual investment advisory fee equal to .40 of 1% of the Fund's average daily net assets. Under the investment advisory contract, theAdviser may voluntarily reimburse some of the operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement of expenses at any time in its sole discretion. The Adviser has also undertaken to reimburse the Fund for operating expenses in excess of limitations established by certain states. ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the Class A (voting) shares of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated Investors. Federated Management and other subsidiaries of Federated Investors serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. Total assets under management or administration by these and other subsidiaries of Federated Investors are approximately $70 billion. Federated Investors, which was founded in 1956 as Federated Investors, Inc., develops and manages mutual funds primarily for the financial industry. Federated Investors' track record of competitive performance and its disciplined, risk averse investment philosophy serve approximately 3,500 client institutions nationwide. Through these same client institutions, individual shareholders also have access to this same level of investment expertise. Deborah A. Cunningham has been the Fund's co-portfolio manager since July 1991. Ms. Cunningham joined Federated Investors in 1981 and has been a Vice President of the Fund's investment adviser since 1993. Ms. Cunningham served as an Assistant Vice President of the investment adviser from 1989 until 1992, and from 1986 until 1989 she acted as an investment analyst. Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A. in Finance from Robert Morris College. Susan M. Nason has been the Fund's co-portfolio manager since January 1994. Ms. Nason joined Federated Investors in 1987 and has been a Vice President of the Fund's investment adviser since 1993. Ms. Nason served as an Assistant Vice President of the investment adviser from 1990 until 1992, and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in Finance from Carnegie Mellon University. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to financial institutions under the Shareholder Services Plan, certain financial institutions may be compensated by the Adviser or its affiliates for the continuing investment of customers' assets in certain funds, including the Fund, advised by those entities. These payments will be made directly by the distributor or Adviser from their assets, and will not be made from the assets of the Fund or by the assessment of a sales charge on Shares. Furthermore, the distributor may offer to pay a fee from its own assets to financial institutions as financial assistance for providing substantial marketing and sales support. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of Shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. DISTRIBUTION OF INSTITUTIONAL SHARES Federated Securities Corp. is the principal distributor for shares of the Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Administrative Services provides these at an annual rate which relates to the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors ("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY NET ASSETS MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS 0.15 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.10 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Administrative Services may choose voluntarily to waive a portion of its fee. SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan (the "Services Plan") under which it may make payments up to 0.25 of 1% of the average daily net assets of Shares to obtain certain personal services for shareholders and the maintenance of shareholder accounts ("shareholder services"). The Trust has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, under which Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon Shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Trust and Federated Shareholder Services. CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston, MA, is custodian for the securities and cash of the Fund. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund, and dividend disbursing agent for the Fund. LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington, D.C. INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young, One Oxford Centre, Pittsburgh, PA. NET ASSET VALUE - -------------------------------------------------------------------------------- The Fund's net asset value per share fluctuates. The net asset value for Shares is determined by adding the interest of the Shares in the market value of all securities and other assets of the Fund, subtracting the interest of the Shares in the liabilities of the Fund and those attributable to Shares, and dividing the remainder by the total number of Shares outstanding. The net asset value for Shares will exceed that of Institutional Service Shares due to the variance in daily net income realized by each class as a result of different distribution charges incurred by the classes. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. INVESTING IN INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- SHARE PURCHASES Shares are sold on days on which the New York Stock Exchange is open. Shares may be purchased either by wire or mail. To purchase Shares of the Fund, open an account by calling Federated Securities Corp. Information needed to establish the account will be taken over the telephone. The Fund reserves the right to reject any purchase request. BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund before 4:00 p.m. (Boston time) to place an order. The order is considered received immediately. Payment by federal funds must be received before 3:00 p.m. (Boston time) on the next business day following the order. Federal funds should be wired as follows: Federated Services Company, c/o State Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Short-Term Income Fund--Institutional Shares; Fund Number (this number can be found on the account statement or by contacting the Fund); Group Number or Order Number; Nominee or Institution Name; and ABA Number 011000028. BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to Federated Short-Term Income Fund--Institutional Shares to Federated Services Company, P.O. Box 8602, Boston, Massachusetts 02266-8602. Orders by mail are considered received after payment by check is converted by the transfer agent's bank, State Street Bank, into federal funds. This is normally the next business day after State Street Bank receives the check. MINIMUM INVESTMENT REQUIRED The minimum initial investment in the Fund is $25,000 plus any non-affiliated bank or broker's fee. However, an account may be opened with a smaller amount as long as the $25,000 minimum is reached within 90 days. An institutional investor's minimum investment will be calculated by combining all accounts it maintains with the Fund. Accounts established through a non-affiliated bank or broker may be subject to a smaller minimum investment. WHAT SHARES COST Shares are sold at their net asset value next determined after an order is received. There is no sales charge imposed by the Fund. Investors who purchase Shares through a non-affiliated bank or broker may be charged an additional service fee by that bank or broker. The net asset value is determined at 4:00 p.m. (Boston time), Monday through Friday, except on: (i) days on which there are not sufficient changes in the value of the Fund's portfolio securities that its net asset value might be materially affected; (ii) days during which no Shares are tendered for redemption and no orders to purchase Shares are received; and (iii) the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. SUBACCOUNTING SERVICES Institutions are encouraged to open single master accounts. However, certain institutions may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent charges a fee based on the level of subaccounting services rendered. Institutions holding Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services provided which may be related to the ownership of Shares. This prospectus should, therefore, be read together with any agreement between the customer and the institution with regard to the services provided, the fees charged for those services, and any restrictions and limitations imposed. CERTIFICATES AND CONFIRMATIONS As transfer agent for the Fund, Federated Services Company maintains a Share account for each shareholder. Share certificates are not issued unless requested by contacting the Fund. Detailed confirmations of each purchase or redemption are sent to each shareholder. Monthly confirmations are sent to report dividends paid during the month. DIVIDENDS Dividends are declared daily and paid monthly. Dividends are declared just prior to determining net asset value. If an order for Shares is placed on the preceding business day, Shares purchased by wire begin earning dividends on the business day wire payment is received by State Street Bank. If the order for Shares and payment by wire are received on the same day, Shares begin earning dividends on the next business day. Shares purchased by check begin earning dividends on the business day after the check is converted upon instruction of by the transfer agent into federal funds. Dividends are automatically reinvested on payment dates in additional Shares of the Fund unless cash payments are requested by contacting the Fund. CAPITAL GAINS Capital gains realized by the Fund, if any, will be distributed at least once every 12 months. REDEEMING INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at their net asset value next determined after the Fund receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests must be received in proper form and can be made by telephone request or by written request. TELEPHONE REDEMPTION Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m. (Boston time). The proceeds will normally be wired the following business day, but in no event more than seven days, to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System. If at any time the Fund shall determine it is necessary to terminate or modify this method of redemption, shareholders would be promptly notified. An authorization form permitting the Fund to accept telephone requests must first be completed. Authorization forms and information on this service are available from Federated Securities Corp. Telephone redemption instructions may be recorded. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming by telephone. If such a case should occur, another method of redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS Shares may also be redeemed by sending a written request to the Fund. Call the Fund for specific instructions before redeeming by letter. The shareholder will be asked to provide in the request his or her name, the Fund name and class name, the shareholder's account number, and the share or dollar amount requested. If Share certificates have been issued, they must be properly endorsed and should be sent by registered or certified mail with the written request. SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable other than to the shareholder of record must have signatures on written redemption requests guaranteed by: a trust company or commercial bank whose deposits are insured by the BIF, which is administered by the Federal Deposit Insurance Corporation ("FDIC"); a member of the New York, American, Boston, Midwest, or Pacific Stock Exchanges; a savings bank or savings and loan association whose deposits are insured by the SAIF, which is adminstered by the FDIC; or any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. The Fund and its transfer agent have adopted standards for accepting signature guarantees from the above institutions. The Fund may elect in the future to limit eligible signature guarantors to institutions that are members of a signature guarantee program. The Fund and its transfer agent reserve the right to amend these standards at any time without notice. RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem shares in any account and pay the proceeds to the shareholder if the account balance falls below a required minimum value of $25,000 due to shareholder redemptions. This requirement does not apply, however, if the balance falls below $25,000 because of changes in the Fund's net asset value. Before Shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional Shares to meet the minimum requirement. REDEMPTION IN KIND The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of the respective Fund's net asset value, whichever is less, for any one shareholder within a 90-day period. Any redemption beyond this amount will also be in cash unless the Trustees determine that payments should be in kind. In such a case, the Fund will pay all or a portion of the remainder of the redemption in portfolio instruments, valued in the same way that net asset value is determined. The portfolio instruments will be selected in a manner that the Trustees deem fair and equitable. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving their securities and selling them before their maturity could receive less than the redemption value of their securities and could incur certain transaction costs. SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- VOTING RIGHTS Each Share of the Fund gives the shareholder one vote in Trustee elections and other matters submitted to shareholders of the Trust for vote. All shares of each portfolio in the Trust have equal voting rights, except that, in matters affecting only a particular Fund or class, only shares of that particular Fund or class are entitled to vote. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will be sought only for certain changes in the Trust's or the Fund's operation and for the election of Trustees under certain circumstances. Trustees may be removed by a two-thirds vote of the number of Trustees or by a two-thirds vote of the shareholders at a special meeting. A special meeting of shareholders shall be called by the Trustees upon the written request of shareholders owning at least 10% of the Trust's outstanding shares of all portfolios entitled to vote. MASSACHUSETTS PARTNERSHIP LAW Under certain circumstances, shareholders may be held personally liable as partners under Massachusetts law for acts or obligations of the Trust. To protect shareholders, the Trust has filed legal documents with Massachusetts that expressly disclaim the liability of shareholders for acts or obligations of the Trust. These documents require notice of this disclaimer to be given in each agreement, obligation, or instrument the Trust or its Trustees enter into or sign. In the unlikely event a shareholder is held personally liable for the Trust's obligations, the Trust is required, by the Declaration of Trust to use its property to protect or compensate the shareholder. On request, the Trust will defend any claim made and pay any judgment against a shareholder for any act or obligation of the Trust. Therefore, financial loss resulting from liability as a shareholder will occur only if the Trust cannot meet its obligations to indemnify shareholders and pay judgments against them from its assets. TAX INFORMATION - -------------------------------------------------------------------------------- FEDERAL INCOME TAX The Fund will pay no federal income tax because the Fund expects to meet requirements of the Internal Revenue Code, as amended, applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. The Fund will be treated as a single, separate entity for federal income tax purposes so that income (including capital gains) and losses realized by the Trust's other portfolios, if any, will not be combined for tax purposes with those realized by the Fund. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions received. This applies whether dividends and distributions are received in cash or as additional shares. Information on the tax status of dividends and distributions is provided annually. PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES In the opinion of Houston, Houston & Donnelly, counsel to the Trust: The Fund is not subject to Pennsylvania corporate or personal property taxes; and Fund shares may be subject to personal property taxes imposed by counties, municipalities, and school districts in Pennsylvania to the extent that the portfolio securities in the Fund would be subject to such taxes if owned directly by residents of those jurisdictions. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local laws. PERFORMANCE INFORMATION - -------------------------------------------------------------------------------- From time to time the Fund advertises its total return and yield for Institutional Shares. Total return represents the change, over a specified period of time, in the value of an investment in Institutional Shares after reinvesting all income and capital gains distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of Institutional Shares is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by Institutional Shares over a thirty-day period by the net asset value per share of Institutional Shares on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by Institutional Shares and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The Institutional Shares are sold without any sales load or other similar non-recurring charges. Total return and yield will be calculated separately for Institutional Shares and Institutional Service Shares. Because Institutional Service Shares are subject to 12b-1 fees, total return and yield of Institutional Shares, for the same period, will exceed that of Institutional Service Shares. From time to time, the Fund may advertise its performance using certain financial publications and/or compare its performance to certain indices. OTHER CLASSES OF SHARES - -------------------------------------------------------------------------------- Institutional Service Shares are sold primarily to banks and other institutions that hold assets in an agency capacity. Institutional Service Shares are sold at net asset value. Investments in Institutional Service Shares are subject to a minimum initial investment of $25,000. Institutional Service Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust whereby the distributor is paid a fee of up to .25 of 1% of the Institutional Service Shares' average net assets. Financial institutions and brokers providing sales and/or administrative services may receive different compensation from one class of shares than from another class of shares. The amount of dividends payable to Institutional Shares will exceed that of Institutional Service Shares by the difference between Class Expenses and distribution and shareholder service expenses borne by shares of each respective class. The stated advisory fee is the same for both classes of the Fund. FEDERATED SHORT-TERM INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors on page 38.
YEAR ENDED APRIL 30, 1994 1993 1992* NET ASSET VALUE, BEGINNING OF PERIOD $ 9.17 $ 8.98 $ 9.08 - ------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - ------------------------------------------------------------------------------- Net investment income 0.48 0.52 0.15 - ------------------------------------------------------------------------------- Net realized and unrealized gain/(loss) on investments (0.32) 0.19 (0.10) - ------------------------------------------------------------------------------- --------- --------- --------- Total from investment operations 0.16 0.71 0.05 - ------------------------------------------------------------------------------- LESS DISTRIBUTIONS - ------------------------------------------------------------------------------- Dividends to shareholders from net investment income (0.48) (0.52) (0.15) - ------------------------------------------------------------------------------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.17 $ 8.98 - ------------------------------------------------------------------------------- --------- --------- --------- TOTAL RETURN** 1.78% 8.12% 0.69% - ------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - ------------------------------------------------------------------------------- Expenses 0.81% 0.76% 0.78%(b) - ------------------------------------------------------------------------------- Net investment income 5.30% 5.82% 6.37%(b) - ------------------------------------------------------------------------------- Expense waiver/reimbursement (a) 0.13% 0.45% 0.98%(b) - ------------------------------------------------------------------------------- SUPPLEMENTAL DATA - ------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $ 39,649 $ 15,673 $ 778 - ------------------------------------------------------------------------------- Portfolio turnover rate 44% 62% 114% - -------------------------------------------------------------------------------
* Reflects operations for the period from January 21, 1992 (date of initial public investment) to April 30, 1992. ** Based on net asset value, which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). (b) Computed on an annualized basis. Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND PORTFOLIO OF INVESTMENTS APRIL 30, 1994 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE - -------------- -------------------------------------------------------------------------------- --------------- CORPORATE BONDS/ASSET-BACKED SECURITIES--64.9% - ------------------------------------------------------------------------------------------------ AUTOMOTIVE--11.6% -------------------------------------------------------------------------------- $ 2,996,386 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%, 12/15/97 $ 2,996,176 -------------------------------------------------------------------------------- 1,615,610 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%, 2/17/98 1,602,766 -------------------------------------------------------------------------------- 8,000,000 Ford Credit Auto Loan Master Trust 1992-1, 6.875%, 1/15/99 8,048,640 -------------------------------------------------------------------------------- 1,306,067 John Deere Owner Trust 1992-A, Class E, 4.88%+, 12/29/1999 1,308,914 -------------------------------------------------------------------------------- 1,659,434 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/97 1,664,097 -------------------------------------------------------------------------------- 3,450,000 Navistar Financial Dealer Note Trust 1990, Class A-3, 4.59%+, 1/25/2003 3,473,702 -------------------------------------------------------------------------------- 1,245,653 Nissan Auto Receivable 1992-A Grantor Trust, 5.30%, 5/15/97 1,241,867 -------------------------------------------------------------------------------- 7,473,000 Orix Credit Alliance Owner Trust 1993-A, Class B, 4.60%, 8/17/98 7,240,067 -------------------------------------------------------------------------------- 2,297,807 Premier Auto Trust 1993-1, Class B, 5.60%, 10/15/98 2,262,903 -------------------------------------------------------------------------------- 9,999,863 Premier Auto Trust 1993-4, Class A2, 4.65%, 2/2/99 9,709,167 -------------------------------------------------------------------------------- 4,999,967 Premier Auto Trust 1993-6, Class B, 4.88%, 1/3/2000 4,845,368 -------------------------------------------------------------------------------- 1,232,263 Volvo Auto Trust 1991-A, 5.65%, 12/15/98 1,232,374 -------------------------------------------------------------------------------- --------------- Total 45,626,041 -------------------------------------------------------------------------------- --------------- BANKING--17.3% -------------------------------------------------------------------------------- 12,500,000 Advanta Credit Card Master Trust 1992-3, Class A-1, 5.95%, 8/31/99 12,239,125 -------------------------------------------------------------------------------- 3,000,000 Bankamerica Corp., 5.50%+, 6/25/2003 2,992,500 -------------------------------------------------------------------------------- 7,450,000 Bankers Trust New York Corp., 5.38%+, 9/24/2002 7,373,191 -------------------------------------------------------------------------------- 18,450,000 Citicorp, 5.00%+, 10/25/2005 18,357,750 -------------------------------------------------------------------------------- 4,000,000 Colonial Credit Card Trust 1991-B, Class B, 7.95%, 1/15/98 4,077,280 -------------------------------------------------------------------------------- 7,000,000 Credit Lyonnais, 5.00%+, 8/7/97 7,136,500 -------------------------------------------------------------------------------- 5,000,000 First Chicago Corp., 4.375%+, 7/28/2003 4,929,000 -------------------------------------------------------------------------------- 1,000,000 J.P. Morgan and Co., Inc., FRN 5.00%+, 8/19/2002 998,750 -------------------------------------------------------------------------------- 7,500,000 MBNA Master Credit Card Trust 1991-1, 7.75%, 10/15/98 7,711,425 -------------------------------------------------------------------------------- 2,000,000 Standard Credit Card Master Trust 1991-1A, 8.50%, 6/7/96 2,080,340 -------------------------------------------------------------------------------- --------------- Total 67,895,861 -------------------------------------------------------------------------------- --------------- CONSUMER SERVICES--0.7% -------------------------------------------------------------------------------- 3,000,000 Encyclopedia Britannica, Dom. Fdg. Corp. 1994-1, 6.76%, 3/15/2002 2,895,900 -------------------------------------------------------------------------------- --------------- FINANCE-AUTOMOTIVE--0.8% -------------------------------------------------------------------------------- 3,000,000 Ford Motor Credit Co., 6.55%, 2/3/98 2,936,610 -------------------------------------------------------------------------------- --------------- FINANCE-RETAIL--13.1% -------------------------------------------------------------------------------- 3,500,000 Diamond Funding Corp., 6.35%, 11/20/97 3,532,830 -------------------------------------------------------------------------------- 5,000,000 Discover Credit Card Trust 1991-B, Class A, 8.625%, 7/16/98 5,220,150 -------------------------------------------------------------------------------- 2,500,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/98 2,620,800 -------------------------------------------------------------------------------- 7,000,000 Discover Credit Card Trust 1991-E, 7.30%, 5/21/99 7,129,850 -------------------------------------------------------------------------------- 10,000,000 Discover Credit Card Trust 1991-F, Class A, 7.85%, 11/21/2000 10,181,500 -------------------------------------------------------------------------------- 2,474,159 Greentree Financial Corp. 1992-1, Class A-5, 6.50%, 10/15/2017 2,411,637 -------------------------------------------------------------------------------- 4,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/97 4,120,880 -------------------------------------------------------------------------------- 6,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/97 5,980,020 -------------------------------------------------------------------------------- 10,000,000 Sears Credit Account Trust 1991-D, 7.75%, 9/15/98 10,327,000 -------------------------------------------------------------------------------- --------------- Total 51,524,667 -------------------------------------------------------------------------------- --------------- HOME EQUITY RECEIVABLES--13.8% -------------------------------------------------------------------------------- 1,106,088 Advanta Home Equity Loan Trust 1991-1, 9.00%, 2/25/2006 1,140,886 -------------------------------------------------------------------------------- 4,152,957 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 4,208,690 -------------------------------------------------------------------------------- 2,855,579 Advanta Home Equity Loan Trust 1992-4, Class A-2, 7.15%, 12/25/2008 2,849,068 -------------------------------------------------------------------------------- 1,000,000 Capital Home Equity Loan Trust 1991-1, Class B, 4.54%+, 12/25/2011 1,001,100 -------------------------------------------------------------------------------- 8,361,563 Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%, 7/15/2020 8,184,716 -------------------------------------------------------------------------------- 2,000,000 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%, 11/15/2013 1,930,856 -------------------------------------------------------------------------------- 4,925,320 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%, 1/15/2024 4,783,786 -------------------------------------------------------------------------------- 991,891 Fleet Finance Home Equity Trust 1991-2, 6.70%, 10/15/2006 978,203 -------------------------------------------------------------------------------- 1,500,000 GE Capital Home Equity Loan, 1991-1, Class B, 8.70%, 8/30/2011 1,534,245 -------------------------------------------------------------------------------- 6,428,464 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 4.75%+, 2/15/2003 6,456,364 -------------------------------------------------------------------------------- 1,355,754 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 1,345,911 -------------------------------------------------------------------------------- 1,123,994 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 1,117,542 -------------------------------------------------------------------------------- 13,935,967 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 13,934,434 -------------------------------------------------------------------------------- 4,684,235 TMS Home Equity Loan Trust 1993-C, Class A-3, 5.75%, 10/15/2022 4,567,129 -------------------------------------------------------------------------------- --------------- Total 54,032,930 -------------------------------------------------------------------------------- --------------- LEASING--0.8% -------------------------------------------------------------------------------- 21,076 Comdisco Receivables Trust 1991-A, 7.70%, 5/15/96 21,066 -------------------------------------------------------------------------------- 1,016,900 Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 1,020,714 -------------------------------------------------------------------------------- 2,250,000 U.S. Leasing, Inc., 7.00%, 11/1/97 2,263,635 -------------------------------------------------------------------------------- --------------- Total 3,305,415 -------------------------------------------------------------------------------- --------------- MANUFACTURED HOUSING RECEIVABLES--2.7% -------------------------------------------------------------------------------- 3,484,632 CIT Group Manufactured Housing 1993-1, Class A-1, 4.70%, 6/15/2018 3,412,152 -------------------------------------------------------------------------------- 6,467,886 Merrill Lynch Mortgage Investments, Inc. 1991-1, Class A, 7.65%, 1/15/2012 6,558,307 -------------------------------------------------------------------------------- 625,213 Merrill Lynch Mortgage Investments, Inc. 1992-B, 8.50%, 4/15/2012 636,348 -------------------------------------------------------------------------------- --------------- Total 10,606,807 -------------------------------------------------------------------------------- --------------- MARINE RECEIVABLES--1.2% -------------------------------------------------------------------------------- 4,785,691 CFC-14 Grantor Trust Class A, 7.15%, 11/15/2006 4,827,566 -------------------------------------------------------------------------------- --------------- RECREATIONAL VEHICLE RECEIVABLES--1.9% -------------------------------------------------------------------------------- 7,422,285 Fleetwood Credit 1993-A, Class A, 6.00%, 1/15/2008 7,341,827 -------------------------------------------------------------------------------- --------------- TRADE RECEIVABLES--1.0% -------------------------------------------------------------------------------- 4,000,000 Unisys Receivables Master Trust I, 5.05%, 11/15/96 3,918,160 -------------------------------------------------------------------------------- --------------- TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES (IDENTIFIED COST, $262,099,875) 254,911,784 -------------------------------------------------------------------------------- --------------- GOVERNMENT AGENCY--0.3% - ------------------------------------------------------------------------------------------------ 1,000,000 Student Loan Marketing Association, 3.94%+, 5/8/95 1,000,000 -------------------------------------------------------------------------------- --------------- MORTGAGE-BACKED SECURITIES--33.3% - ------------------------------------------------------------------------------------------------ GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--1.0% -------------------------------------------------------------------------------- 1,409,826 Federal Home Loan Mortgage Corp. Pound606116, 5.47%+, 9/01/2019 1,450,119 -------------------------------------------------------------------------------- 1,643,269 Federal Home Loan Mortgage Corp. Pound785167, 5.63%+, 12/01/2018 1,695,180 -------------------------------------------------------------------------------- 652,709 Federal Home Loan Mortgage Corp. Series 1132 Class G, 8.00%, 1/15/2005 657,487 -------------------------------------------------------------------------------- --------------- Total 3,802,786 -------------------------------------------------------------------------------- --------------- NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--32.3% -------------------------------------------------------------------------------- 363,756 Capstead Securities Corp. IV 1992, Class 4-E, 4.74%+, 6/25/2018 364,891 -------------------------------------------------------------------------------- 116,969 Capstead Securities Corp. IV 1992-10, Class D, 8.25%, 7/25/2023 116,773 -------------------------------------------------------------------------------- 2,060,000 Chemical Mortgage Securities, Inc. 1993-1, Class A-4, 7.45%, 7/25/2020 2,098,625 -------------------------------------------------------------------------------- 3,586,370 Citicorp Mortgage Securities 1992-18, Class A-1, 5.26%+, 10/25/2022 3,617,751 -------------------------------------------------------------------------------- 901,129 Citicorp Mortgage Securities 1992-5, Class A-1, 8.00%, 9/25/2021 902,842 -------------------------------------------------------------------------------- 10,200,000 Citicorp Mortgage Securities, Inc., Series 1993-12, Class A-2, 6.50%, 6/25/2021 9,560,358 -------------------------------------------------------------------------------- 6,594,982 DLJ Mortgage Acceptance Corp., 1993-15, Class A-1, 4.58%+, 11/25/2023 6,706,305 -------------------------------------------------------------------------------- 8,751,940 DLJ Mortgage Acceptance Corp., 1993-Q3, Class A-2, 5.65%+, 4/25/2023 8,932,493 -------------------------------------------------------------------------------- 2,379,622 GCA 1993-ASC1, Class B-1, 5.43%+, 9/25/2023 2,357,301 -------------------------------------------------------------------------------- 7,144,488 GCA 1993-LB2, Class A-1, 5.74%+, 8/25/2023 7,349,893 -------------------------------------------------------------------------------- 6,705,669 GCA 1993-LB3, Class A-1, 5.54%+, 1/25/2024 6,961,356 -------------------------------------------------------------------------------- 8,929,613 GCA Long Beach Mortgage PTC, Class A-2, 6.08%+, 7/25/2022 9,189,108 -------------------------------------------------------------------------------- 2,485,564 GCA REMIC PTC 1991-4, Class B-1A, 8.76%+, 7/01/2019 2,518,970 -------------------------------------------------------------------------------- 3,982,084 GCA REMIC Trust V, 1993-5, Class B, 5.12%+, 5/1/2020 3,817,823 -------------------------------------------------------------------------------- 9,484,564 GE Capital Mortgage Services, Inc. 1993-12, Class A, 6.50%, 11/25/2023 9,027,693 -------------------------------------------------------------------------------- 4,609,913 GE Capital Mortgage Services, Inc. 1993-9, Class A-1, 6.00%, 8/25/2008 4,466,775 -------------------------------------------------------------------------------- 2,669,885 Glendale Federal Bank, 1988-1A, 5.20%+, 3/25/2018 2,684,917 -------------------------------------------------------------------------------- 1,964,161 GMBS, Inc., 1990-5, Class A, 6.61%+, 12/26/2020 1,974,590 -------------------------------------------------------------------------------- 1,453,110 Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%, 7/15/2002 1,475,808 -------------------------------------------------------------------------------- 2,854,461 Prudential Home Mortgage 1992-A, Class B1-1, 7.20%, 4/28/2022 2,705,772 -------------------------------------------------------------------------------- 4,506,946 Residential Funding Mortgage Securities, Inc. 1993-S38, Class A, 4.85%+, 9/25/2023 4,680,914 -------------------------------------------------------------------------------- 2,000,125 Resolution Trust Corp. 1992-7, Class B-2B, 8.35%, 6/25/2029 2,029,507 -------------------------------------------------------------------------------- 2,000,000 Resolution Trust Corp. 1992-12, Class B-3, 5.77%+, 1/25/2025 2,010,620 -------------------------------------------------------------------------------- 4,012,100 Salomon Brothers Mortgage Securities VII, Inc. 1992-6, Class A-1, 5.22%+, 11/25/2022 4,124,960 -------------------------------------------------------------------------------- 12,000,000 Salomon Brothers Mortgage Securities VII, Inc. 1993-5, Class A-3C, 7.44%+, 10/25/2023 12,234,000 -------------------------------------------------------------------------------- 6,686,403 Salomon Brothers Mortgage Securities VII, Inc. 1993-9, Class A-1, 7.24%, 1/25/2024 6,594,465 -------------------------------------------------------------------------------- 8,812,654 Zions Home Refinance Loan Trust 1993-1, 5.15%, 9/25/2003 8,437,764 -------------------------------------------------------------------------------- --------------- Total 126,942,274 -------------------------------------------------------------------------------- --------------- TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST, $133,837,428) 130,745,060 -------------------------------------------------------------------------------- --------------- *REPURCHASE AGREEMENTS--1.3% - ------------------------------------------------------------------------------------------------ 3,000,000 Bankers Trust Co., 3.61%, dated 4/29/94, due 5/2/94 3,000,000 -------------------------------------------------------------------------------- 2,176,000 Union Bank of Switzerland, 3.62%, dated 4/29/94, due 5/2/94 2,176,000 -------------------------------------------------------------------------------- --------------- TOTAL REPURCHASE AGREEMENTS 5,176,000 -------------------------------------------------------------------------------- --------------- TOTAL INVESTMENTS (IDENTIFIED COST, $402,113,303) $ 391,832,844\\ -------------------------------------------------------------------------------- ---------------
* Repurchase agreements are fully collateralized by U.S. government and/or agency obligations. The investment in the repurchase agreements are through participation in a joint account with other Federated funds based on market prices at the date of the portfolio. + Denotes variable rate and floating rate obligations for which the current yield is shown. \\ The cost for federal tax purposes amounts to $402,113,303. The net unrealized depreciation of investments on a federal tax basis amounts to $10,280,459 which is comprised of $146,234 appreciation and $10,426,693 depreciation at April 30, 1994. The following abbreviations are used in this portfolio: FRN--Floating Rate Note PTC-Pass Through Certificate REMIC-Real Estate Mortgage Investment Conduit Note: The categories of investments are shown as a percentage of net assets ($392,755,586) at April 30, 1994. (See Notes which are integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1994 - -------------------------------------------------------------------------------- ASSETS: - ------------------------------------------------------------------------------------------------ Investments, at value (Notes 2A and 2B) (identified and tax cost, $402,113,303) $ 391,832,844 - ------------------------------------------------------------------------------------------------ Cash 234,808 - ------------------------------------------------------------------------------------------------ Interest receivable 2,775,314 - ------------------------------------------------------------------------------------------------ Receivable for Fund shares sold 1,411,953 - ------------------------------------------------------------------------------------------------ --------------- Total assets 396,254,919 - ------------------------------------------------------------------------------------------------ LIABILITIES: - ------------------------------------------------------------------------------------------------ Payable for Fund shares redeemed $ 1,929,125 - --------------------------------------------------------------------------------- Dividends payable 1,435,826 - --------------------------------------------------------------------------------- Payable to transfer and dividend disbursing agent (Note 4) 3,980 - --------------------------------------------------------------------------------- Accrued expenses 130,402 - --------------------------------------------------------------------------------- ------------- Total liabilities 3,499,333 - ------------------------------------------------------------------------------------------------ --------------- NET ASSETS for 44,384,375 shares of beneficial interest outstanding $ 392,755,586 - ------------------------------------------------------------------------------------------------ --------------- NET ASSETS CONSIST OF: - ------------------------------------------------------------------------------------------------ Paid-in capital $ 415,115,331 - ------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investments (10,280,459) - ------------------------------------------------------------------------------------------------ Accumulated net realized gain (loss) on investments (12,079,286) - ------------------------------------------------------------------------------------------------ --------------- Total $ 392,755,586 - ------------------------------------------------------------------------------------------------ --------------- NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share; Institutional Shares ($353,106,260 / 39,903,321 shares of beneficial interest outstanding) $8.85 - ------------------------------------------------------------------------------------------------ --------------- Institutional Service Shares ($39,649,326 / 4,481,054 shares of beneficial interest outstanding) $8.85 - ------------------------------------------------------------------------------------------------ ---------------
(See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1994 - -------------------------------------------------------------------------------- INVESTMENT INCOME: - ------------------------------------------------------------------------------------------------- Interest income (Note 2C) $ 19,390,453 - ------------------------------------------------------------------------------------------------- EXPENSES: - ------------------------------------------------------------------------------------------------- Investment advisory fee (Note 4) $ 1,269,273 - ---------------------------------------------------------------------------------- Trustees' fees 10,646 - ---------------------------------------------------------------------------------- Administrative personnel and services fees (Note 4) 383,643 - ---------------------------------------------------------------------------------- Custodian and portfolio accounting fees and expenses 163,757 - ---------------------------------------------------------------------------------- Transfer and dividend disbursing agent fees and expenses (Note 4) 7,460 - ---------------------------------------------------------------------------------- Fund share registration costs 98,061 - ---------------------------------------------------------------------------------- Auditing fees 21,469 - ---------------------------------------------------------------------------------- Distribution service fees (Note 4) 70,952 - ---------------------------------------------------------------------------------- Shareholder services fees (Note 4) 15,198 - ---------------------------------------------------------------------------------- Legal fees 14,495 - ---------------------------------------------------------------------------------- Printing and postage 36,222 - ---------------------------------------------------------------------------------- Insurance premiums 6,741 - ---------------------------------------------------------------------------------- Taxes 4,377 - ---------------------------------------------------------------------------------- Miscellaneous 5,114 - ---------------------------------------------------------------------------------- ------------- Total expenses 2,107,408 - ---------------------------------------------------------------------------------- Deduct--Waiver of investment advisory fee (Note 4) $ 259,625 - --------------------------------------------------------------------- Waiver of distribution service fees (Note 4) 15,198 274,823 - --------------------------------------------------------------------- ----------- ------------- Net expenses 1,832,585 - ------------------------------------------------------------------------------------------------- --------------- Net investment income 17,557,868 - ------------------------------------------------------------------------------------------------- --------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: - ------------------------------------------------------------------------------------------------- Net realized gain (loss) on investment transactions (identified cost basis) (2,324,205) - ------------------------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments (11,254,546) - ------------------------------------------------------------------------------------------------- --------------- Net realized and unrealized loss on investments (13,578,751) - ------------------------------------------------------------------------------------------------- --------------- Change in net assets resulting from operations $ 3,979,117 - ------------------------------------------------------------------------------------------------- ---------------
(See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED APRIL 30, --------------------------------- 1994 1993 - ------------------------------------------------------------------------------ ---------------- --------------- INCREASE (DECREASE) IN NET ASSETS: - ------------------------------------------------------------------------------ OPERATIONS-- - ------------------------------------------------------------------------------ Net investment income $ 17,557,868 $ 5,989,214 - ------------------------------------------------------------------------------ Net realized gain (loss) on investment transactions ($669,532 net loss and $61,811 net gain, respectively, as computed for federal tax purposes) (2,324,205) (2,884) - ------------------------------------------------------------------------------ Change in unrealized appreciation (depreciation) on investments (11,254,546) 1,162,577 - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets from operations 3,979,117 7,148,907 - ------------------------------------------------------------------------------ ---------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)-- - ------------------------------------------------------------------------------ Dividends to shareholders from net investment income: Institutional Shares (16,047,919) (5,534,478) - ------------------------------------------------------------------------------ Institutional Service Shares (1,509,949) (340,673) - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets from distributions to shareholders (17,557,868) (5,875,151) - ------------------------------------------------------------------------------ ---------------- --------------- FUND SHARE TRANSACTIONS (NOTE 3) - ------------------------------------------------------------------------------ Net proceeds from sale of shares 513,518,367 202,156,588 - ------------------------------------------------------------------------------ Net asset value of shares issued to shareholders in payment of dividends declared 3,669,215 895,871 - ------------------------------------------------------------------------------ Cost of shares redeemed (270,654,913) (81,349,085) - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets from Fund share transactions 246,532,669 121,703,374 - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets 232,953,918 122,977,130 - ------------------------------------------------------------------------------ NET ASSETS: - ------------------------------------------------------------------------------ Beginning of period 159,801,668 36,824,538 - ------------------------------------------------------------------------------ ---------------- --------------- End of period $ 392,755,586 $ 159,801,668 - ------------------------------------------------------------------------------ ---------------- ---------------
(See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1994 - -------------------------------------------------------------------------------- (1) ORGANIZATION Federated Income Securities Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. The Trust consists of two diversified portfolios. The financial statements included herein are only those of Federated Short-Term Income Fund (the "Fund"). The financial statements of the other portfolio are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund provides two classes of shares, Institutional Shares and Institutional Service Shares. Institutional Service Shares are identical in all respects to Institutional Shares except that Institutional Service Shares will be sold pursuant to a distribution plan ("Plan") adopted in accordance with Investment Company Act Rule 12b-1. (2) SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP). A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at the mean between the over-the-counter bid and asked prices as furnished by an independent pricing service. Corporate bonds (and other fixed asset backed securities) are valued at the last sale price reported on national securities exchanges on that day, if available. Otherwise, corporate bonds (and other asset backed securities) and short-term obligations are valued at the prices provided by an independent pricing service. Short-term securities with remaining maturities of sixty days or less at the time of purchase may be stated at amortized cost, which approximates value. B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian bank's vault, all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by the Fund to monitor on a daily basis, the market value of each repurchase agreement's underlying collateral to ensure the value at least equals the principal amount of the repurchase agreement, including accrued interest. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund adviser to be creditworthy pursuant to guidelines established by the Board of Trustees ("Trustees"). Risks may arise from the potential inability of counterparties to honor the terms of these agreements. Accordingly, the Fund could receive less than the repurchase price on the sale of collateral securities. C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued daily. Bond premium and discount are amortized as required by the Internal Revenue Code, as amended ("Code"). Distributions to shareholders are recorded on the ex-dividend date. D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to, distribute to shareholders each year substantially all of its taxable income. Accordingly, no provisions for federal tax are necessary. At April 30, 1994 the Fund for federal tax purposes, had a capital loss carryforward of ($10,249,866) which will reduce the Fund's taxable income arising from future net realized gain on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital loss carryforward will expire in 1995, ($156,476), 1996 ($791,359), 1997 ($3,077,752), 1998 ($316,627), 1999 ($1,132,354), 2000 ($4,105,766) and 2002 ($669,532). Additionally, net capital losses of ($1,829,377) attributable to security transactions incurred after October 31, 1993, are treated as arising on May 1, 1994, the first day of the Fund's next taxable year. E. WNEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. F. OTHER--Investment transactions are accounted for on the trade date. (3) SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
YEAR ENDED APRIL 30, --------------------------------------------------------------- 1994 1993 INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT - ----------------------------------------------- ------------- ---------------- ------------- --------------- Shares sold 50,506,612 $ 459,763,632 19,997,401 $ 182,667,537 - ----------------------------------------------- Shares issued to shareholders in payment of dividends declared 307,713 2,782,792 69,745 637,195 - ----------------------------------------------- Shares redeemed (26,635,056) (241,204,503) (8,357,188) (76,399,182) - ----------------------------------------------- ------------- ---------------- ------------- --------------- Net change resulting from fund share transactions 24,179,269 $ 221,341,921 11,709,958 $ 106,905,550 - ----------------------------------------------- ------------- ---------------- ------------- ---------------
YEAR ENDED APRIL 30, ---------------------------------------------------------- 1994 1993 INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT - ---------------------------------------------------- ------------ --------------- ----------- -------------- Shares sold 5,927,113 $ 53,754,735 2,134,568 $ 19,489,051 - ---------------------------------------------------- Shares issued to shareholders in payment of dividends declared 97,795 886,423 28,299 258,676 - ---------------------------------------------------- Shares redeemed (3,253,210) (29,450,410) (541,975) (4,949,903) - ---------------------------------------------------- ------------ --------------- ----------- -------------- Net change resulting from fund share transactions 2,771,698 $ 25,190,748 1,620,892 $ 14,797,824 - ---------------------------------------------------- ------------ --------------- ----------- --------------
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser ("Adviser"), receives for its services an annual investment advisory fee equal to .40 of 1% of the Fund's average daily net assets. Adviser may voluntarily choose to waive a portion of its fee and reimburse certain operating expenses of the Fund. Adviser can modify or terminate this voluntary waiver and reimbursement at any time at its sole discretion. ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund administrative personnel and services. Prior to March 1, 1994, these services were provided at approximate cost. Effective March 1, 1994, the fee is based on the level of average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors for the period. The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Service Shares. The Plan provides that the Fund may incur distribution expenses up to .25 of 1% of the average daily net assets of the Institutional Service Shares, annually, to compensate FSC. Under the terms of a shareholder services agreement with Federated Shareholder Services ("FSS") the Fund will pay FSS up to .25 of 1% of average net assets for each class of shares for the period. This fee is to obtain certain personal services for shareholders and the maintenance of shareholder accounts. TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves as transfer agent and dividend disbursing agent for the Fund. The fee is based on the size, type and number of accounts and transactions made by shareholders. Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. (5) INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the fiscal year ended April 30, 1994 were as follows: PURCHASES $ 373,721,007 - ------------------------------------------------------------------------------------------------- --------------- SALES $ 136,235,736 - ------------------------------------------------------------------------------------------------- ---------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Trustees and Shareholders of FEDERATED SHORT-TERM INCOME FUND (a portfolio of Federated Income Securities Trust): We have audited the accompanying statement of assets and liabilities of the Federated Short-Term Income Fund (a portfolio of Federated Income Securities Trust), including the portfolio of investments, as of April 30, 1994, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights (see pages 2 and 24 of the Prospectus) for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of April 30, 1994, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Federated Short-Term Income Fund at April 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with generally accepted accounting principles. ERNST & YOUNG Pittsburgh, Pennsylvania June 9, 1994 ADDRESSES - -------------------------------------------------------------------------------- Federated Short-Term Income Fund Federated Investors Tower Institutional Shares Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Custodian State Street Bank and P.O. Box 8602 Trust Company Boston, Massachusetts 02266-8602 - --------------------------------------------------------------------------------------------------------------------- Transfer Agent & Dividend Disbursing Agent Federated Services Company Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Shareholder Servicing Agent Federated Shareholder Services Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Houston, Houston & Donnelly 2510 Centre City Tower Pittsburgh, Pennsylvania 15222 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W. Washington, D.C. 20037 - --------------------------------------------------------------------------------------------------------------------- Independent Auditors Ernst & Young One Oxford Centre Pittsburgh, Pennsylvania 15219 - ---------------------------------------------------------------------------------------------------------------------
FEDERATED SHORT-TERM INCOME FUND INSTITUTIONAL SHARES PROSPECTUS A Diversified Portfolio of Federated Income Securities Trust, An Open-End, Management Investment Company June 30, 1994 1111903A-IS (6/94) FEDERATED SHORT-TERM INCOME FUND INSTITUTIONAL SHARES (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information should be read with the prospectus of the Federated Short-Term Income Fund (the "Fund") dated June 30, 1994. This Statement is not a prospectus itself. To receive a copy of the prospectus, write or call the Fund. FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 Statement dated June 30, 1994 FEDERATED SECURITIES CORP. --------------------------------------------------------- Distributor A subsidiary of FEDERATED INVESTORS TABLE OF CONTENTS - -------------------------------------------------------------------------------- GENERAL INFORMATION ABOUT THE FUND 1 - --------------------------------------------------------------- INVESTMENT OBJECTIVE AND POLICIES 1 - --------------------------------------------------------------- U.S. Government Securities 1 Weighted Average Portfolio Maturity 1 Weighted Average Portfolio Duration 1 When-Issued and Delayed Delivery Transactions 2 Repurchase Agreements 2 Lending of Portfolio Securities 2 Reverse Repurchase Agreements 2 Privately Issued Mortgage-Related Securities 2 Portfolio Turnover 3 Investment Limitations 3 TRUST MANAGEMENT 5 - --------------------------------------------------------------- Officers and Trustees 5 The Funds 7 Fund Ownership 7 Trustee Liability 7 INVESTMENT ADVISORY SERVICES 7 - --------------------------------------------------------------- Adviser to the Fund 7 Other Advisory Services 8 Other Related Services 8 ADMINISTRATIVE SERVICES 8 - --------------------------------------------------------------- SHAREHOLDER SERVICES PLAN 9 - --------------------------------------------------------------- BROKERAGE TRANSACTIONS 9 - --------------------------------------------------------------- PURCHASING INSTITUTIONAL SHARES 9 - --------------------------------------------------------------- Other Payments to Financial Institutions 9 Conversion to Federal Funds 9 DETERMINING NET ASSET VALUE 10 - --------------------------------------------------------------- Determining Value of Securities 10 REDEEMING INSTITUTIONAL SHARES 10 - --------------------------------------------------------------- Redemption in Kind 10 TAX STATUS 10 - --------------------------------------------------------------- The Fund's Tax Status 10 Shareholders' Tax Status 10 TOTAL RETURN 11 - --------------------------------------------------------------- YIELD 11 - --------------------------------------------------------------- PERFORMANCE COMPARISONS 11 - --------------------------------------------------------------- APPENDIX 13 - --------------------------------------------------------------- GENERAL INFORMATION ABOUT THE FUND - -------------------------------------------------------------------------------- The Fund is a portfolio of Federated Income Securities Trust (the "Trust"), which was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to permit the Trust to offer one or more separate series and classes of shares and to change the name of the Trust from "Federated Floating Rate Trust" to "Federated Income Securities Trust.". Shares of the Fund are offered in two classes, Institutional Shares and Institutional Service Shares. This statement of additional information relates to Institutional Shares ("Shares") of the Fund. INVESTMENT OBJECTIVE AND POLICIES - -------------------------------------------------------------------------------- The Fund's investment objective is to seek to provide current income. The Fund will pursue this objective by investing primarily in a diversified portfolio of short and medium-term high grade debt securities. The foregoing investment objective and policy may not be changed without the prior approval of the Fund's shareholders. U.S. GOVERNMENT SECURITIES The types of U.S. government obligations in which the Fund may invest generally include direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by U.S. government agencies or instrumentalities. These securities may be backed by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or the credit of the agency or instrumentality issuing the obligations. Examples of agencies and instrumentalities which may not always receive financial support from the U.S. government are: Federal Farm Credit Banks; Federal Home Loan Banks; Student Loan Marketing Association; Federal Home Loan Mortgage Corporation; and Federal National Mortgage Association. WEIGHTED AVERAGE PORTFOLIO MATURITY The Fund will determine its dollar-weighted average portfolio maturity by assigning a "weight" to each portfolio security based upon the pro rata market value of such portfolio security in comparison to the market value of the entire portfolio. The remaining maturity of each portfolio security is then multiplied by its weight, and the results are added together to determine the weighted average maturity of the portfolio. For purposes of calculating its dollar-weighted average portfolio maturity, the Fund will treat (a) treat asset-backed securities as having a maturity equal to their estimated weighted-average maturity and (b) variable and floating rate instruments as having a remaining maturity commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. The average maturity of asset-backed securities will be calculated based upon assumptions established by the investment adviser as to the probable amount of the principal prepayments weighted by the period until such prepayments are expected to be received. Fixed rate securities hedged with interest rate swaps or caps will be treated as floating or variable rate securities based upon the interest rate index of the swap or cap; floating and variable rate securities hedged with interest rate swaps or floors will be treated as having a maturity equal to the term of the swap or floor. In the event that the Fund holds an interest rate swap, cap or floor that is not hedging another portfolio security, the swap, cap or floor will be treated as having a maturity equal to its term and a weight equal to its notional principal amount for such term. WEIGHTED AVERAGE PORTFOLIO DURATION Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Duration measures the magnitude of the change in the price of a debt security relative to a given change in the market rate of interest. The duration of a debt security depends upon three primary variables: the security's coupon rate, maturity date and the level of market interest rates for similar debt securities. Generally, debt securities with lower coupons or longer maturities will have a longer duration than securities with higher coupons or shorter maturities. For purposes of calculating its dollar-weighted average portfolio duration, the Fund will treat variable and floating rate instruments as having a remaining duration commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. Duration is calculated by dividing the sum of the time-weighted values of cash flows of a security or portfolio of securities, including principal and interest payments, by the sum of the present values of the cash flows. Certain debt securities, such as asset-backed securities, may be subject to prepayment at irregular intervals. The duration of these instruments will be calculated based upon assumptions established by the investment adviser as to the probable amount and sequence of principal prepayments. The duration of interest rate agreements, such as interest rates swaps, caps and floors, is calculated in the same manner as other securities. However, certain interest rate agreements have negative durations, which the Fund may use to reduce its weighted average portfolio duration. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. The Fund engages in when-issued and delayed delivery transactions only for the purpose of acquiring portfolio securities consistent with the Fund's investment objective and policies, not for investment leverage. These transactions are made to secure what is considered to be an advantageous price and yield for the Fund. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Fund sufficient to make payment for the securities to be purchased are segregated at the trade date. These securities are marked to market daily and maintained until the transaction is settled. The Fund may engage in these transactions to an extent that would cause the segregation of an amount up to 20% of the total value of its assets. REPURCHASE AGREEMENTS The Fund or its custodian will take possession of the securities subject to repurchase agreements, and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Board of Trustees ("Trustees"). LENDING OF PORTFOLIO SECURITIES The collateral received when the Fund lends portfolio securities must be valued daily and, should the market value of the loaned securities increase, the borrower must furnish additional collateral to the Fund. During the time portfolio securities are on loan, the borrower pays the Fund any dividends or interest paid on such securities. Loans are subject to termination at the option of the Fund or the borrower. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. REVERSE REPURCHASE AGREEMENTS The use of reverse repurchase agreements may enable the Fund to avoid selling portfolio instruments at a time when a sale may be deemed to be disadvantageous, but the ability to enter into reverse repurchase agreements does not ensure that the Fund will be able to avoid selling portfolio instruments at a disadvantageous time. PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES Privately issued mortgage-related securities generally represent an ownership interest in federal agency mortgage pass-through securities such as those issued by Government National Mortgage Association as well as those issued by non-government related entities. The terms and characteristics of the mortgage instruments may vary among pass-through mortgage loan pools. The market for such mortgage-related securities has expanded considerably since its inception. The size of the primary issuance market and the active participation in the secondary market by securities dealers and other investors makes government-related and non-government related pools highly liquid. PORTFOLIO TURNOVER For the fiscal years ended April 30, 1994, and 1993, the portfolio turnover rates were 44% and 62%, respectively. INVESTMENT LIMITATIONS CONCENTRATION OF INVESTMENTS The Fund will not purchase securities if as a result of such purchase 25% or more of the value of its total assets would be invested in any one industry. INVESTING IN COMMODITIES The Fund will not purchase or sell commodities or commodity contracts, including futures contracts. INVESTING IN REAL ESTATE The Fund will not purchase or sell real estate including limited partnership interests in real estate, although it may invest in the securities of companies whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. BUYING ON MARGIN The Fund will not purchase any securities on margin but may obtain such short-term credits as are necessary for the clearance of transactions. SELLING SHORT The Fund will not sell securities short unless: during the time the short position is open, it owns an equal amount of the securities sold or securities readily and freely convertible into or exchangeable, without payment of additional consideration, for securities of the same issue as, and equal in amount to, the securities sold short; and not more than 10% of the Fund's net assets (taken at current value) is held as collateral for such sales at any one time. ISSUING SENIOR SECURITIES AND BORROWING MONEY The Fund will not issue senior securities, except that the Fund may borrow money and engage in reverse repurchase agreements in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. The Fund will not purchase any securities while any borrowings, other than reverse repurchase agreements, are outstanding. LENDING CASH OR SECURITIES The Fund will not lend any of its assets except portfolio securities up to one-third of the value of its total assets. This shall not prevent the purchase or holding of corporate bonds, debentures, notes, certificates of indebtedness or other debt securities of an issuer, repurchase agreements or other transactions which are permitted by the Fund's investment objective and policies or its Declaration of Trust. UNDERWRITING The Fund will not underwrite any issue of securities, except as it may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of restricted securities which the Fund may purchase pursuant to its investment objective, policies, and limitations. INVESTING IN MINERALS The Fund will not purchase interests in oil, gas, or other mineral exploration or development programs, or leases, although it may purchase the securities of issuers which invest in or sponsor such programs. INVESTING IN NEW ISSUERS The Fund will not invest more than 5% of the value of its total assets in securities of companies, including their predecessors, that have been in operation for less than three years. With respect to asset-backed securities, the Fund will treat the originator of the asset pool as the company issuing the security for purposes of determining compliance with this limitation. INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF THE TRUST The Fund will not purchase or retain the securities of any issuer if the officers and Trustees of the Trust or its investment adviser owning individually more than 1/2 of 1% of the issuer's securities together own more than 5% of the issuer's securities. DIVERSIFICATION OF INVESTMENTS The Fund will not, with respect to 75% of its assets, invest more than 5% of the value of its total assets in securities of one issuer (except U.S. government obligations), or purchase more than 10% of the outstanding voting securities in any one issuer. ACQUIRING SECURITIES The Fund will not purchase securities of a company for the purpose of exercising control or management. PLEDGING ASSETS The Fund will not mortgage, pledge, or hypothecate any assets except to secure permitted borrowings. In those cases, it may mortgage, pledge, or hypothecate assets having a market value not exceeding 10% of the value of total assets at the time of the borrowing. The above investment limitations cannot be changed without shareholder approval. The following limitations, however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in this limitation becomes effective. INVESTING IN ILLIQUID SECURITIES The Fund will limit investments in illiquid securities, including certain restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and repurchase agreements providing for settlement in more than seven days after notice, to 15% of its net assets. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES The Fund will limit its investment in other investment companies to no more than 3% of the total outstanding voting stock of any investment company, will not invest more than 5% of its total assets in any one investment company, or invest more than 10% of its total assets in investment companies in general. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, or acquisition of assets. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. During the fiscal year ended April 30, 1994, the Fund did not borrow money, invest in repurchase agreements or sell securities short in excess of 5% of the value of its net assets. The Fund does not intend to borrow money, invest in reverse repurchase agreements, or sell securities short in excess of 5% of the value of its net assets, during the coming year. In order to comply with certain state restrictions, the Fund will limit its investment in securities of other investment companies to those with sales loads of less than 1.00% of the offering price of such securities. The Fund will purchase securities of closed-end investment companies only in open market transactions involving any customary brokers' commissions. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, reorganization, or acquisition of assets. While it is a policy to waive advisory fees on Fund assets invested in securities of other open-end investment companies, it should be noted that investment companies incur certain expenses such as custodian and transfer agency fees and, therefore, any investment by the Fund in shares of another investment company would be subject to such duplicate expenses. For purposes of its policies and limitations, the Fund considers certificates of deposit and demand and time deposits issued by a U.S. branch of a domestic bank or savings and loan having a capital surplus, and undivided profits in excess of $100,000,000 at the time of investment to be "cash items." TRUST MANAGEMENT - -------------------------------------------------------------------------------- OFFICERS AND TRUSTEES Officers and Trustees are listed with their addresses, principal occupations, and present positions, including any affiliation with Federated Management, Federated Investors, Federated Securities Corp., Federated Administrative Services, Federated Services Company, Federated Shareholder Services, and the Funds (as defined below).
POSITIONS WITH PRINCIPAL OCCUPATIONS NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research; Pittsburgh, PA Director, tna Life and Casualty Company; Chief Executive Officer and Director, Trustee, or Managing General Partner of the Funds; formerly, Director, The Standard Fire Insurance Company. Mr. Donahue is the father of J. Christopher Donahue, Vice President of the Trust. John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate Department Village Development Corporation; General Partner or Trustee in private John R. Wood and real estate ventures in Southwest Florida; Director, Trustee, or Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples 3255 Tamiami Trail North Property Management Inc. Naples, FL William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.; One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly, 23rd Floor Vice Chairman and Director, PNC Bank, N.A. and PNC Bank Corp. and Pittsburgh, PA Director, Ryan Homes, Inc. James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, 571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Concord, MA Blue Cross of Massachusetts, Inc.; Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore 3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Pittsburgh, PA Funds. Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park 5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A., Western Region. Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; 225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly, Boston, MA President, State Street Bank and Trust Company and State Street Boston Corporation and Trustee, Lahey Clinic Foundation, Inc. Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, 5916 Penn Mall Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A. Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie 1202 Cathedral of Learning Endowment for International Peace, RAND Corporation, Online Computer Pittsburgh, PA Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director, Trustee or Managing General Partner of the Funds; President, Emeritus University of Pittsburgh; formerly Chairman National Advisory Council for Environmental Policy and Technology. Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing 4905 Bayard Street General Partner of the Funds. Pittsburgh, PA John A. Staley, IV* Vice President Vice President and Trustee, Federated Investors; Executive Vice Federated Investors Tower and Trustee President, Federated Securities Corp.; President and Trustee, Pittsburgh, PA Federated Advisers, Federated Management, and Federated Research; Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds; formerly, Vice President, The Standard Fire Insurance Company and President of its Federated Research Division. Glen R. Johnson President Trustee, Federated Investors; President and/or Trustee of some of the Federated Investors Tower Funds; staff member, Federated Securities Corp. and Federated Pittsburgh, PA Administrative Services. J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Federated Investors Tower Advisers, Federated Management, and Federated Research; Trustee, Pittsburgh, PA Federated Administrative Services, Federated Services Company, and Federated Shareholder Services; President or Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of the Trust. Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman Federated Investors Tower and Director, Federated Securities Corp.; President or Vice President Pittsburgh, PA of the Funds; Director or Trustee of some of the Funds. Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, and Pittsburgh, PA Federated Research; Executive Vice President, Treasurer, and Director, Federated Securities Corp.; Chairman, Treasurer, and Trustee, Federated Administrative Services; Trustee, Federated Services Com- pany, and Federated Shareholder Services; Trustee or Director of some of the Funds; Vice President and Treasurer of the Funds. John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated Federated Investors Tower and Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers, Pittsburgh, PA Federated Management, and Federated Research; Executive Vice President, Secretary, and Trustee, Federated Administrative Services, Inc.; Trustee, Federated Services Company, and Federated Shareholder Services, Director and Executive Vice President, Federated Securities Corp.; Vice President and Secretary of the Funds.
*This Trustee is deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940 as amended. \Members of the Executive Committee. The Executive Committee of the Board of Trustees handles the responsibilities of the Board of Trustees between meetings of the Board. THE FUNDS "The Funds" and "Funds" mean the following investment companies: American Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust; Automated Government Money Trust; California Municipal Cash Trust; Cash Trust Series Inc.; Cash Trust Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated Intermediate Municipal Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal Trust; International Series Funds, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Trademark Funds; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations and World Investment Series, Inc. FUND OWNERSHIP Officers and Trustees own less than 1% of the Fund's outstanding shares. As of June 3, 1994, the following shareholder of record owned 5% or more of the outstanding Institutional Shares of the Fund: Valley Trust Company, Appleton, Wisconsin, owned approximately 2,373,554 shares (6.12%). TRUSTEE LIABILITY The Trust's Declaration of Trust provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. INVESTMENT ADVISORY SERVICES - -------------------------------------------------------------------------------- ADVISER TO THE FUND The Fund's investment adviser is Federated Management (the "Adviser"). It is a subsidiary of Federated Investors. All of the voting securities of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, his wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee of Federated Management, is Chairman and Trustee of Federated Investors and Chairman and Trustee of the Trust. John A. Staley, IV, President and Trustee of Federated Management, is Vice President and Trustee of Federated Investors, Executive Vice President of Federated Securities Corp., and Vice President and Trustee of the Trust. J. Christopher Donahue, Trustee of Federated Management, is President and Trustee of Federated Investors, Trustee of Federated Administrative Services, and Vice President of the Trust. John W. McGonigle, Vice President, Secretary and Trustee of Federated Management, is Trustee, Vice President, Secretary, and General Counsel of Federated Investors, Director, Executive Vice President, and Secretary of Federated Administrative Services, Director and Executive Vice President of Federated Securities Corp., and Vice President and Secretary of the Trust. The Adviser shall not be liable to the Trust, the Fund, or any shareholder of the Fund for any losses that may be sustained in the purchase, holding, or sale of any security, or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Trust. ADVISORY FEES For its advisory services, the Adviser receives an annual investment advisory fee as described in the prospectus. During the fiscal years ended April 30, 1994, 1993, and 1992, the Fund's Adviser earned $1,269,273, $395,758, and $266,945, respectively, $259,625, all, and all of which were waived, respectively, because of undertakings to limit the Fund's expenses. STATE EXPENSE LIMITATIONS The Adviser has undertaken to comply with the expense limitations established by certain states for investment companies whose shares are registered for sale in those states. If the Fund's normal operating expenses (including the investment advisory fee, but not including brokerage commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2% per year of the first $30 million of average net assets, 2% per year of the next $70 million of average net assets, and 1-1/2% per year of the remaining average net assets, the Adviser will reimburse the Fund for its expenses over the limitation. If the Fund's monthly projected operating expenses exceed this limitation, the investment advisory fee paid will be reduced by the amount of the excess, subject to an annual adjustment. If the expense limitation is exceeded, the amount to be reimbursed by the Adviser will be limited, in any single fiscal year, by the amount of the investment advisory fee. This arrangement is not part of the advisory contract and may be amended or rescinded in the future. OTHER ADVISORY SERVICES Federated Research Corp. receives fees from certain depository institutions for providing consulting and portfolio advisory services relating to each institution's program of asset management. Federated Research Corp. may advise such clients to purchase or redeem shares of investment companies, such as the Fund, which are managed, for a fee, by Federated Research Corp. or other affiliates of Federated Investors, such as the Adviser, and may advise such clients to purchase and sell securities in the direct markets. Further, Federated Research Corp., and other affiliates of the Adviser, may, from time to time, provide certain consulting services and equipment to depository institutions in order to facilitate the purchase of shares of funds offered by Federated Securities Corp. OTHER RELATED SERVICES Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of shares of funds offered by Federated Securities Corp. ADMINISTRATIVE SERVICES - -------------------------------------------------------------------------------- Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services to the Fund for a fee as described in the prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc., also a subsidiary of Federated Investors, served as the Fund's administrator. (For purposes of this Statement of Additional Information, Federated Administrative Services and Federated Administrative Services, Inc., may hereinafter collectively be referred to as, the "Administrators".) For the fiscal years ended April 30, 1994, 1993, and 1992, the Administrators collectively earned $383,643, $292,200, and $166,568, respectively. John A. Staley, IV, an officer of the Trust and Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the Fund, each hold approximately 15% and 20%, respectively, of the outstanding common stock and serve as directors of Commercial Data Services, Inc., a company which provides computer processing services to the Administrators. SHAREHOLDER SERVICES PLAN - -------------------------------------------------------------------------------- This arrangement permits the payment of fees to Federated Shareholder Services and, indirectly, to financial institutions to cause services to be provided to shareholders by a representative who has knowledge of the shareholder's particular circumstances and goals. These activities and services may include, but are not limited to, providing office space, equipment, telephone facilities, and various clerical, supervisory, computer, and other personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries; and assisting clients in changing dividend options, account designations, and addresses. For the fiscal period ended April 30, 1994, no payments were made pursuant to the Shareholder Services Plan. BROKERAGE TRANSACTIONS - -------------------------------------------------------------------------------- When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. In working with dealers, the Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Trustees. The Adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the Adviser and may include: advice as to the advisability of investing in securities; security analysis and reports; economic studies; industry studies; receipt of quotations for portfolio evaluations; and similar services. The Adviser and its affiliates exercise reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. Research services provided by brokers may be used by the Adviser or by affiliates of Federated Investors in advising Federated Funds and other accounts. To the extent that receipt of these services may supplant services for which the Adviser or its affiliates might otherwise have paid, it would tend to reduce their expenses. PURCHASING INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- Shares are sold at their net asset value without a sales charge on days on which the New York Stock Exchange is open for business. The procedure for purchasing Shares of the Fund is explained in the prospectus under "Investing in Institutional Shares." OTHER PAYMENTS TO FINANCIAL INSTITUTIONS The administrative services for which the distributor will pay financial institutions include, but are not limited to, providing office space, equipment, telephone facilities, and various clerical, supervisory, and computer personnel as is necessary or beneficial to establish and maintain shareholders' accounts and records, process purchase and redemption transactions, process automatic investments of client account cash balances, answer routine client inquiries regarding the Fund, assist clients in changing dividend options, account designations, and addresses, and providing such other services as the Fund may reasonably request. CONVERSION TO FEDERAL FUNDS It is the Fund's policy to be as fully invested as possible so that maximum interest may be earned. To this end, all payments from shareholders must be in federal funds or be converted into federal funds. State Street Bank and Trust Company ("State Street Bank") acts as the shareholder's agent in depositing checks and converting them to federal funds. DETERMINING NET ASSET VALUE - -------------------------------------------------------------------------------- Net asset value generally changes each day. The days on which net asset value is calculated by the Fund are described in the prospectus. DETERMINING VALUE OF SECURITIES The values of the Fund's portfolio securities are determined as follows: according to prices provided by independent pricing services, which may be determined without exclusive reliance on quoted prices from dealers but which use market prices when most representative, and which may take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data employed in determining valuations for such securities; or for short-term obligations with remaining maturities of less than 60 days at the time of purchase, at amortized cost unless the Trustees determines that particular circumstances of the security indicate otherwise. REDEEMING INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at the next computed net asset value after the Fund receives the redemption request. Redemption procedures are explained in the prospectus under "Redeeming Institutional Shares." Although State Street Bank does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions of less than $5,000. REDEMPTION IN KIND Although the Trust intends to redeem shares in cash, it reserves the right under certain circumstances to pay the redemption price in whole or in part by a distribution of securities from the respective Fund's portfolio. Redemption in kind will be made in conformity with applicable Securities and Exchange Commission rules, taking such securities at the same value employed in determining net asset value and selecting the securities in a manner the Trustees determine to be fair and equitable. The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act of 1940 under which the Fund is obligated to redeem shares for any one shareholder in cash only up to the lesser of $250,000 or 1% of the respective class's net asset value during any 90-day period. TAX STATUS - -------------------------------------------------------------------------------- THE FUND'S TAX STATUS The Fund will pay no federal income tax because it expects to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, the Fund must, among other requirements: derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; derive less than 30% of its gross income from gains on the sale of securities held less than three months; invest in securities within certain statutory limits; and distribute to its shareholders at least 90% of its net income earned during the year. SHAREHOLDERS' TAX STATUS Shareholders are subject to federal income tax on dividends and capital gains received as cash or additional Shares. No portion of any income dividend paid by the Fund is expected to be eligible for the dividends received deduction available to corporations. These dividends, and any short-term capital gains, are taxable as ordinary income. CAPITAL GAINS Fixed income securities offering the current income sought by the Fund are often purchased at a discount from par value. Because the total yield on such securities when held to maturity and retired may include an element of capital gain, the Fund may achieve capital gains. However, the Fund will not hold securities to maturity for the purpose of realizing capital gains unless current yields on those securities remain attractive. Capital gains or losses may also be realized on the sale of securities. Sales would generally be made because of: the availability of higher relative yields; differentials in market values; new investment opportunities; changes in creditworthiness of an issuer; or an attempt to preserve gains or limit losses. Distributions of long-term capital gains are taxed as such, whether they are taken in cash or reinvested, and regardless of the length of time the shareholder has owned the Shares. TOTAL RETURN - -------------------------------------------------------------------------------- The Fund's average annual total returns for the one-year and five-year periods ended April 30, 1994, and for the period from July 1, 1986 (effective date of the Trust's initial registration statement) to April 30, 1994, were 2.04%, 6.51%, and 6.90%, respectively, for Institutional Shares. The Fund's average annual total returns for the one-year period ended April 30, 1994 and for the period from January 21, 1992 (the effective date of the Institutional Service Shares) to April 30, 1994 were 1.78% and 4.62%, respectively, for the Institutional Service Shares. The average annual total return for both classes of shares of the Fund is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of shares owned at the end of the period by the maximum offering price per share at the end of the period. The number of shares owned at the end of the period is based on the number of shares purchased at the beginning of the period with $1,000, adjusted over the period by any additional shares, assuming the monthly reinvestment of all dividends and distributions. YIELD - -------------------------------------------------------------------------------- The Fund's yield for the thirty-day period ended April 30, 1994, was and 5.11% 4.86% for Institutional Shares and Institutional Service Shares, respectively. The yield for both classes of shares of the Fund is determined by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by either class of shares over a thirty-day period by the maximum offering price per share of either class of shares on the last day of the period. This value is then annualized using semi-annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a twelve-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by the Fund because of certain adjustments required by the Securities and Exchange Commission and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in either class of shares, performance will be reduced for those shareholders paying those fees. PERFORMANCE COMPARISONS - -------------------------------------------------------------------------------- The performance of both classes of shares depends upon such variables as: portfolio quality; average portfolio maturity; type of instruments in which the portfolio is invested; changes in interest rates and market value of portfolio securities; changes in the Fund's or either class of share's expenses; and various other factors. Either class of share's performance fluctuates on a daily basis largely because net earnings and the maximum offering price per share fluctuate daily. Both net earnings and net asset value per share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specific period of time. From time to time, the Fund will quote its Lipper ranking in the "short-term investment grade debt funds" category in advertising and sales literature. MERRILL LYNCH TOTAL RETURN INVESTMENT GRADE CORPORATES INDEX (SHORT-TERM 1-2.99 YEARS) is comprised of over 400 issues of investment grade corporate debt securities with remaining maturities from 1 to 2.99 years. MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rate more than 1,000 NASDQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. Advertisements and other sales literature for both classes of shares may quote total returns which are calculated on non-standardized base periods. These total returns also represent the historic change in the value of an investment in the either class of shares based on monthly reinvestment of dividends over a specified period of time. APPENDIX - -------------------------------------------------------------------------------- STANDARD & POOR'S CORPORATION LONG TERM DEBT RATING DEFINITIONS AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Corporation. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A--Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS AAA--Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA--Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AAcategories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A--Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS P-1--Issuers (or related supporting institutions) rated PRIME-1 have a superior capacity for repayment of short-term promissory obligations. PRIME-1 repayment capacity will normally be evidenced by the following characteristics: Conservative capitalization structures with moderate reliance on debt and ample asset protection; Broad margins in earning coverage of fixed financial charges and high internal cash generation; Well established access to a range of financial markets and assured sources of alternative liquidity. P-2--Issuers (or related supporting institutions) rated PRIME-2 have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, which sound, will be more subject to variation. Capitalization characteristics, while sound appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATINGS A-1--This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) sign designation. A-2--Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS DEFINITIONS FITCH-1--(HIGHEST GRADE) Commercial paper assigned this rating is regarded as having the strongest degree of assurance for timely payment. FITCH-2--(GOOD CREDIT QUALITY) Issues carrying this rating have a satisfactory degree for timely payment but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings only slightly less in degree than the strongest issues. 1111903B-IS (6/94) FEDERATED SHORT-TERM INCOME FUND (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) INSTITUTIONAL SERVICE SHARES PROSPECTUS The Institutional Service Shares of Federated Short-Term Income Fund (the "Fund") offered by this prospectus represent interests in a diversified portfolio of securities which is an investment portfolio in Federated Income Securities Trust (the "Trust"), an open-end, management investment company (a mutual fund). The investment objective of the Fund is to seek to provide current income. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in Institutional Service Shares of the Fund. Keep this prospectus for future reference. The Fund has also filed a Statement of Additional Information for Institutional Service Shares dated June 30, 1994, with the Securities and Exchange Commission. The information contained in the Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Statement of Additional Information free of charge by calling 1-800-235-4669. To obtain other information, or make inquiries about the Fund, contact the Fund at the address listed in the back of this prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated June 30, 1994 TABLE OF CONTENTS - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES 1 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES 2 - ------------------------------------------------------ GENERAL INFORMATION 3 - ------------------------------------------------------ INVESTMENT INFORMATION 3 - ------------------------------------------------------ Investment Objective 3 Investment Policies 3 Acceptable Investments 3 Variable Rate Demand Notes 4 Asset-Backed Securities 4 Mortgage-Related Asset-Backed Securities 5 Adjustable Rate Mortgage Securities ("ARMS") 5 Collateralized Mortgage Obligations ("CMOs") 6 Real Estate Mortgage Investment Conduits ("REMICs") 7 Resets of Interest 7 Caps and Floors 8 Non-Mortgage Related Asset-Backed Securities 8 Bank Instruments 9 Foreign Investments 9 Credit Facilities 9 Interest Rate Swaps, Caps and Floors 9 Auction Rate Securities 11 Average Portfolio Maturity and Duration 11 Credit Enhancement 11 Demand Features 12 Restricted and Illiquid Securities 12 Repurchase Agreements 12 Reverse Repurchase Agreements 13 Lending of Portfolio Securities 13 When-Issued and Delayed Delivery Transactions 13 Special Considerations 13 Portfolio Turnover 14 Investment Limitations 14 FEDERATED INCOME SECURITIES TRUST INFORMATION 15 - ------------------------------------------------------ Management of the Trust 15 Board of Trustees 15 Investment Adviser 15 Advisory Fees 15 Adviser's Background 15 Other Payments to Financial Institutions 16 Distribution of Institutional Service Shares 16 Distribution and Shareholder Services Plans 16 Administration of the Fund 17 Administrative Services 17 Custodian 17 Transfer Agent and Dividend Disbursing Agent 17 Legal Counsel 18 Independent Auditors 18 NET ASSET VALUE 18 - ------------------------------------------------------ INVESTING IN INSTITUTIONAL SERVICE SHARES 18 - ------------------------------------------------------ Share Purchases 18 By Wire 18 By Mail 18 Minimum Investment Required 18 What Shares Cost 19 Subaccounting Services 19 Certificates and Confirmations 19 Dividends 19 Capital Gains 20 REDEEMING INSTITUTIONAL SERVICE SHARES 20 - ------------------------------------------------------ Telephone Redemption 20 Written Requests 20 Signatures 20 Receiving Payment 21 Accounts with Low Balances 21 Redemption in Kind 21 SHAREHOLDER INFORMATION 21 - ------------------------------------------------------ Voting Rights 21 Massachusetts Partnership Law 22 TAX INFORMATION 22 - ------------------------------------------------------ Federal Income Tax 22 Pennsylvania Corporate and Personal Property Taxes 22 PERFORMANCE INFORMATION 23 - ------------------------------------------------------ OTHER CLASSES OF SHARES 23 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 24 - ------------------------------------------------------ FINANCIAL STATEMENTS 25 - ------------------------------------------------------ REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 38 - ------------------------------------------------------ ADDRESSES Inside Back Cover - ------------------------------------------------------ SUMMARY OF FUND EXPENSES-- INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................................ None Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)..................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable).................................................... None Redemption Fee (as a percentage of amount redeemed, if applicable)......................................... None Exchange Fee............................................................................................... None ANNUAL INSTITUTIONAL SERVICE SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee (after waiver) (1).......................................................................... 0.32% 12b-1 Fee (after waiver) (2)............................................................................... 0.01% Total Other Expenses....................................................................................... 0.48% Shareholder Services Fee (3)................................................................ 0.24% Total Institutional Service Shares Operating Expenses (4)......................................... 0.81%
- --------- (1) The management fee has been reduced to reflect the voluntary waiver of a portion of the management fee. The adviser can terminate this voluntary waiver at any time at its sole discretion. The maximum management fee is 0.40%. (2) The maximum 12b-1 fee is 0.25% (3) The maximum Shareholder Services Fee is 0.25%. (4) The Total Institutional Service Shares Operating Expenses in the table above are based on expenses expected during the fiscal year ending April 30, 1995. The Total Institutional Service Shares Operating Expenses were 0.81% for the fiscal year ended April 30, 1994 and were 0.94% absent the voluntary waivers of a portion of the management fee and a portion of the 12b-1 fee. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SERVICE SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SERVICE SHARES" AND "TRUST INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to additional fees. Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted under the rules of the National Association of Securities Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period....... $8 $26 $45 $100
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth in the foregoing table and example relates only to Institutional Service Shares of the Fund. The Fund also offers another class of shares called Institutional Shares. Institutional Shares and Institutional Service Shares are subject to certain of the same expenses; however, Institutional Shares are not subject to a 12b-1 fee. See "Other Classes of Shares." FEDERATED SHORT-TERM INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors on page 38.
YEAR ENDED APRIL 30, 1994 1993 1992* NET ASSET VALUE, BEGINNING OF PERIOD $ 9.17 $ 8.98 $ 9.08 - ----------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - ----------------------------------------------------------------------------- Net investment income 0.48 0.52 0.15 - ----------------------------------------------------------------------------- Net realized and unrealized gain/(loss) on investments (0.32) 0.19 (0.10) - ----------------------------------------------------------------------------- --------- --------- --------- Total from investment operations 0.16 0.71 0.05 - ----------------------------------------------------------------------------- LESS DISTRIBUTIONS - ----------------------------------------------------------------------------- Dividends to shareholders from net investment income (0.48) (0.52) (0.15) - ----------------------------------------------------------------------------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.17 $ 8.98 - ----------------------------------------------------------------------------- --------- --------- --------- TOTAL RETURN** 1.78% 8.12% 0.69% - ----------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - ----------------------------------------------------------------------------- Expenses 0.81% 0.76% 0.78%(b) - ----------------------------------------------------------------------------- Net investment income 5.30% 5.82% 6.37%(b) - ----------------------------------------------------------------------------- Expense waiver/reimbursement (a) 0.13% 0.45% 0.98%(b) - ----------------------------------------------------------------------------- SUPPLEMENTAL DATA - ----------------------------------------------------------------------------- Net assets, end of period (000 omitted) $39,649 $15,673 $778 - ----------------------------------------------------------------------------- Portfolio turnover rate 44% 62% 114% - -----------------------------------------------------------------------------
* Reflects operations for the period from January 21, 1992 (date of initial public investment) to April 30, 1992. ** Based on net asset value, which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). (b) Computed on an annualized basis. Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) GENERAL INFORMATION - -------------------------------------------------------------------------------- The Trust was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to permit the Trust to offer separate series of shares of beneficial interest representing interests in separate portfolios of securities. The shares in any one portfolio may be offered in separate classes. With respect to this Fund, as of the date of this prospectus the Board of Trustees ("Trustees") have established two classes of shares, Institutional Service Shares and Institutional Shares. This prospectus relates only to Institutional Service Shares ("Shares") of the Fund. A minimum initial investment of $25,000 over a 90-day period is required. Shares are currently sold and redeemed at net asset value without a sales charge imposed by the Fund. INVESTMENT INFORMATION - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE The investment objective of the Fund is to seek to provide current income. This investment objective cannot be changed without the approval of the Fund's shareholders. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. INVESTMENT POLICIES The Fund will invest primarily in a diversified portfolio of short and medium-term high grade debt securities. The Fund may also invest in long-term high grade debt securities to the extent consistent with its policies regarding the Fund's average dollar-weighted portfolio maturity and duration. This investment policy may not be changed without the prior approval of the Fund's shareholders. Unless indicated otherwise, the other investment policies described in this prospectus may be changed by the Trustees without the approval of the Fund's shareholders. Shareholders will be notified before any material changes in these policies become effective. ACCEPTABLE INVESTMENTS. The high grade debt securities in which the Fund invests include medium and long-term instruments rated by one or more nationally recognized statistical rating organizations ("NRSROs") in one of their three highest rating categories (e.g., AAA, AA or A by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's") ) and short-term instruments rated by one or more NRSROs in one of their two highest categories (e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). Although the Fund may invest in unrated debt securities that are determined by the Fund's investment adviser to be of comparable quality to instruments having such ratings, as a matter of operating policy, the Fund will invest only in rated securities. Downgraded securities will be evaluated on a case by case basis by the adviser. The adviser will determine whether or not the security continues to be an acceptable investment. If not, the security will be sold. Acceptable investments currently include the following: corporate debt obligations, including medium-term notes and variable rate demand notes; asset-backed securities; commercial paper (including Canadian Commercial Paper and Europaper); certificates of deposit, demand and time deposits, bankers' acceptances, deposit notes and other instruments of domestic and foreign banks and other deposit institutions ("Bank Instruments"); medium and short-term credit facilities, including demand notes and participations in revolving credit facilities; interest rate swaps, caps and floors; auction rate securities (see below); obligations issued or guaranteed as to payment of principal and interest by the U.S. government or one of its agencies or instrumentalities ("Government Securities"); and other money market instruments. The Fund invests only in instruments denominated and payable in U.S. dollars. VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate debt instruments that have variable or floating interest rates and provide the Fund with the right to tender the security for repurchase at its stated principal amount plus accrued interest. Such securities typically bear interest at a rate that is intended to cause the securities to trade at par. The interest rate may float or be adjusted at regular intervals (ranging from daily to annually), and is normally based on a published interest rate or interest rate index. Many variable rate demand notes allow the Fund to demand the repurchase of the security on not more than seven days prior notice. Other notes only permit the Fund to tender the security at the time of each interest rate adjustment or at other fixed intervals. See "Demand Features." ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of certain governmental, government related, private loans, receivables or other lender assets into pools. Interests in these pools are sold as individual securities. Payments from the asset pools may be divided into several different tranches of debt securities, with some tranches entitled to receive regular installments of principal and interest, other tranches entitled to receive regular installments of interest, with principal payable at maturity or upon specified call dates, and other tranches only entitled to receive payments of principal and accrued interest at maturity or upon specified call dates. Different tranches of securities will bear different interest rates, which may be fixed or floating. Because the loans held in the asset pool often may be prepaid without penalty or premium, asset-backed securities are generally subject to higher prepayment risks than most other types of debt instruments. Prepayment risks on mortgage-backed securities tend to increase during periods of declining mortgage interest rates, because many borrowers refinance their mortgages to take advantage of the more favorable rates. Prepayments on mortgage-backed securities are also affected by other factors, such as the frequency with which people sell their homes or elect to make unscheduled payments on their mortgages. All asset-backed securities are subject to similar prepayment risks, although they may be more or less sensitive to certain factors. Depending upon market conditions, the yield that the Fund receives from the reinvestment of such prepayments, or any scheduled principal payments, may be lower than the yield on the original asset-backed security. As a consequence, mortgage securities may be a less effective means of "locking in" interest rates than other types of debt securities having the same stated maturity and may also have less potential for capital appreciation. For certain types of asset pools, such as collateralized mortgage obligations, prepayments may be allocated to one tranche of securities ahead of other tranches, in order to reduce the risk of prepayment for the other tranches. Prepayments may result in a capital loss to the Fund to the extent that the prepaid asset-backed securities were purchased at a market premium over their stated principal amount. Conversely, the prepayment of asset-backed securities purchased at a market discount from their stated principal amount will accelerate the recognition of interest income by the Fund, which would be taxed as ordinary income when distributed to the shareholders. The credit characteristics of asset-backed securities also differ in a number of respects from those of traditional debt securities. The credit quality of most asset-backed securities depends primarily upon the credit quality of the assets underlying such securities, how well the entity issuing the securities is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement provided to such securities. MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in various mortgage-related asset-backed securities. These types of investments may include adjustable rate mortgage securities, collateralized mortgage obligations, real estate mortgage investment conduits, or other securities collateralized by or representing an interest in real estate mortgages (collectively, "mortgage securities"). Mortgage securities are: (i) issued or guaranteed by the U.S. government or one of its agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; (iii) those issued by private issuers that represent an interest in or are collateralized by whole loans or mortgage-backed securities without a government guarantee but usually having some form of private credit enhancement; and (iv) privately issued securities which are collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government. The privately issued mortgage-related securities provide for a periodic payment consisting of both interest and principal. The interest portion of these payments will be distributed by the Fund as income, and the capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage securities representing interests in adjustable rather than fixed interest rate mortgages. Typically, the ARMS in which the Fund invests are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be collateralized by whole loans or private pass-through securities. The underlying mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are typically conventional residential mortgages conforming to strict underwriting size and maturity constraints. Unlike conventional bonds, ARMS pay back principal over the life of the ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly scheduled payments of principal and/or interest and may receive unscheduled principal payments representing payments on the underlying mortgages. At the time that a holder of the ARMS reinvests the payments and any unscheduled prepayments of principal that it receives, the holder may receive a rate of interest which is actually lower than the rate of interest paid on the existing ARMS. As a consequence, ARMS may be a less effective means of "locking in" long-term interest rates than other types of fixed-income securities. Not unlike other fixed-income securities, the market value of ARMS will generally vary inversely with changes in market interest rates. Thus, the market value of ARMS generally declines when interest rates rise and generally rises when interest rates decline. While ARMS generally entail less risk of a decline during periods of rapidly rising rates, ARMS may also have less potential for capital appreciation than other similar investments (e.g., investments with comparable maturities) because, as interest rates decline, the likelihood increases that mortgages will be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal payments may result in some loss of a holder's principal investment to the extent of the premium paid. Conversely, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal would increase current and total returns and would accelerate the recognition of income, which would be taxed as ordinary income when distributed to shareholders. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but may be collateralized by whole loans or private pass-through securities. The CMOs in which the Fund invests may be: (a) collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government; (b) collateralized by pools of mortgages in which payment of principal and interest is guaranteed by the issuer and such guarantee is collateralized by U.S. government securities; or (c) collateralized by pools of mortgages without a government guarantee as to payment of principal and interest, but which have some form of credit enhancement. The following example illustrates how mortgage cash flows are prioritized in the case of CMOs. Most of the CMOs in which the Fund invests use the same basic structure. (1) Several classes of securities are issued against a pool of mortgage collateral. The most common structure contains four tranches of securities: The first three (A, B, and C bonds) pay interest at their stated rates beginning with the issue date; the final tranche (Z bond) typically receives any excess income from the underlying investments after payments are made to the other tranches and receives no principal or interest payments until the shorter maturity tranches have been retired, but then receives all remaining principal and interest payments. (2) The cash flows from the underlying mortgages are applied first to pay interest and then to retire securities. (3) The tranches of securities are retired sequentially. All principal payments are directed first to the shortest-maturity tranche (or A bonds). When those securities are completely retired, all principal payments are then directed to the next-shortest-maturity security tranche (or B bond). This process continues until all of the tranches have been completely retired. Because the cash flow is distributed sequentially instead of pro rata, as with pass-through securities, the cash flows and average lives of CMOs are more predictable, and there is a period of time during which the investors in the longer-maturity classes receive no principal paydowns. One or more of the tranches often bear interest at an adjustable rate. The interest portion of these payments is distributed by the Fund as income, and the principal portion is reinvested. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings of multiple class real estate mortgage-backed securities which qualify and elect treatment as such under provisions of the Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts, partnerships, corporations, associations, or segregated pools of mortgages. Once REMIC status is elected and obtained, the entity is not subject to federal income taxation. Instead, income is passed through the entity and is taxed to the person or persons who hold interests in the REMIC. A REMIC interest must consist of one or more classes of "regular interests," some of which may offer adjustable rates of interest, and a single class of "residual interests." To qualify as a REMIC, substantially all the assets of the entity must be in assets directly or indirectly secured principally by real property. RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and REMICs in which the Fund invests will be readjusted at intervals of one year or less to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to have somewhat less volatile interest rates. To the extent that the adjusted interest rate on the mortgage security reflects current market rates, the market value of an adjustable rate mortgage security will tend to be less sensitive to interest rate changes than a fixed rate debt security of the same stated maturity. Hence, adjustable rate mortgage securities which use indices that lag changes in market rates should experience greater price volatility than adjustable rate mortgage securities that closely mirror the market. Certain residual interest tranches of CMO's may have adjustable interest rates that deviate significantly from prevailing market rates, even after the interest rate is reset, and are subject to correspondingly increased price volatility. In the event that the Fund purchases such residual interest mortgage securities, it will factor in the increased interest and price volatility of such securities when determining its dollar-weighted average portfolio maturity and duration. CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which the Fund invests will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage securities in which the Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage securities in which the Fund invests to be shorter than the maturities stated in the underlying mortgages. NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in non-mortgage related asset-backed securities, including interests in pools of receivables, such as credit card and accounts receivable and motor vehicle and other installment purchase obligations and leases. These securities may be in the form of pass-through instruments or asset-backed obligations. The securities are structured similarly to collateralized mortgage obligations and mortgage pass-through securities, which are described above. Also, these securities may be issued either by non- governmental entities and carry no direct or indirect governmental guarantees, or by governmental entities (i.e., Small Business Administration) and carry varying degrees of governmental support. Non-mortgage related asset backed securities have structural characteristics similar to mortgage-related asset-backed securities but have underlying assets that are not mortgage loans or interests in mortgage loans. The Fund may invest in non-mortgage related asset-backed securities including, but not limited to, interests in pools of receivables, such as motor vehicle installment purchase obligations and credit card receivables. These securities may be in the form of pass-through instruments or asset-backed bonds. The securities are issued by non-governmental entities and carry no direct or indirect government guarantee. Mortgage-backed and asset-backed securities generally pay back principal and interest over the life of the security. At the time the Fund reinvests the payments and any unscheduled prepayments of principal received, the Fund may receive a rate of interest which is actually lower than the rate of interest paid on these securities ("prepayment risks"). Although non-mortgage related asset-backed securities generally are less likely to experience substantial prepayments than are mortgage-related asset-backed securities, certain of the factors that affect the rate of prepayments on mortgage-related asset-backed securities also affect the rate of prepayments on non-mortgage related asset-backed securities. Non-mortgage related asset-backed securities present certain risks that are not presented by mortgage-related asset-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of asset-backed securities backed by motor vehicle installment purchase obligations permit the servicer of such receivables to retain the possession of the underlying obligations. If the servicer sells these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset- backed securities. Further, if a vehicle is registered in one state and is then reregistered because the owner and obligor moves to another state, such registration could defeat the original security interest in the vehicle in certain cases. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an institution having capital, surplus and undivided profits over $100 million or insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"). Bank Instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). FOREIGN INVESTMENTS. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are subject to somewhat different risks than domestic obligations of domestic issuers. Examples of these risks include international, economic and political developments, foreign governmental restrictions that may adversely affect the payment of principal or interest, foreign withholdings or other taxes on interest income, difficulties in obtaining or enforcing a judgment against the issuing bank, and the possible impact of interruptions in the flow of international currency transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject to the same regulatory requirements that apply to domestic banks, such as reserve requirements, loan limitations, examinations, accounting, auditing, and recordkeeping, and the public availability of information. These factors will be carefully considered by the Fund's adviser in selecting investments for the Fund. CREDIT FACILITIES. Demand notes are borrowing arrangements between a corporation and an institutional lender (such as the Fund) payable upon demand by either party. The notice period for demand typically ranges from one to seven days, and the party may demand full or partial payment. Revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. As the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the facility. The Fund generally acquires a participation interest in a revolving credit facility from a bank or other financial institution. The terms of the participation requires the Fund to make a pro rata share of all loans extended to the borrower and entitles the Fund to a pro rata share of all payments made by the borrower. Demand notes and revolving facilities usually provide for floating or variable rates of interest. INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate swaps and may purchase or sell (i.e., write) interest rate caps and floors. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed-rate payments) on a notional principal amount. The principal amount of an interest rate swap is notional in that it only provides the basis for determining the amount of interest payments under the swap agreement, and does not represent an actual loan. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate on $10 million principal amount in exchange for the right to receive the equivalent of a fixed rate of interest on $10 million principal amount. Neither party to the swap would actually advance $10 million to the other. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of the amount of excess interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of the amount of the interest shortfall on a notional principal amount from the party selling the interest rate floor. The Fund expects to enter into interest rate transactions primarily to hedge against changes in the price of other portfolio securities. For example, the Fund may hedge against changes in the market value of a fixed rate note by entering into a concurrent swap that requires the Fund to pay the same or a lower fixed rate of interest on a notional principal amount equal to the principal amount of the note in exchange for a variable rate of interest based on a market index. Interest accrued on the hedged note would then equal or exceed the Fund's obligations under the swap, while changes in the market value of the swap would largely offset any changes in the market value of the note. The Fund may also enter into swaps and caps to preserve or enhance a return or spread on a portfolio security. The Fund does not intend to use these transactions in a speculative manner. The Fund will usually enter into interest rate swaps on a net basis (i.e., the two payment streams are netted out), with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and the Fund will segregate liquid assets in an aggregate net asset value at least equal to the accrued excess, if any, on each business day. If the Fund enters into an interest rate swap on other than a net basis, the Fund will segregate liquid assets in the full amount accrued on a daily basis of the Fund's obligations with respect to the swap. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. The Fund's investment adviser has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent interest rate swaps, caps or floors are determined by the investment adviser to be illiquid, they will be included in the Fund's limitation on investments in illiquid securities. To the extent the Fund sells caps and floors, it will maintain in a segregated account cash and/or U.S. government securities having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Fund's obligations with respect to the caps or floors. The use of interest rate swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Fund's investment adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these investment techniques were not utilized. Moreover, even if the Fund's investment adviser is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the portfolio security being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to a default on an interest rate swap is limited to the net asset value of the swap together with the net amount of interest payments owed to the Fund by the defaulting party. A default on a portfolio security hedged by an interest rate swap would also expose the Fund to the risk of having to cover its net obligations under the swap with income from other portfolio securities. The Fund may purchase and sell caps and floors without limitation, subject to the segregated account requirement described above. AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal securities and auction rate preferred securities (collectively, "auction rate securities"). Provided that the auction mechanism is successful, auction rate securities usually permit the holder to sell the securities in an auction at par value at specified intervals. The interest rate or dividend is reset by "Dutch" auction in which bids are made by broker-dealers and other institutions for a certain amount of securities at a specified minimum yield. The interest rate or dividend rate set by the auction is the lowest interest or dividend rate that covers all securities offered for sale. While this process is designed to permit auction rate securities to be traded at par value, there is some risk that an auction will fail due to insufficient demand for the securities. If so, the securities may become illiquid and subject to the Fund's 15% limitation on illiquid securities. AVERAGE PORTFOLIO MATURITY AND DURATION. Although the Fund will not maintain a stable net asset value, the adviser will seek to limit, to the extent consistent with the Fund's investment objective of current income, the magnitude of fluctuations in the Fund's net asset value by limiting the dollar-weighted average maturity and duration of the Fund's portfolio. Securities with shorter maturities and durations generally have less volatile prices than securities of comparable quality with longer maturities or durations. The Fund should be expected to maintain a higher average maturity and duration during periods of lower expected market volatility, and a lower average maturity and duration during periods of higher expected market volatility. In any event, the Fund's dollar-weighted average maturity will not exceed 3 years, and its dollar-weighted average duration will not exceed 3 years. Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Duration measures the magnitude of the change in the price of a debt security relative to a given change in the market rate of interest. CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been credit enhanced by a guaranty, letter of credit or insurance. The Fund typically evaluates the credit quality and ratings of credit enhanced securities based upon the financial condition and ratings of the party providing the credit enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund will not treat credit enhanced securities as having been issued by the credit enhancer for diversification purposes. However, under certain circumstances applicable regulations may require the Fund to treat the securities as having been issued by both the issuer and the credit enhancer. The bankruptcy, receivership or default of the credit enhancer will adversely affect the quality and marketability of the underlying security. DEMAND FEATURES. The Fund may acquire securities that are subject to puts and standby commitments ("demand features") to purchase the securities at their principal amount (usually with accrued interest) within a fixed period following a demand by the Fund. The demand feature may be issued by the issuer of the underlying securities, a dealer in the securities or by another third party, and may not be transferred separately from the underlying security. The Fund uses these arrangements to provide the Fund with liquidity and not to protect against changes in the market value of the underlying securities. The bankruptcy, receivership or default by the issuer of the demand feature, or a default on the underlying security or other event that terminates the demand feature before its exercise, will adversely affect the liquidity of the underlying security. Demand features that are exercisable even after a payment default on the underlying security are treated as a form of credit enhancement. RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted and illiquid securities. Restricted securities are any securities in which the Fund may otherwise invest pursuant to its investment objective and policies but which are subject to restriction on resale under federal securities law. The Fund will limit investments in illiquid securities, including certain restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, and repurchase agreements providing for settlement in more than seven days after notice, to 15% of its net assets. The Fund may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to disposition under federal securities law and is generally sold to institutional investors, such as the Fund, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(2) commercial paper is normally resold to other institutional investors like the Fund through or with the assistance of the issuer or investment dealers who make a market in Section 4(2) commercial paper, thus providing liquidity. The Fund believes that Section 4(2) commercial paper and possibly certain other restricted securities which meet the criteria for liquidity established by the Trustees are quite liquid. The Fund intends, therefore, to treat the restricted securities which meet the criteria for liquidity established by the Trustees, including Section 4(2) commercial paper, as determined by the Fund's investment adviser, as liquid and not subject to the investment limitation applicable to illiquid securities. In addition, because Section 4(2) commercial paper is liquid, the Fund intends to not subject such paper to the limitation applicable to restricted securities. REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be purchased pursuant to repurchase agreements. Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or other securities in which the Fund may invest to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase agreements. This transaction is similar to borrowing cash. In a reverse repurchase agreement the Fund transfers possession of a portfolio instrument to another person, such as a financial institution, broker, or dealer, in return for a percentage of the instrument's market value in cash, and agrees that on a stipulated date in the future the Fund will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed upon rate. When effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar amount sufficient to make payment for the obligations to be purchased, are segregated at the trade date. These securities are marked to market daily and maintained until the transaction is settled. During the period any reverse repurchase agreements are outstanding, but only to the extent necessary to assure completion of the reverse repurchase agreements, the Fund will restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreements. This policy may not be changed without the approval of the Fund's shareholders. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend portfolio securities on a short-term or long-term basis, or both, up to one-third of the value of its total assets, to broker/dealers, banks, or other institutional borrowers of securities. The Fund will limit the amount of portfolio securities it may lend to not more than one-third of its total assets. The Fund will only enter into loan arrangements with broker/dealers, banks, or other institutions which the investment adviser has determined are creditworthy under guidelines established by the Trustees and will receive collateral equal to at least 100% of the value of the securities loaned. This policy may not be changed without the approval of the Fund's shareholders. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may purchase securities on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market value of the securities purchased may vary from the purchase prices. Accordingly, the Fund may pay more/less than the market value of the securities on the settlement date. The Fund will limit its purchase of securities on a when-issued or delayed delivery basis to no more than 20% of the value of its total assets. This policy may not be changed without the approval of the Fund's shareholders. SPECIAL CONSIDERATIONS In the debt market, prices move inversely to interest rates. A decline in market interest rates results in a rise in the market prices of outstanding debt obligations. Conversely, an increase in market interest rates results in a decline in market prices of outstanding debt obligations. In either case, the amount of change in market prices of debt obligations in response to changes in market interest rates generally depends on the maturity of the debt obligations: the debt obligations with the longest maturities will experience the greatest market price changes. The market value of debt obligations, and therefore the Fund's net asset value, will fluctuate due to changes in economic conditions and other market factors such as interest rates which are beyond the control of the Fund's investment adviser. The Fund's investment adviser could be incorrect in its expectations about the direction or extent of these market factors. Although debt obligations with longer maturities offer potentially greater returns, they have greater exposure to market price fluctuation. Consequently, to the extent the Fund is significantly invested in debt obligations with longer maturities, there is a greater possibility of fluctuation in the Fund's net asset value. PORTFOLIO TURNOVER While the Fund does not intend to engage in substantial short-term trading, from time to time it may sell portfolio securities for investment reasons without considering how long they have been held. For example, the Fund would do this: to take advantage of short-term differentials in yields or market values; to take advantage of new investment opportunities; to respond to changes in the creditworthiness of an issuer; or to try to preserve gains or limit losses. Any such trading would increase the Fund's portfolio turnover and its transaction costs. However, the Fund will not attempt to set or meet any arbitrary turnover rate since turnover is incidental to transactions considered necessary to achieve the Fund's investment objective. INVESTMENT LIMITATIONS The Fund will not: borrow money directly or through reverse repurchase agreements or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 10% of the value of its total assets to secure such borrowings; lend any of its assets except portfolio securities up to one-third of the value of its total assets; sell securities short except, under strict limitations, the Fund may maintain open short positions so long as not more than 10% of the value of its net assets is held as collateral for those positions; underwrite any issue of securities, except as it may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of restricted securities which the Fund may purchase pursuant to its investment objective, policies, and limitations; invest more than 5% of its total assets in securities of issuers that have records of less than three years of continuous operations; or with respect to 75% of its assets, invest more than 5% of the value of its total assets in securities of one issuer (except U.S. government obligations), or purchase more than 10% of the outstanding voting securities of any one issuer. For these purposes the Fund takes all common stock and all preferred stock of an issuer each as a single class, regardless of priorities, series, designations, or other differences. The above investment limitations cannot be changed without shareholder approval. The following limitation however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in this limitation becomes effective. The Fund will not: invest more than 15% of the value of its net assets in illiquid securities, including repurchase agreements providing for settlement more than seven days after notice, non-negotiable time deposits, certain interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and certain restricted securities not determined by the Trustees to be liquid. FEDERATED INCOME SECURITIES TRUST INFORMATION - -------------------------------------------------------------------------------- MANAGEMENT OF THE TRUST BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The Executive Committee of the Board of Trustees handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust, investment decisions for the Fund are made by Federated Management, the Fund's investment adviser (the "Adviser"), subject to direction by the Trustees. The Adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES. The Fund's Adviser receives an annual investment advisory fee equal to .40 of 1% of the Fund's average daily net assets. Under the investment advisory contract, the Adviser may voluntarily reimburse some of the operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement of expenses at any time in its sole discretion. The Adviser has also undertaken to reimburse the Fund for operating expenses in excess of limitations established by certain states. ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the Class A (voting) shares of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated Investors. Federated Management and other subsidiaries of Federated Investors serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. Total assets under management or administration by these and other subsidiaries of Federated Investors are approximately $70 billion. Federated Investors, which was founded in 1956 as Federated Investors, Inc., develops and manages mutual funds primarily for the financial industry. Federated Investors' track record of competitive performance and its disciplined, risk averse investment philosophy serve approximately 3,500 client institutions nationwide. Through these same client institutions, individual shareholders also have access to this same level of investment expertise. Deborah A. Cunningham has been the Fund's co-portfolio manager since July 1991. Ms. Cunningham joined Federated Investors in 1981 and has been a Vice President of the Fund's investment adviser since 1993. Ms. Cunningham served as an Assistant Vice President of the investment adviser from 1989 until 1992, and from 1986 until 1989 she acted as an investment analyst. Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A. in Finance from Robert Morris College. Susan M. Nason has been the Fund's co-portfolio manager since January 1994. Ms. Nason joined Federated Investors in 1987 and has been a Vice President of the Fund's investment adviser since 1993. Ms. Nason served as an Assistant Vice President of the investment adviser from 1990 until 1992, and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in Finance from Carnegie Mellon University. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to financial institutions under the Distribution and Shareholder Services Plans described below, certain financial institutions may be compensated by the Adviser or its affiliates for the continuing investment of customers' assets in certain funds, including the Fund, advised by those entities. These payments will be made directly by the distributor or Adviser from their assets, and will not be made from the assets of the Fund or by the assessment of a sales charge on Shares. Furthermore, the distributor may offer to pay a fee from its own assets to financial institutions as financial assistance for providing substantial marketing and sales support. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of Shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES Federated Securities Corp. is the principal distributor for shares of the Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors. DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an amount, computed at an annual rate of 0.25 of 1% of the average daily net assets of the Shares to finance any activity which is principally intended to result in the sale of Shares of subject to the Distribution Plan. The distributor may select financial institutions such as banks, fiduciaries, custodians for public funds, investment advisers, and broker/dealers to provide sales support services as agents for their clients or customers. The Distribution Plan is a compensation-type plan. As such, the Fund makes no payments to the distributor except as described above. Therefore, the Fund does not pay for unreimbursed expenses of the distributor, including amounts expended by the distributor in excess of amounts received by it from the Fund, interest, carrying or other financing charges in connection with excess amounts expended, or the distributor's overhead expenses. However, the distributor may be able to recover such amount or may earn a profit from future payments made by the Fund under the Distribution Plan. In addition, the Trust has adopted a Shareholder Services Plan (the "Services Plan") under which it may make payments up to 0.25 of 1% of the average daily net asset value of Shares to obtain certain personal services for shareholders and the maintenance of shareholder accounts ("shareholder services"). The Trust has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, under which Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon Shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Trust and Federated Shareholder Services. The Glass-Steagall Act limits the ability of a depository institution (such as a commercial bank or a savings and loan association) to become an underwriter or distributor of securities. In the event the Glass-Steagall Act is deemed to prohibit depository institutions from acting in the capacities described above or should Congress relax current restrictions on depository institutions, the Trustees will consider appropriate changes in the services. State securities laws governing the ability of depository institutions to act as underwriters or distributors of securities may differ from interpretations given to the Glass-Steagall Act and, therefore, banks and financial institutions may be required to register as dealers pursuant to state law. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Administrative Services provides these at an annual rate which relates to the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors ("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY NET ASSETS MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS 0.15 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.10 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Administrative Services may choose voluntarily to waive a portion of its fee. CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston, MA, is custodian for the securities and cash of the Fund. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund. LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, Pittsburgh, PA, and Dickstein, Shapiro & Morin, L.L.P., Washington, D.C. INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young, One Oxford Centre Building, Pittsburgh, PA. NET ASSET VALUE - -------------------------------------------------------------------------------- The Fund's net asset value per share fluctuates. The net asset value for Shares is determined by adding the interest of the Shares in the market value of all securities and other assets of the Fund, subtracting the interest of the Shares in the liabilities of the Fund and those attributable to Shares, and dividing the remainder by the total number of Shares outstanding. The net asset value for Institutional Shares will exceed that of Shares due to the variance in daily net income realized by each class as a result of different distribution charges incurred by the classes. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. INVESTING IN INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- SHARE PURCHASES Shares are sold on days on which the New York Stock Exchange is open. Shares may be purchased either by wire or mail. To purchase Shares of the Fund, open an account by calling Federated Securities Corp. Information needed to establish the account will be taken over the telephone. The Fund reserves the right to reject any purchase request. BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund before 4:00 p.m. (Boston time) to place an order. The order is considered received immediately. Payment by federal funds must be received before 3:00 p.m. (Boston time) on the next business day following the order. Federal funds should be wired as follows: Federated Services Company, c/o State Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Short-Term Income Fund--Institutional Service Shares; Fund Number (this number can be found on the account statement or by contacting the Fund); Group Number or Order Number; Nominee or Institution Name; and ABA Number 011000028. BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to Federated Short-Term Income Fund--Institutional Service Shares to Federated Services Company, P.O. Box 8602, Boston, Massachusetts 02266-8602. Orders by mail are considered received after payment by check is converted by the transfer agent's bank, State Street Bank into federal funds. This is normally the next business day after State Street Bank receives the check. MINIMUM INVESTMENT REQUIRED The minimum initial investment in the Fund is $25,000 plus any non-affiliated bank or broker's fee. However, an account may be opened with a smaller amount as long as the $25,000 minimum is reached within 90 days. An institutional investor's minimum investment will be calculated by combining all accounts it maintains with the Fund. Accounts established through a non-affiliated bank or broker may be subject to a smaller minimum investment. WHAT SHARES COST Shares are sold at their net asset value next determined after an order is received. There is no sales charge imposed by the Fund. Investors who purchase Shares through a non-affiliated bank or broker may be charged an additional service fee by that bank or broker. The net asset value is determined at 4:00 p.m. (Boston time), Monday through Friday, except on: (i) days on which there are not sufficient changes in the value of the Fund's portfolio securities that its net asset value might be materially affected; (ii) days during which no Shares are tendered for redemption and no orders to purchase Shares are received; and (iii) the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. SUBACCOUNTING SERVICES Institutions are encouraged to open single master accounts. However, certain institutions may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent charges a fee based on the level of subaccounting services rendered. Institutions holding Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services provided which may be related to the ownership of Shares. This prospectus should, therefore, be read together with any agreement between the customer and the institution with regard to the services provided, the fees charged for those services, and any restrictions and limitations imposed. CERTIFICATES AND CONFIRMATIONS As transfer agent for the Fund, Federated Services Company maintains a Share account for each shareholder. Share certificates are not issued unless requested by contacting the Fund. Detailed confirmations of each purchase or redemption are sent to each shareholder. Monthly confirmations are sent to report dividends paid during the month. DIVIDENDS Dividends are declared daily and paid monthly. Dividends are declared just prior to determining net asset value. If an order for Shares is placed on the preceding business day, Shares purchased by wire begin earning dividends on the business day wire payment is received by State Street Bank. If the order for Shares and payment by wire are received on the same day, Shares begin earning dividends on the next business day. Shares purchased by check begin earning dividends on the business day after the check is converted upon instruction of the transfer agent into federal funds. Dividends are automatically reinvested on payment dates in additional Shares of the Fund unless cash payments are requested by contacting the Fund. CAPITAL GAINS Capital gains realized by the Fund, if any, will be distributed at least once every 12 months. REDEEMING INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at their net asset value next determined after the Fund receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests must be received in proper form and can be made by telephone request or by written request. TELEPHONE REDEMPTION Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m. (Boston time). The proceeds will normally be wired the following business day, but in no event more than seven days, to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System. If at any time the Fund shall determine it is necessary to terminate or modify this method of redemption, shareholders would be promptly notified. An authorization form permitting the Fund to accept telephone requests must first be completed. Authorization forms and information on this service are available from Federated Securities Corp. Telephone redemption instructions may be recorded. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fradulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming by telephone. If such a case should occur, another method of redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS Shares may also be redeemed by sending a written request to the Fund. Call the Fund for specific instructions before redeeming by letter. The shareholder will be asked to provide in the request his or her name, the Fund name and class name, the shareholder's account number, and the share or dollar amount requested. If Share certificates have been issued, they must be properly endorsed and should be sent by registered or certified mail with the written request. SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable other than to the shareholder of record must have signatures on written redemption requests guaranteed by: a trust company or commercial bank whose deposits are insured by the BIF, which is administered by the Federal Deposit Insurance Corporation ("FDIC"); a member of the New York, American, Boston, Midwest, or Pacific Stock Exchanges; a savings bank or savings and loan association whose deposits are insured by the SAIF, which is administered by the FDIC; or any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. The Fund and its transfer agent have adopted standards for accepting signature guarantees from the above institutions. The Fund may elect in the future to limit eligible signature guarantors to institutions that are members of a signature guarantee program. The Fund and its transfer agent reserve the right to amend these standards at any time without notice. RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem shares in any account and pay the proceeds to the shareholder if the account balance falls below a required minimum value of $25,000 due to shareholder redemptions. This requirement does not apply, however, if the balance falls below $25,000 because of changes in the Fund's net asset value. Before Shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional Shares to meet the minimum requirement. REDEMPTION IN KIND The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of the respective Fund's net asset value, whichever is less, for any one shareholder within a 90-day period. Any redemption beyond this amount will also be in cash unless the Trustees determine that payments should be in kind. In such a case, the Fund will pay all or a portion of the remainder of the redemption in portfolio instruments, valued in the same way that net asset value is determined. The portfolio instruments will be selected in a manner that the Trustees deem fair and equitable. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving their securities and selling them before their maturity could receive less than the redemption value of their securities and could incur certain transaction costs. SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- VOTING RIGHTS Each Share of the Fund gives the shareholder one vote in Trustee elections and other matters submitted to shareholders of the Trust for vote. All shares of each portfolio in the Trust have equal voting rights, except that, in matters affecting only a particular Fund or class, only shares of that particular Fund or class are entitled to vote. As of June 3, 1994, Heritage Trust Company, Grand Junction, Colorado owned 34.80% of the Shares of the Fund, and, therefore, may, for certain purposes be deemed to control the Fund and be able to affect the outcome of certain matters presented for a vote of shareholders. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will be sought only for certain changes in the Trust's or the Fund's operation and for the election of Trustees under certain circumstances. Trustees may be removed by a two-thirds vote of the number of Trustees or by a two-thirds vote of the shareholders at a special meeting. A special meeting of shareholders shall be called by the Trustees upon the written request of shareholders owning at least 10% of the Trust's outstanding shares of all portfolios entitled to vote. MASSACHUSETTS PARTNERSHIP LAW Under certain circumstances, shareholders may be held personally liable as partners under Massachusetts law for acts or obligations of the Trust. To protect shareholders, the Trust has filed legal documents with Massachusetts that expressly disclaim the liability of shareholders for acts or obligations of the Trust. These documents require notice of this disclaimer to be given in each agreement, obligation, or instrument the Trust or its Trustees enter into or sign. In the unlikely event a shareholder is held personally liable for the Trust's obligations, the Trust is required, by the Declaration of Trust to use its property to protect or compensate the shareholder. On request, the Trust will defend any claim made and pay any judgment against a shareholder for any act or obligation of the Trust. Therefore, financial loss resulting from liability as a shareholder will occur only if the Trust cannot meet its obligations to indemnify shareholders and pay judgments against them from its assets. TAX INFORMATION - -------------------------------------------------------------------------------- FEDERAL INCOME TAX The Fund will pay no federal income tax because the Fund expects to meet requirements of the Internal Revenue Code, as amended, applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. The Fund will be treated as a single, separate entity for federal income tax purposes so that income (including capital gains) and losses realized by the Trust's other portfolios, if any, will not be combined for tax purposes with those realized by the Fund. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions received. This applies whether dividends and distributions are received in cash or as additional shares. Information on the tax status of dividends and distributions is provided annually. PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES In the opinion of Houston, Houston & Donnelly, counsel to the Trust: The Fund is not subject to Pennsylvania corporate or personal property taxes; and Fund shares may be subject to personal property taxes imposed by counties, municipalities, and school districts in Pennsylvania to the extent that the portfolio securities in the Fund would be subject to such taxes if owned directly by residents of those jurisdictions. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local laws. PERFORMANCE INFORMATION - -------------------------------------------------------------------------------- From time to time the Fund advertises its total return and yield for Institutional Service Shares. Total return represents the change, over a specified period of time, in the value of an investment in Institutional Service Shares after reinvesting all income and capital gains distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of Institutional Service Shares is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by Institutional Service Shares over a thirty-day period by the maximum offering price per share of Institutional Service Shares on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by Institutional Service Shares and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The Institutional Service Shares are sold without any sales load or other similar non-recurring charges other than a Rule 12b-1 fee. Total return and yield will be calculated separately for Institutional Service Shares and Institutional Shares. Because Institutional Service Shares are subject to 12b-1 fees, total return and yield of Institutional Shares, for the same period, will exceed that of Institutional Service Shares. From time to time, the Fund may advertise its performance using certain financial publications and/or compare its performance to certain indices. OTHER CLASSES OF SHARES - -------------------------------------------------------------------------------- Institutional Shares are sold to banks and other institutions that hold assets as principals or in a fiduciary capacity for individuals, trusts, estates or partnerships and are subject to a minimum initial investment of $25,000. Institutional Shares are sold at net asset value and are distributed without a Rule 12b-1 Plan. Financial institutions and brokers providing sales and/or administrative services may receive different compensation from one class of shares than from another class of shares. The amount of dividends payable to Institutional Shares will be greater than those payable to Institutional Service Shares by the difference between Class Expenses and distribution and shareholder service expenses borne by shares of each respective class. The stated advisory fee is the same for both classes of the Fund. FEDERATED SHORT-TERM INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors on page 38.
YEAR ENDED APRIL 30, 1994 1993 1992* 1991 1990 1989 1988 1987** - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 $ 10.00 - --------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------- Net investment income 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74 - --------------------------- Net realized and unrealized gain/(loss) on investments (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42) (0.02) - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72 - --------------------------- LESS DISTRIBUTIONS - --------------------------- Dividends to shareholders from net investment income (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94) (0.74) - --------------------------- Distributions in excess of net investment income -- -- (0.02)*** (0.01)*** -- -- -- -- - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL DISTRIBUTIONS (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94) (0.74) - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PE- RIOD $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL RETURN**** 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40% - --------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------- Expenses 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50%(b) - --------------------------- Net investment income 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58%(b) - --------------------------- Expense waiver/ reimbursement (a) 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60%(b) - --------------------------- SUPPLEMENTAL DATA - --------------------------- Net assets, end of period (000 omitted) $ 353,106 $ 144,129 $ 36,047 $ 47,223 $ 65,429 $ 69,904 $ 90,581 $ 80,073 - --------------------------- Portfolio turnover rate 44% 62% 114% 23% 34% 38% 77% 82% - ---------------------------
* On December 31, 1991, the shareholders approved a change in the fundamental investment policies which state that the Fund will be invested in high-grade as opposed to lower-rated debt securities, and as a result, investment income per share is lower. ** Reflects operations for the period from July 1, 1986 to April 30, 1987. *** Distributions in excess of net investment income for the years ended April 30, 1992 and 1991, were a result of certain book and tax timing differences. These distributions did not represent a return of capital for federal income tax purposes for the years ended April 30, 1992 and 1991. **** Based on net asset value which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). (b) Computed on an annualized basis. Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND PORTFOLIO OF INVESTMENTS APRIL 30, 1994 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE - -------------- -------------------------------------------------------------------------------- --------------- CORPORATE BONDS/ASSET-BACKED SECURITIES--64.9% - ------------------------------------------------------------------------------------------------ AUTOMOTIVE--11.6% -------------------------------------------------------------------------------- $ 2,996,386 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%, 12/15/97 $ 2,996,176 -------------------------------------------------------------------------------- 1,615,610 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%, 2/17/98 1,602,766 -------------------------------------------------------------------------------- 8,000,000 Ford Credit Auto Loan Master Trust 1992-1, 6.875%, 1/15/99 8,048,640 -------------------------------------------------------------------------------- 1,306,067 John Deere Owner Trust 1992-A, Class E., 4.88%+, 12/29/1999 1,308,914 -------------------------------------------------------------------------------- 1,659,434 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/97 1,664,097 -------------------------------------------------------------------------------- 3,450,000 Navistar Financial Dealer Note Trust 1990, Class A-3, 4.59%+, 1/25/2003 3,473,702 -------------------------------------------------------------------------------- 1,245,653 Nissan Auto Receivable 1992-A Grantor Trust, 5.30%, 5/15/97 1,241,867 -------------------------------------------------------------------------------- 7,473,000 Orix Credit Alliance Owner Trust 1993-A, Class B, 4.60%, 8/17/98 7,240,067 -------------------------------------------------------------------------------- 2,297,807 Premier Auto Trust 1993-1, Class B, 5.60%, 10/15/98 2,262,903 -------------------------------------------------------------------------------- 9,999,863 Premier Auto Trust 1993-4, Class A2, 4.65%, 2/2/99 9,709,167 -------------------------------------------------------------------------------- 4,999,967 Premier Auto Trust 1993-6, Class B, 4.88%, 1/3/2000 4,845,368 -------------------------------------------------------------------------------- 1,232,263 Volvo Auto Trust 1991-A, 5.65%, 12/15/98 1,232,374 -------------------------------------------------------------------------------- --------------- Total 45,626,041 -------------------------------------------------------------------------------- --------------- BANKING--17.3% -------------------------------------------------------------------------------- 12,500,000 Advanta Credit Card Master Trust 1992-3, Class A-1, 5.95%, 8/31/99 12,239,125 -------------------------------------------------------------------------------- 3,000,000 Bankamerica Corp., 5.50%+, 6/25/2003 2,992,500 -------------------------------------------------------------------------------- 7,450,000 Bankers Trust New York Corp., 5.38%+, 9/24/2002 7,373,191 -------------------------------------------------------------------------------- 18,450,000 Citicorp, 5.00%+, 10/25/2005 18,357,750 -------------------------------------------------------------------------------- 4,000,000 Colonial Credit Card Trust 1991-B, Class B, 7.95%, 1/15/98 4,077,280 -------------------------------------------------------------------------------- 7,000,000 Credit Lyonnais, 5.00%+, 8/7/97 7,136,500 -------------------------------------------------------------------------------- 5,000,000 First Chicago Corp., 4.375%+, 7/28/2003 4,929,000 -------------------------------------------------------------------------------- 1,000,000 J.P. Morgan and Co., Inc., FRN 5.00%+, 8/19/2002 998,750 -------------------------------------------------------------------------------- 7,500,000 MBNA Master Credit Card Trust 1991-1, 7.75%, 10/15/98 7,711,425 -------------------------------------------------------------------------------- 2,000,000 Standard Credit Card Master Trust 1991-1A, 8.50%, 6/7/96 2,080,340 -------------------------------------------------------------------------------- --------------- Total 67,895,861 -------------------------------------------------------------------------------- --------------- CONSUMER SERVICES--0.7% -------------------------------------------------------------------------------- 3,000,000 Encyclopedia Britannica, Dom. Fdg. Corp. 1994-1, 6.76%, 3/15/2002 2,895,900 -------------------------------------------------------------------------------- --------------- FINANCE-AUTOMOTIVE--0.8% -------------------------------------------------------------------------------- 3,000,000 Ford Motor Credit Co., 6.55%, 2/3/98 2,936,610 -------------------------------------------------------------------------------- --------------- FINANCE-RETAIL--13.1% -------------------------------------------------------------------------------- 3,500,000 Diamond Funding Corp., 6.35%, 11/20/97 3,532,830 -------------------------------------------------------------------------------- 5,000,000 Discover Credit Card Trust 1991-B, Class A, 8.625%, 7/16/98 5,220,150 -------------------------------------------------------------------------------- 2,500,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/98 2,620,800 -------------------------------------------------------------------------------- 7,000,000 Discover Credit Card Trust 1991-E, 7.30%, 5/21/99 7,129,850 -------------------------------------------------------------------------------- 10,000,000 Discover Credit Card Trust 1991-F, Class A, 7.85%, 11/21/2000 10,181,500 -------------------------------------------------------------------------------- 2,474,159 Greentree Financial Corp. 1992-1, Class A-5, 6.50%, 10/15/2017 2,411,637 -------------------------------------------------------------------------------- 4,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/97 4,120,880 -------------------------------------------------------------------------------- 6,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/97 5,980,020 -------------------------------------------------------------------------------- 10,000,000 Sears Credit Account Trust 1991-D, 7.75%, 9/15/98 10,327,000 -------------------------------------------------------------------------------- --------------- Total 51,524,667 -------------------------------------------------------------------------------- --------------- HOME EQUITY RECEIVABLES--13.8% -------------------------------------------------------------------------------- 1,106,088 Advanta Home Equity Loan Trust 1991-1, 9.00%, 2/25/2006 1,140,886 -------------------------------------------------------------------------------- 4,152,957 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 4,208,690 -------------------------------------------------------------------------------- 2,855,579 Advanta Home Equity Loan Trust 1992-4, Class A-2, 7.15%, 12/25/2008 2,849,068 -------------------------------------------------------------------------------- 1,000,000 Capital Home Equity Loan Trust 1991-1, Class B, 4.54%+, 12/25/2011 1,001,100 -------------------------------------------------------------------------------- 8,361,563 Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%, 7/15/2020 8,184,716 -------------------------------------------------------------------------------- 2,000,000 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%, 11/15/2013 1,930,856 -------------------------------------------------------------------------------- 4,925,320 Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%, 1/15/2024 4,783,786 -------------------------------------------------------------------------------- 991,891 Fleet Finance Home Equity Trust 1991-2, 6.70%, 10/15/2006 978,203 -------------------------------------------------------------------------------- 1,500,000 GE Capital Home Equity Loan, 1991-1, Class B, 8.70%, 8/30/2011 1,534,245 -------------------------------------------------------------------------------- 6,428,464 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 4.75%+, 2/15/2003 6,456,364 -------------------------------------------------------------------------------- 1,355,754 TMS Home Equity Loan Trust 1992-A, Class A, 6.95%, 12/15/2007 1,345,911 -------------------------------------------------------------------------------- 1,123,994 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 1,117,542 -------------------------------------------------------------------------------- 13,935,967 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 13,934,434 -------------------------------------------------------------------------------- 4,684,235 TMS Home Equity Loan Trust 1993-C, Class A-3, 5.75%, 10/15/2022 4,567,129 -------------------------------------------------------------------------------- --------------- Total 54,032,930 -------------------------------------------------------------------------------- --------------- LEASING--0.8% -------------------------------------------------------------------------------- 21,076 Comdisco Receivables Trust 1991-A, 7.70%, 5/15/96 21,066 -------------------------------------------------------------------------------- 1,016,900 Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/99 1,020,714 -------------------------------------------------------------------------------- 2,250,000 U.S. Leasing, Inc., 7.00%, 11/1/97 2,263,635 -------------------------------------------------------------------------------- --------------- Total 3,305,415 -------------------------------------------------------------------------------- --------------- MANUFACTURED HOUSING RECEIVABLES--2.7% -------------------------------------------------------------------------------- 3,484,632 CIT Group Manufactured Housing 1993-1, Class A-1, 4.70%, 6/15/2018 3,412,152 -------------------------------------------------------------------------------- 6,467,886 Merrill Lynch Mortgage Investments, Inc. 1991-1, Class A, 7.65%, 1/15/2012 6,558,307 -------------------------------------------------------------------------------- 625,213 Merrill Lynch Mortgage Investments, Inc. 1992-B, 8.50%, 4/15/2012 636,348 -------------------------------------------------------------------------------- --------------- Total 10,606,807 -------------------------------------------------------------------------------- --------------- MARINE RECEIVABLES--1.2% -------------------------------------------------------------------------------- 4,785,691 CFC-14 Grantor Trust Class A, 7.15%, 11/15/2006 4,827,566 -------------------------------------------------------------------------------- --------------- RECREATIONAL VEHICLE RECEIVABLES--1.9% -------------------------------------------------------------------------------- 7,422,285 Fleetwood Credit 1993-A, Class A, 6.00%, 1/15/2008 7,341,827 -------------------------------------------------------------------------------- --------------- TRADE RECEIVABLES--1.0% -------------------------------------------------------------------------------- 4,000,000 Unisys Receivables Master Trust I, 5.05%, 11/15/96 3,918,160 -------------------------------------------------------------------------------- --------------- TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES (IDENTIFIED COST, $262,099,875) 254,911,784 -------------------------------------------------------------------------------- --------------- GOVERNMENT AGENCY--0.3% - ------------------------------------------------------------------------------------------------ 1,000,000 Student Loan Marketing Association, 3.94%+, 5/8/95 1,000,000 -------------------------------------------------------------------------------- --------------- MORTGAGE-BACKED SECURITIES--33.3% - ------------------------------------------------------------------------------------------------ GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--1.0% -------------------------------------------------------------------------------- 1,409,826 Federal Home Loan Mortgage Corp. Pound606116, 5.47%+, 9/01/2019 1,450,119 -------------------------------------------------------------------------------- 1,643,269 Federal Home Loan Mortgage Corp. Pound785167, 5.63%+, 12/01/2018 1,695,180 -------------------------------------------------------------------------------- 652,709 Federal Home Loan Mortgage Corp. Series 1132 Class G, 8.00%, 1/15/2005 657,487 -------------------------------------------------------------------------------- --------------- Total 3,802,786 -------------------------------------------------------------------------------- --------------- NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--32.3% -------------------------------------------------------------------------------- 363,756 Capstead Securities Corp. IV 1992, Class 4-E, 4.74%+, 6/25/2018 364,891 -------------------------------------------------------------------------------- 116,969 Capstead Securities Corp. IV 1992-10, Class D, 8.25%, 7/25/2023 116,773 -------------------------------------------------------------------------------- 2,060,000 Chemical Mortgage Securities, Inc. 1993-1, Class A-4, 7.45%, 7/25/2020 2,098,625 -------------------------------------------------------------------------------- 3,586,370 Citicorp Mortgage Securities 1992-18, Class A-1, 5.26%+, 10/25/2022 3,617,751 -------------------------------------------------------------------------------- 901,129 Citicorp Mortgage Securities 1992-5, Class A-1, 8.00%, 9/25/2021 902,842 -------------------------------------------------------------------------------- 10,200,000 Citicorp Mortgage Securities, Inc., Series 1993-12, Class A-2, 6.50%, 6/25/2021 9,560,358 -------------------------------------------------------------------------------- 6,594,982 DLJ Mortgage Acceptance Corp., 1993-15, Class A-1, 4.58%+, 11/25/2023 6,706,305 -------------------------------------------------------------------------------- 8,751,940 DLJ Mortgage Acceptance Corp., 1993-Q3, Class A-2, 5.65%+, 4/25/2023 8,932,493 -------------------------------------------------------------------------------- 2,379,622 GCA 1993-ASC1, Class B-1, 5.43%+, 9/25/2023 2,357,301 -------------------------------------------------------------------------------- 7,144,488 GCA 1993-LB2, Class A-1, 5.74%+, 8/25/2023 7,349,893 -------------------------------------------------------------------------------- 6,705,669 GCA 1993-LB3, Class A-1, 5.54%+, 1/25/2024 6,961,356 -------------------------------------------------------------------------------- 8,929,613 GCA Long Beach Mortgage PTC, Class A-2, 6.08%+, 7/25/2022 9,189,108 -------------------------------------------------------------------------------- 2,485,564 GCA REMIC PTC 1991-4, Class B-1A, 8.76%+, 7/01/2019 2,518,970 -------------------------------------------------------------------------------- 3,982,084 GCA REMIC Trust V, 1993-5, Class B, 5.12%+, 5/1/2020 3,817,823 -------------------------------------------------------------------------------- 9,484,564 GE Capital Mortgage Services, Inc. 1993-12, Class A, 6.50%, 11/25/2023 9,027,693 -------------------------------------------------------------------------------- 4,609,913 GE Capital Mortgage Services, Inc. 1993-9, Class A-1, 6.00%, 8/25/2008 4,466,775 -------------------------------------------------------------------------------- 2,669,885 Glendale Federal Bank, 1988-1A, 5.20%+, 3/25/2018 2,684,917 -------------------------------------------------------------------------------- 1,964,161 GMBS, Inc., 1990-5, Class A, 6.61%+, 12/26/2020 1,974,590 -------------------------------------------------------------------------------- 1,453,110 Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%, 7/15/2002 1,475,808 -------------------------------------------------------------------------------- 2,854,461 Prudential Home Mortgage 1992-A, Class B1-1, 7.20%, 4/28/2022 2,705,772 -------------------------------------------------------------------------------- 4,506,946 Residential Funding Mortgage Securities, Inc. 1993-S38, Class A, 4.85%+, 9/25/2023 4,680,914 -------------------------------------------------------------------------------- 2,000,125 Resolution Trust Corp. 1992-7, Class B-2B, 8.35%, 6/25/2029 2,029,507 -------------------------------------------------------------------------------- 2,000,000 Resolution Trust Corp. 1992-12, Class B-3, 5.77%+, 1/25/2025 2,010,620 -------------------------------------------------------------------------------- 4,012,100 Salomon Brothers Mortgage Securities VII, Inc. 1992-6, Class A-1, 5.22%+, 11/25/2022 4,124,960 -------------------------------------------------------------------------------- 12,000,000 Salomon Brothers Mortgage Securities VII, Inc. 1993-5, Class A-3C, 7.44%+, 10/25/2023 12,234,000 -------------------------------------------------------------------------------- 6,686,403 Salomon Brothers Mortgage Securities VII, Inc. 1993-9, Class A-1, 7.24%, 1/25/2024 6,594,465 -------------------------------------------------------------------------------- 8,812,654 Zions Home Refinance Loan Trust 1993-1, 5.15%, 9/25/2003 8,437,764 -------------------------------------------------------------------------------- --------------- Total 126,942,274 -------------------------------------------------------------------------------- --------------- TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST, $133,837,428) 130,745,060 -------------------------------------------------------------------------------- --------------- *REPURCHASE AGREEMENTS-1.3% - ------------------------------------------------------------------------------------------------ 3,000,000 Bankers Trust Co., 3.61%, dated 4/29/94, due 5/2/94 3,000,000 -------------------------------------------------------------------------------- 2,176,000 Union Bank of Switzerland, 3.62%, dated 4/29/94, due 5/2/94 2,176,000 -------------------------------------------------------------------------------- --------------- TOTAL REPURCHASE AGREEMENTS 5,176,000 -------------------------------------------------------------------------------- --------------- TOTAL INVESTMENTS (IDENTIFIED COST, $402,113,303) $ 391,832,844\\ -------------------------------------------------------------------------------- ---------------
* Repurchase agreements are fully collateralized by U.S. government and/or agency obligations. The investment in the repurchase agreements are through participation in a joint account with other Federated funds based on market prices at the date of the portfolio. + Denotes variable rate and floating rate obligations for which the current yield is shown. \\ The cost for federal tax purposes amounts to $402,113,303. The net unrealized depreciation of investments on a federal tax basis amounts to $10,280,459 which is comprised of $146,234 appreciation and $10,426,693 depreciation at April 30, 1994. The following abbreviations are used in this portfolio: FRN-Floating Rate Note PTC-Pass Through Certificate REMIC-Real Estate Mortgage Investment Conduit Note: The categories of investments are shown as a percentage of net assets ($392,755,586) at April 30, 1994. (See Notes which are integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1994 - -------------------------------------------------------------------------------- ASSETS: - ------------------------------------------------------------------------------------------------ Investments, at value (Notes 2A and 2B) (identified and tax cost, $402,113,303) $ 391,832,844 - ------------------------------------------------------------------------------------------------ Cash 234,808 - ------------------------------------------------------------------------------------------------ Interest receivable 2,775,314 - ------------------------------------------------------------------------------------------------ Receivable for Fund shares sold 1,411,953 - ------------------------------------------------------------------------------------------------ --------------- Total assets 396,254,919 - ------------------------------------------------------------------------------------------------ LIABILITIES: - ------------------------------------------------------------------------------------------------ Payable for Fund shares redeemed $ 1,929,125 - --------------------------------------------------------------------------------- Dividends payable 1,435,826 - --------------------------------------------------------------------------------- Payable to transfer and dividend disbursing agent (Note 4) 3,980 - --------------------------------------------------------------------------------- Accrued expenses 130,402 - --------------------------------------------------------------------------------- ------------- Total liabilities 3,499,333 - ------------------------------------------------------------------------------------------------ --------------- NET ASSETS for 44,384,375 shares of beneficial interest outstanding $ 392,755,586 - ------------------------------------------------------------------------------------------------ --------------- NET ASSETS CONSIST OF: - ------------------------------------------------------------------------------------------------ Paid-in capital $ 415,115,331 - ------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investments (10,280,459) - ------------------------------------------------------------------------------------------------ Accumulated net realized gain (loss) on investments (12,079,286) - ------------------------------------------------------------------------------------------------ --------------- Total $ 392,755,586 - ------------------------------------------------------------------------------------------------ --------------- NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share; Institutional Shares ($353,106,260 / 39,903,321 shares of beneficial interest outstanding) $8.85 - ------------------------------------------------------------------------------------------------ --------------- Institutional Service Shares ($39,649,326 / 4,481,054 shares of beneficial interest outstanding) $8.85 - ------------------------------------------------------------------------------------------------ ---------------
(See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1994 - -------------------------------------------------------------------------------- INVESTMENT INCOME: - ------------------------------------------------------------------------------------------------- Interest income (Note 2C) $ 19,390,453 - ------------------------------------------------------------------------------------------------- EXPENSES: - ------------------------------------------------------------------------------------------------- Investment advisory fee (Note 4) $ 1,269,273 - ---------------------------------------------------------------------------------- Trustees' fees 10,646 - ---------------------------------------------------------------------------------- Administrative personnel and services fees (Note 4) 383,643 - ---------------------------------------------------------------------------------- Custodian and portfolio accounting fees and expenses 163,757 - ---------------------------------------------------------------------------------- Transfer and dividend disbursing agent fees and expenses (Note 4) 7,460 - ---------------------------------------------------------------------------------- Fund share registration costs 98,061 - ---------------------------------------------------------------------------------- Auditing fees 21,469 - ---------------------------------------------------------------------------------- Distribution service fees (Note 4) 70,952 - ---------------------------------------------------------------------------------- Shareholder services fees (Note 4) 15,198 - ---------------------------------------------------------------------------------- Legal fees 14,495 - ---------------------------------------------------------------------------------- Printing and postage 36,222 - ---------------------------------------------------------------------------------- Insurance premiums 6,741 - ---------------------------------------------------------------------------------- Taxes 4,377 - ---------------------------------------------------------------------------------- Miscellaneous 5,114 - ---------------------------------------------------------------------------------- ------------- Total expenses 2,107,408 - ---------------------------------------------------------------------------------- Deduct--Waiver of investment advisory fee (Note 4) $ 259,625 - --------------------------------------------------------------------- Waiver of distribution service fees (Note 4) 15,198 274,823 - --------------------------------------------------------------------- ----------- ------------- Net expenses 1,832,585 - ------------------------------------------------------------------------------------------------- --------------- Net investment income 17,557,868 - ------------------------------------------------------------------------------------------------- --------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: - ------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments transactions (identified cost basis) (2,324,205) - ------------------------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments (11,254,546) - ------------------------------------------------------------------------------------------------- --------------- Net realized and unrealized loss on investments (13,578,751) - ------------------------------------------------------------------------------------------------- --------------- Change in net assets resulting from operations $ 3,979,117 - ------------------------------------------------------------------------------------------------- ---------------
(See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED APRIL 30, --------------------------------- 1994 1993 - ------------------------------------------------------------------------------ ---------------- --------------- INCREASE (DECREASE) IN NET ASSETS: - ------------------------------------------------------------------------------ OPERATIONS-- - ------------------------------------------------------------------------------ Net investment income $ 17,557,868 $ 5,989,214 - ------------------------------------------------------------------------------ Net realized gain (loss) on investment transactions ($669,532 net loss and $61,811 net gain, respectively, as computed for federal tax purposes) (2,324,205) (2,884) - ------------------------------------------------------------------------------ Change in unrealized appreciation (depreciation) on investments (11,254,546) 1,162,577 - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets from operations 3,979,117 7,148,907 - ------------------------------------------------------------------------------ ---------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)-- - ------------------------------------------------------------------------------ Dividends to shareholders from net investment income: Institutional Shares (16,047,919) (5,534,478) - ------------------------------------------------------------------------------ Institutional Service Shares (1,509,949) (340,673) - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets from distributions to shareholders (17,557,868) (5,875,151) - ------------------------------------------------------------------------------ ---------------- --------------- FUND SHARE TRANSACTIONS (NOTE 3) - ------------------------------------------------------------------------------ Net proceeds from sale of shares 513,518,367 202,156,588 - ------------------------------------------------------------------------------ Net asset value of shares issued to shareholders in payment of dividends declared 3,669,215 895,871 - ------------------------------------------------------------------------------ Cost of shares redeemed (270,654,913) (81,349,085) - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets from Fund share transactions 246,532,669 121,703,374 - ------------------------------------------------------------------------------ ---------------- --------------- Change in net assets 232,953,918 122,977,130 - ------------------------------------------------------------------------------ NET ASSETS: - ------------------------------------------------------------------------------ Beginning of period 159,801,668 36,824,538 - ------------------------------------------------------------------------------ ---------------- --------------- End of period $ 392,755,586 $ 159,801,668 - ------------------------------------------------------------------------------ ---------------- ---------------
(See Notes which are an integral part of the Financial Statements) FEDERATED SHORT-TERM INCOME FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1994 - -------------------------------------------------------------------------------- (1) ORGANIZATION Federated Income Securities Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. The Trust consists of two diversified portfolios. The financial statements included herein are only those of Federated Short-Term Income Fund (the "Fund"). The financial statements of the other portfolio are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund provides two classes of shares, Institutional Shares and Institutional Service Shares. Institutional Service Shares are identical in all respects to Institutional Shares except that Institutional Service Shares will be sold pursuant to a distribution plan ("Plan") adopted in accordance with Investment Company Act Rule 12b-1. (2) SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP). A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at the mean between the over-the-counter bid and asked prices as furnished by an independent pricing service. Corporate bonds (and other fixed asset backed securities) are valued at the last sale price reported on national securities exchanges on that day, if available. Otherwise, corporate bonds (and other asset backed securities) and short-term obligations are valued at the prices provided by an independent pricing service. Short-term securities with remaining maturities of sixty days or less at the time of purchase may be stated at amortized cost, which approximates value. B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian bank's vault, all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by the Fund to monitor on a daily basis, the market value of each repurchase agreement's underlying collateral to ensure the value at least equals the principal amount of the repurchase agreement, including accrued interest. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund adviser to be creditworthy pursuant to guidelines established by the Board of Trustees ("Trustees"). Risks may arise from the potential inability of counterparties to honor the terms of these agreements. Accordingly, the Fund could receive less than the repurchase price on the sale of collateral securities. C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued daily. Bond premium and discount are amortized as required by the Internal Revenue Code, as amended ("Code"). Distributions to shareholders are recorded on the ex-dividend date. D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to, distribute to shareholders each year substantially all of its taxable income. Accordingly, no provisions for federal tax are necessary. At April 30, 1994 the Fund for federal tax purposes, had a capital loss carryforward of ($10,249,866) which will reduce the Fund's taxable income arising from future net realized gain on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital loss carryforward will expire in 1995, ($156,476), 1996 ($791,359), 1997 ($3,077,752), 1998 ($316,627), 1999 ($1,132,354), 2000 ($4,105,766) and 2002 ($669,532). Additionally, net capital losses of ($1,829,377) attributable to security transactions incurred after October 31, 1993, are treated as arising on May 1, 1994, the first day of the Fund's next taxable year. E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. F. OTHER--Investment transactions are accounted for on the trade date. (3) SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
YEAR ENDED APRIL 30, --------------------------------------------------------------- 1994 1993 INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT - ----------------------------------------------- ------------- ---------------- ------------- --------------- Shares sold 50,506,612 $ 459,763,632 19,997,401 $ 182,667,537 - ----------------------------------------------- Shares issued to shareholders in payment of dividends declared 307,713 2,782,792 69,745 637,195 - ----------------------------------------------- Shares redeemed (26,635,056) (241,204,503) (8,357,188) (76,399,182) - ----------------------------------------------- ------------- ---------------- ------------- --------------- Net change resulting from fund share transactions 24,179,269 $ 221,341,921 11,709,958 $ 106,905,550 - ----------------------------------------------- ------------- ---------------- ------------- ---------------
YEAR ENDED APRIL 30, ---------------------------------------------------------- 1994 1993 INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT - ---------------------------------------------------- ------------ --------------- ----------- -------------- Shares sold 5,927,113 $ 53,754,735 2,134,568 $ 19,489,051 - ---------------------------------------------------- Shares issued to shareholders in payment of dividends declared 97,795 886,423 28,299 258,676 - ---------------------------------------------------- Shares redeemed (3,253,210) (29,450,410) (541,975) (4,949,903) - ---------------------------------------------------- ------------ --------------- ----------- -------------- Net change resulting from fund share transactions 2,771,698 $ 25,190,748 1,620,892 $ 14,797,824 - ---------------------------------------------------- ------------ --------------- ----------- --------------
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser ("Adviser"), receives for its services an annual investment advisory fee equal to .40 of 1% of the Fund's average daily net assets. Adviser may voluntarily choose to waive a portion of its fee and reimburse certain operating expenses of the Fund. Adviser can modify or terminate this voluntary waiver and reimbursement at any time at its sole discretion. ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund administrative personnel and services. Prior to March 1, 1994, these services were provided at approximate cost. Effective March 1, 1994, the fee is based on the level of average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors for the period. The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Service Shares. The Plan provides that the Fund may incur distribution expenses up to .25 of 1% of the average daily net assets of the Institutional Service Shares, annually, to compensate FSC. Under the terms of a shareholder services agreement with Federated Shareholder Services ("FSS") the Fund will pay FSS up to .25 of 1% of average net assets for each class of shares for the period. This fee is to obtain certain personal services for shareholders and the maintenance of shareholder accounts. TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves as transfer agent and dividend disbursing agent for the Fund. The fee is based on the size, type and number of accounts and transactions made by shareholders. Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. (5) INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the fiscal year ended April 30, 1994 were as follows: PURCHASES $ 373,721,007 - ------------------------------------------------------------------------------------------------- --------------- SALES $ 136,235,736 - ------------------------------------------------------------------------------------------------- ---------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Trustees and Shareholders of FEDERATED SHORT-TERM INCOME FUND (a portfolio of Federated Income Securities Trust): We have audited the accompanying statement of assets and liabilities of the Federated Short-Term Income Fund (a portfolio of Federated Income Securities Trust), including the portfolio of investments, as of April 30, 1994, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights (see pages 2 and 24 of the Prospectus) for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of April 30, 1994, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Federated Short-Term Income Fund at April 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with generally accepted accounting principles. ERNST & YOUNG Pittsburgh, Pennsylvania June 9, 1994 ADDRESSES - -------------------------------------------------------------------------------- Federated Short-Term Income Fund Federated Investors Tower Institutional Service Shares Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Custodian State Street Bank and P.O. Box 8602 Trust Company Boston, Massachusetts 02266-8602 - --------------------------------------------------------------------------------------------------------------------- Transfer Agent, and Dividend Disbursing Agent Federated Services Company Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Shareholder Servicing Agent Federated Shareholder Services Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Houston, Houston & Donnelly 2510 Centre City Tower Pittsburgh, Pennsylvania 15222 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W. Washington, D.C. 20037 - --------------------------------------------------------------------------------------------------------------------- Independent Auditors Ernst & Young One Oxford Centre Pittsburgh, Pennsylvania 15219 - ---------------------------------------------------------------------------------------------------------------------
FEDERATED SHORT-TERM INCOME FUND INSTITUTIONAL SERVICE SHARES PROSPECTUS A Diversified Portfolio of Federated Income Securities Trust, An Open-End, Management Investment Company June 30, 1994 1111903A-SS (6/94) FEDERATED SHORT-TERM INCOME FUND INSTITUTIONAL SERVICE SHARES (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information should be read with the prospectus of the Federated Short-Term Income Fund (the "Fund") dated June 30, 1994. This Statement is not a prospectus itself. To receive a copy of the prospectus, write or call the Fund. FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 Statement dated June 30, 1994 [LOGO] FEDERATED SECURITIES CORP. --------------------------------------------------------- Distributor A subsidiary of FEDERATED INVESTORS TABLE OF CONTENTS - -------------------------------------------------------------------------------- GENERAL INFORMATION ABOUT THE FUND 1 - --------------------------------------------------------------- INVESTMENT OBJECTIVE AND POLICIES 1 - --------------------------------------------------------------- U.S. Government Securities 1 Weighted Average Portfolio Maturity 1 Weighted Average Portfolio Duration 1 When-Issued and Delayed Delivery Transactions 2 Repurchase Agreements 2 Lending of Portfolio Securities 2 Reverse Repurchase Agreements 2 Privately Issued Mortgage-Related Securities 2 Portfolio Turnover 3 Investment Limitations 3 TRUST MANAGEMENT 5 - --------------------------------------------------------------- Officers and Trustees 5 The Funds 7 Fund Ownership 7 Trustee Liability 7 INVESTMENT ADVISORY SERVICES 8 - --------------------------------------------------------------- Adviser to the Fund 8 Other Advisory Services 8 Other Related Services 8 ADMINISTRATIVE SERVICES 8 - --------------------------------------------------------------- BROKERAGE TRANSACTIONS 9 - --------------------------------------------------------------- PURCHASING INSTITUTIONAL SERVICE SHARES 9 - --------------------------------------------------------------- Distribution and Shareholder Services Plans 9 Other Payments to Financial Institutions 10 Conversion to Federal Funds 10 DETERMINING NET ASSET VALUE 10 - --------------------------------------------------------------- Determining Value of Securities 10 REDEEMING INSTITUTIONAL SERVICE SHARES 10 - --------------------------------------------------------------- Redemption in Kind 10 TAX STATUS 10 - --------------------------------------------------------------- The Fund's Tax Status 10 Shareholders' Tax Status 11 TOTAL RETURN 11 - --------------------------------------------------------------- YIELD 11 - --------------------------------------------------------------- PERFORMANCE COMPARISONS 12 - --------------------------------------------------------------- APPENDIX 13 - --------------------------------------------------------------- GENERAL INFORMATION ABOUT THE FUND - -------------------------------------------------------------------------------- The Fund is a portfolio of Federated Income Securities Trust (the "Trust"), which was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to permit the Trust to offer one or more separate series and classes of shares and to change the name of the Trust from "Federated Floating Rate Trust" to "Federated Income Securities Trust." Shares of the Fund are offered in two classes, Institutional Service Shares and Institutional Shares. This statement of additional information relates to Institutional Service Shares ("Shares") of the Fund. INVESTMENT OBJECTIVE AND POLICIES - -------------------------------------------------------------------------------- The Fund's investment objective is to seek to provide current income. The Fund will pursue this objective by investing primarily in a diversified portfolio of short and medium-term high grade debt securities. The foregoing investment objective and policy may not be changed without the prior approval of the Fund's shareholders. U.S. GOVERNMENT SECURITIES The types of U.S. government obligations in which the Fund may invest generally include direct obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by U.S. government agencies or instrumentalities. These securities may be backed by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or the credit of the agency or instrumentality issuing the obligations. Examples of agencies and instrumentalities which may not always receive financial support from the U.S. government are: Federal Farm Credit Banks; Federal Home Loan Banks; Student Loan Marketing Association; Federal Home Loan Mortgage Corporation; and Federal National Mortgage Association. WEIGHTED AVERAGE PORTFOLIO MATURITY The Fund will determine its dollar-weighted average portfolio maturity by assigning a "weight" to each portfolio security based upon the pro rata market value of such portfolio security in comparison to the market value of the entire portfolio. The remaining maturity of each portfolio security is then multiplied by its weight, and the results are added together to determine the weighted average maturity of the portfolio. For purposes of calculating its dollar-weighted average portfolio maturity, the Fund will (a) treat asset-backed securities as having a maturity equal to their estimated weighted-average maturity and (b) treat variable and floating rate instruments as having a remaining maturity commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. The average maturity of asset-backed securities will be calculated based upon assumptions established by the investment adviser as to the probable amount of principal prepayments weighted by the period until such prepayments are expected to be received. Fixed rate securities hedged with interest rate swaps or caps will be treated as floating or variable rate securities based upon the interest rate index of the swap or cap; floating and variable rate securities hedged with interest rate swaps or floors will be treated as having a maturity equal to the term of the swap or floor. In the event that the Fund holds an interest rate swap, cap or floor that is not hedging another portfolio security, the swap, cap or floor will be treated as having a maturity equal to its term and a weight equal to its notional principal amount for such term. WEIGHTED AVERAGE PORTFOLIO DURATION Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Duration measures the magnitude of the change in the price of a debt security relative to a given change in the market rate of interest. The duration of a debt security depends upon three primary variables: the security's coupon rate, maturity date and the level of market interest rates for similar debt securities. Generally, debt securities with lower coupons or longer maturities will have a longer duration than securities with higher coupons or shorter maturities. For purposes of calculating its dollar-weighted average portfolio duration, the Fund will treat variable and floating rate instruments as having a remaining duration commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. Duration is calculated by dividing the sum of the time-weighted values of cash flows of a security or portfolio of securities, including principal and interest payments, by the sum of the present values of the cash flows. Certain debt securities, such as asset-backed securities, may be subject to prepayment at irregular intervals. The duration of these instruments will be calculated based upon assumptions established by the investment adviser as to the probable amount and sequence of principal prepayments. The duration of interest rate agreements, such as interest rates swaps, caps and floors, is calculated in the same manner as other securities. However, certain interest rate agreements have negative durations, which the Fund may use to reduce its weighted average portfolio duration. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. The Fund engages in when-issued and delayed delivery transactions only for the purpose of acquiring portfolio securities consistent with the Fund's investment objective and policies, not for investment leverage. These transactions are made to secure what is considered to be an advantageous price and yield for the Fund. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Fund sufficient to make payment for the securities to be purchased are segregated at the trade date. These securities are marked to market daily and maintained until the transaction is settled. The Fund may engage in these transactions to an extent that would cause the segregation of an amount up to 20% of the total value of its assets. REPURCHASE AGREEMENTS The Fund or its custodian will take possession of the securities subject to repurchase agreements, and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Board of Trustees ("Trustees"). LENDING OF PORTFOLIO SECURITIES The collateral received when the Fund lends portfolio securities must be valued daily and, should the market value of the loaned securities increase, the borrower must furnish additional collateral to the Fund. During the time portfolio securities are on loan, the borrower pays the Fund any dividends or interest paid on such securities. Loans are subject to termination at the option of the Fund or the borrower. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. REVERSE REPURCHASE AGREEMENTS The use of reverse repurchase agreements may enable the Fund to avoid selling portfolio instruments at a time when a sale may be deemed to be disadvantageous, but the ability to enter into reverse repurchase agreements does not ensure that the Fund will be able to avoid selling portfolio instruments at a disadvantageous time. PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES Privately issued mortgage-related securities generally represent an ownership interest in federal agency mortgage pass-through securities such as those issued by Government National Mortgage Association as well as those issued by non-government related entities. The terms and characteristics of the mortgage instruments may vary among pass-through mortgage loan pools. The market for such mortgage-related securities has expanded considerably since its inception. The size of the primary issuance market and the active participation in the secondary market by securities dealers and other investors makes government-related and non-government related pools highly liquid. PORTFOLIO TURNOVER For the fiscal years ended April 30, 1994, and 1993, the portfolio turnover rates were 44% and 62%, respectively. INVESTMENT LIMITATIONS CONCENTRATION OF INVESTMENTS The Fund will not purchase securities if as a result of such purchase 25% or more of the value of its total assets would be invested in any one industry. INVESTING IN COMMODITIES The Fund will not purchase or sell commodities or commodity contracts, including futures contracts. INVESTING IN REAL ESTATE The Fund will not purchase or sell real estate including limited partnership interests in real estate, although it may invest in the securities of companies whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. BUYING ON MARGIN The Fund will not purchase any securities on margin but may obtain such short-term credits as are necessary for the clearance of transactions. SELLING SHORT The Fund will not sell securities short unless: during the time the short position is open, it owns an equal amount of the securities sold or securities readily and freely convertible into or exchangeable, without payment of additional consideration, for securities of the same issue as, and equal in amount to, the securities sold short; and not more than 10% of the Fund's net assets (taken at current value) is held as collateral for such sales at any one time. ISSUING SENIOR SECURITIES AND BORROWING MONEY The Fund will not issue senior securities, except that the Fund may borrow money and engage in reverse repurchase agreements in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. The Fund will not purchase any securities while any borrowings, other than reverse repurchase agreements, are outstanding. LENDING CASH OR SECURITIES The Fund will not lend any of its assets except portfolio securities up to one-third of the value of its total assets. This shall not prevent the purchase or holding of corporate bonds, debentures, notes, certificates of indebtedness or other debt securities of an issuer, repurchase agreements or other transactions which are permitted by the Fund's investment objective and policies or its Declaration of Trust. UNDERWRITING The Fund will not underwrite any issue of securities, except as it may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of restricted securities which the Fund may purchase pursuant to its investment objective, policies, and limitations. INVESTING IN MINERALS The Fund will not purchase interests in oil, gas, or other mineral exploration or development programs, or leases, although it may purchase the securities of issuers which invest in or sponsor such programs. INVESTING IN NEW ISSUERS The Fund will not invest more than 5% of the value of its total assets in securities of companies, including their predecessors, that have been in operation for less than three years. With respect to asset-backed securities, the Fund will treat the originator of the asset pool as the company issuing the security for purposes of determining compliance with this limitation. INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF THE TRUST The Fund will not purchase or retain the securities of any issuer if the officers and Trustees of the Trust or its investment adviser owning individually more than 1/2 of 1% of the issuer's securities together own more than 5% of the issuer's securities. DIVERSIFICATION OF INVESTMENTS The Fund will not, with respect to 75% of its assets, invest more than 5% of the value of its total assets in securities of one issuer (except U.S. government obligations), or purchase more than 10% of the outstanding voting securities in any one issuer. ACQUIRING SECURITIES The Fund will not purchase securities of a company for the purpose of exercising control or management. PLEDGING ASSETS The Fund will not mortgage, pledge, or hypothecate any assets except to secure permitted borrowings. In those cases, it may mortgage, pledge, or hypothecate assets having a market value not exceeding 10% of the value of total assets at the time of the borrowing. The above investment limitations cannot be changed without shareholder approval. The following limitation, however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in this limitation become effective. INVESTING IN ILLIQUID SECURITIES The Fund will limit investments in illiquid securities, including certain restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and repurchase agreements providing for settlement in more then seven days after notice, to 15% of its net assets. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES The Fund will limit its investment in other investment companies to no more than 3% of the total outstanding voting stock of any investment company, will not invest more than 5% of its total assets in any one investment company, or invest more than 10% of its total assets in investment companies in general. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, or acquisition of assets. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. During the fiscal year ended April 30, 1994, the Fund did not borrow money, invest in repurchase agreements or sell securities short in excess of 5% of the value of its net assets. The Fund does not intend to borrow money, invest in reverse repurchase agreements, or sell securities short in excess of 5% of the value of its net assets during the coming year. In order to comply with certain state restrictions, the Fund will limit its investment in securities of other investment companies to those with sales loads of less than 1.00% of the offering price of such securities. The Fund will purchase securities of closed-end investment companies only in open market transactions involving any customary brokers' commissions. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, reorganization, or acquisition of assets. While it is a policy to waive advisory fees on Fund assets invested in securities of other open-end investment companies, it should be noted that investment companies incur certain expenses such as custodian and transfer agency fees and, therefore, any investment by the Fund in shares of another investment company would be subject to such duplicate expenses. For purposes of its policies and limitations the Fund considers certificates of deposit and demand and time deposits issued by a U.S. branch of a domestic bank or savings and loan having a capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment to be cash items. TRUST MANAGEMENT - -------------------------------------------------------------------------------- OFFICERS AND TRUSTEES Officers and Trustees are listed with their addresses, principal occupations, and present positions, including any affiliation with Federated Management, Federated Investors, Federated Securities Corp., Federated Administrative Services, Federated Services Company, Federated Shareholder Services, and the Funds (as defined below).
POSITIONS WITH PRINCIPAL OCCUPATIONS NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research; Pittsburgh, PA Director, tnaLife and Casualty Company; Chief Executive Officer and Director, Trustee, or Managing General Partner of the Funds; formerly, Director, The Standard Fire Insurance Company. Mr. Donahue is the father of J. Christopher Donahue, Vice President of the Trust. John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate Department Village Development Corporation; General Partner or Trustee in private John R. Wood and real estate ventures in southwest Florida; Director, Trustee, or Associates, Inc., Realtors Managing General Partner of the Funds; formerly, President, Naples 3255 Tamiami Trail North Property Management, Inc. Naples, FL William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.; One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; formerly, 23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Pittsburgh, PA Director, Ryan Homes, Inc. James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, 571 Hayward Mill Road Trustee, or Managing General Partner of the Funds; formerly, Director, Concord, MA Blue Cross of Massachusetts, Inc.; Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore 3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Funds. Pittsburgh, PA Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park 5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A., Western Region. Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; 225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; formerly, Boston, MA President, State Street Bank and Trust Company and State Street Boston Corporation and Trustee, Lahey Clinic Foundation, Inc. Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.; 5916 Penn Mall Director Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing Pittsburgh, PA General Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A. Wesley W. Posvar Trustee Professor, Foreign Policy and Management Consultant; Trustee, Carnegie 1202 Cathedral of Learning Endowment for International Peace, RAND Corporation, Online Computer Pittsburgh, PA Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director, Trustee or Managing General Partner of the Funds; President Emeritus, University of Pittsburgh; formerly, Chairman, National Advisory Council for Environmental Policy and Technology. Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or Managing 4905 Bayard Street General Partner of the Funds. Pittsburgh, PA John A. Staley, IV* Vice President Vice President and Trustee, Federated Investors; Executive Vice Federated Investors Tower and Trustee President, Federated Securities Corp.; President and Trustee, Federated Pittsburgh, PA Advisers, Federated Management, and Federated Research; Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds; formerly, Vice President, The Standard Fire Insurance Com- pany and President of its Federated Research Division. Glen R. Johnson President Trustee, Federated Investors; President and/or Trustee of some of the Federated Investors Tower Funds; staff member, Federated Securities Corp. and Federated Pittsburgh, PA Administrative Services. J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Advisers, Federated Investors Tower Federated Management, and Federated Research; Trustee, Federated Pittsburgh, PA Administrative Services, Federated Services Company, and Federated Shareholder Services; President or Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of the Trust. Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman and Federated Investors Tower Director, Federated Securities Corp.; President or Vice President of the Pittsburgh, PA Funds; Director or Trustee of some of the Funds. Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, and Pittsburgh, PA Federated Research; Executive Vice President, Treasurer, and Director, Federated Securities Corp.; Chairman, Treasurer, and Trustee, Federated Administrative Services; Trustee, Federated Services Company and Federated Shareholder Services; Trustee or Director of some of the Funds; Vice President and Treasurer of the Funds. John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated Federated Investors Tower and Secretary Investors; Vice President, Secretary and Trustee, Federated Advisers, Pittsburgh, PA Federated Management, and Federated Research; Executive Vice President, Secretary, and Trustee, Federated Administrative Services; Trustee, Federated Services Company and Federated Shareholder Services; Director and Executive Vice President, Federated Securities Corp.; Vice President and Secretary of the Funds.
*This Trustee is deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940 as amended. \Members of the Executive Committee. The Executive Committee of the Board of Trustees handles the responsibilities of the Board of Trustees between meetings of the Board. THE FUNDS "The Funds" and "Funds" mean the following investment companies: American Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust; Automated Government Money Trust; California Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal Trust; International Series Funds, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations and World Investment Series, Inc. FUND OWNERSHIP Officers and Trustees own less than 1% of the Fund's outstanding shares. As of June 3, 1994, the following shareholders of record owned 5% or more of the outstanding Institutional Service Shares of the Fund: Heritage Trust Company, Grand Junction, Colorado, owned approximately 1,449,742 shares (34.80%); Charles Schwab & Co., Inc., San Francisco, California, owned approximately 934,521 shares (21.69%); The Trust Company of St. Joseph, St. Joseph, Missouri, owned approximately 379,991 shares (8.82%); and Howell Paving, Incorporated, owned approximately 222,352 shares (5.16%). TRUSTEE LIABILITY The Trust's Declaration of Trust provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. INVESTMENT ADVISORY SERVICES - -------------------------------------------------------------------------------- ADVISER TO THE FUND The Fund's investment adviser is Federated Management (the "Adviser"). It is a subsidiary of Federated Investors. All of the voting securities of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, his wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee of Federated Management, is Chairman and Trustee of Federated Investors and Chairman and Trustee of the Trust. John A. Staley, IV, President and Trustee of Federated Management, is Vice President and Trustee of Federated Investors, Executive Vice President of Federated Securities Corp., and Vice President and Trustee of the Trust. J. Christopher Donahue, Trustee of Federated Management, is Vice President and Trustee of Federated Investors, Trustee of Federated Administrative Services, and Vice President of the Trust. John W. McGonigle, Vice President, Secretary and Trustee of Federated Management, is Trustee, Vice President, Secretary, and General Counsel of Federated Investors, Director, Executive Vice President, and Secretary of Federated Administrative Services, Director and Executive Vice President of Federated Securities Corp., and Vice President and Secretary of the Trust. The Adviser shall not be liable to the Trust, the Fund, or any shareholder of the Fund for any losses that may be sustained in the purchase, holding, or sale of any security, or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Trust. ADVISORY FEES For its advisory services, the Adviser receives an annual investment advisory fee as described in the prospectus. During the fiscal years ended April 30, 1994, 1993, and 1992, the Fund's Adviser earned $1,269,273, $395,758, and $266,945, respectively, $259,625, all, and all of which were waived, respectively, because of undertakings to limit the Fund's expenses. STATE EXPENSE LIMITATIONS The Adviser has undertaken to comply with the expense limitations established by certain states for investment companies whose shares are registered for sale in those states. If the Fund's normal operating expenses (including the investment advisory fee, but not including brokerage commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2% per year of the first $30 million of average net assets, 2% per year of the next $70 million of average net assets, and 1-1/2% per year of the remaining average net assets, the Adviser will reimburse the Fund for its expenses over the limitation. If the Fund's monthly projected operating expenses exceed this limitation, the investment advisory fee paid will be reduced by the amount of the excess, subject to an annual adjustment. If the expense limitation is exceeded, the amount to be reimbursed by the Adviser will be limited, in any single fiscal year, by the amount of the investment advisory fee. This arrangement is not part of the advisory contract and may be amended or rescinded in the future. OTHER ADVISORY SERVICES Federated Research Corp. receives fees from certain depository institutions for providing consulting and portfolio advisory services relating to each institution's program of asset management. Federated Research Corp. may advise such clients to purchase or redeem shares of investment companies, such as the Fund, which are managed, for a fee, by Federated Research Corp. or other affiliates of Federated Investors, such as the Adviser, and may advise such clients to purchase and sell securities in the direct markets. Further, Federated Research Corp., and other affiliates of the Adviser, may, from time to time, provide certain consulting services and equipment to depository institutions in order to facilitate the purchase of shares of funds offered by Federated Securities Corp. OTHER RELATED SERVICES Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of shares of funds offered by Federated Securities Corp. ADMINISTRATIVE SERVICES - -------------------------------------------------------------------------------- Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services to the Fund for a fee as described in the prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc., also a subsidiary of Federated Investors, served as the Fund's administrator. (For purposes of this Statement of Additional Information, Federated Administrative Services and Federated Administrative Services, Inc., may collectively be referred to as, the "Administrators".) For the fiscal years ended April 30, 1994, 1993, and 1992, the Administrators collectively earned $383,643, $292,200, and $166,568, respectively. John A. Staley, IV, an officer of the Trust and Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the Fund, each hold approximately 15% and 20%, respectively, of the outstanding common stock and serve as directors of Commercial Data Services, Inc., a company which provides computer processing services to the Administrators. BROKERAGE TRANSACTIONS - -------------------------------------------------------------------------------- When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. In working with dealers, the Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Trustees. The Adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the Adviser and may include: advice as to the advisability of investing in securities; security analysis and reports; economic studies; industry studies; receipt of quotations for portfolio evaluations; and similar services. The Adviser and its affiliates exercise reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. Research services provided by brokers may be used by the Adviser or by affiliates of Federated Investors in advising Federated Funds and other accounts. To the extent that receipt of these services may supplant services for which the Adviser or its affiliates might otherwise have paid, it would tend to reduce their expenses. PURCHASING INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- Shares are sold at their net asset value without a sales charge on days on which the New York Stock Exchange is open for business. The procedure for purchasing Shares of the Fund is explained in the prospectus under "Investing in Institutional Service Shares." DISTRIBUTION AND SHAREHOLDER SERVICES PLANS These arrangements permit the payment of fees to financial institutions, the distributor, and Federated Shareholder Services, to stimulate distribution activities and to cause services to be provided to shareholders by a representative who has knowledge of the shareholder's particular circumstances and goals. These activities and services may include, but are not limited to, marketing efforts; providing office space, equipment, telephone facilities, and various clerical, supervisory, computer, and other personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries; and assisting clients in changing dividend options, account designations, and addresses. By adopting the Distribution Plan, (Institutional Service Shares only) the Board of Trustees expects that the Fund will be able to achieve a more predictable flow of cash for investment purposes and to meet redemptions. This will facilitate more efficient portfolio management and assist the Fund in pursuing its investment objectives. By identifying potential investors whose needs are served by the Fund's objectives, and properly servicing these accounts, it may be possible to curb sharp fluctuations in rates of redemptions and sales. Other benefits, which may be realized under either arrangement, may include: (1) providing personal services to shareholders; (2) investing shareholder assets with a minimum of delay and administrative detail; (3) enhancing shareholder recordkeeping systems; and (4) responding promptly to shareholders' requests and inquiries concerning their accounts. For the fiscal period ended April 30, 1994, no payments were made pursuant to the Distribution Plan. The Trustees expect that the adoption of the Plan will result in the sale of a sufficient number of shares so as to allow the Fund to achieve economic viability. It is also anticipated that an increase in the size of the Fund will facilitate more efficient portfolio management and assist the Fund in seeking to achieve its investment objective. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS The administrative services for which the distributor will pay financial institutions include, but are not limited to, providing office space, equipment, telephone facilities, and various clerical, supervisory, and computer personnel as is necessary or beneficial to establish and maintain shareholders' accounts and records, process purchase and redemption transactions, process automatic investments of client account cash balances, answer routine client inquiries regarding the Fund, assist clients in changing dividend options, account designations, and addresses, and providing such other services as the Fund may reasonably request. CONVERSION TO FEDERAL FUNDS It is the Fund's policy to be as fully invested as possible so that maximum interest may be earned. To this end, all payments from shareholders must be in federal funds or be converted into federal funds. State Street Bank and Trust Company ("State Street Bank") acts as the shareholder's agent in depositing checks and converting them to federal funds. DETERMINING NET ASSET VALUE - -------------------------------------------------------------------------------- Net asset value generally changes each day. The days on which net asset value is calculated by the Fund are described in the prospectus. DETERMINING VALUE OF SECURITIES The values of the Fund's portfolio securities are determined as follows: according to prices provided by independent pricing services, which may be determined without exclusive reliance on quoted prices from dealers but which use market prices when most representative, and which may take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data employed in determining valuations for such securities; or for short-term obligations with remaining maturities of less than 60 days, at the time of purchase, at amortized cost unless the Trustees determines that particular circumstances of the security indicate otherwise. REDEEMING INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at the next computed net asset value after the Fund receives the redemption request. Redemption procedures are explained in the prospectus under "Redeeming Institutional Service Shares." Although State Street Bank does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions of less than $5,000. REDEMPTION IN KIND Although the Trust intends to redeem shares in cash, it reserves the right under certain circumstances to pay the redemption price in whole or in part by a distribution of securities from the respective Fund's portfolio. Redemption in kind will be made in conformity with applicable Securities and Exchange Commission rules, taking such securities at the same value employed in determining net asset value and selecting the securities in a manner the Trustees determine to be fair and equitable. The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act of 1940 under which the Fund is obligated to redeem shares for any one shareholder in cash only up to the lesser of $250,000 or 1% of the respective class's net asset value during any 90-day period. TAX STATUS - -------------------------------------------------------------------------------- THE FUND'S TAX STATUS The Fund will pay no federal income tax because it expects to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, the Fund must, among other requirements: derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; derive less than 30% of its gross income from gains on the sale of securities held less than three months; invest in securities within certain statutory limits; and distribute to its shareholders at least 90% of its net income earned during the year. SHAREHOLDERS' TAX STATUS Shareholders are subject to federal income tax on dividends and capital gains received as cash or additional Shares. No portion of any income dividend paid by the Fund is expected to be eligible for the dividends received deduction available to corporations. These dividends, and any short-term capital gains, are taxable as ordinary income. CAPITAL GAINS Fixed income securities offering the current income sought by the Fund are often purchased at a discount from par value. Because the total yield on such securities when held to maturity and retired may include an element of capital gain, the Fund may achieve capital gains. However, the Fund will not hold securities to maturity for the purpose of realizing capital gains unless current yields on those securities remain attractive. Capital gains or losses may also be realized on the sale of securities. Sales would generally be made because of: the availability of higher relative yields; differentials in market values; new investment opportunities; changes in creditworthiness of an issuer; or an attempt to preserve gains or limit losses. Distributions of long-term capital gains are taxed as such, whether they are taken in cash or reinvested, and regardless of the length of time the shareholder has owned the Shares. TOTAL RETURN - -------------------------------------------------------------------------------- The Fund's average annual total return for the one-year period ended April 30, 1994, and for the period from January 21, 1992 (effective date of the Institutional Service Shares) to April 30, 1994 were 1.78% and 4.62%, respectively, for Institutional Service Shares. The Fund's average annual total returns for the one-year and five-year periods ended April 30, 1994, and for the period from July 1, 1986 (effective date of the Trust's initial registration statement) to April 30, 1994 were 2.04%, 6.51%, and 6.90%, respectively, for the Institutional Shares. The average annual total return for both classes of shares of the Fund is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of shares owned at the end of the period by the maximum offering price per share at the end of the period. The number of shares owned at the end of the period is based on the number of shares purchased at the beginning of the period with $1,000, adjusted over the period by any additional shares, assuming the monthly reinvestment of all dividends and distributions. YIELD - -------------------------------------------------------------------------------- The Fund's yield for the thirty-day period ended April 30, 1994, was 4.86% and 5.11% for Institutional Service Shares and Institutional Shares, respectively. The yield for both classes of shares of the Fund is determined by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by either class of shares over a thirty-day period by the maximum offering price per share of either class of shares on the last day of the period. This value is then annualized using semi-annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a twelve-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by the Fund because of certain adjustments required by the Securities and Exchange Commission and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in either class of shares, performance will be reduced for those shareholders paying those fees. PERFORMANCE COMPARISONS - -------------------------------------------------------------------------------- The performance of both classes of shares depends upon such variables as: portfolio quality; average portfolio maturity; type of instruments in which the portfolio is invested; changes in interest rates and market value of portfolio securities; changes in the Fund's or either class of share's expenses; and various other factors. Either class of share's performance fluctuates on a daily basis largely because net earnings and the maximum offering price per share fluctuate daily. Both net earnings and net asset value per share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specific period of time. From time to time, the Fund will quote its Lipper ranking in the "short-term investment grade debt funds" category in advertising and sales literature. MERRILL LYNCH TOTAL RETURN INVESTMENT GRADE CORPORATES INDEX (SHORT-TERM 1-2.99 YEARS) is comprised of over 400 issues of investment grade corporate debt securities with remaining maturities from 1 to 2.99 years. MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDQ-listed mutual funds of all types according to their risk-adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. Advertisements and other sales literature for both classes of shares may quote total returns which are calculated on non-standardized base periods. These total returns also represent the historic change in the value of an investment in the either class of shares based on monthly reinvestment of dividends over a specified period of time. APPENDIX - -------------------------------------------------------------------------------- STANDARD & POOR'S CORPORATION LONG-TERM DEBT RATING DEFINITIONS AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Corporation. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A--Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS AAA--Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA--Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A--Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS P-1--Issuers (or related supporting institutions) rated PRIME-1 have a superior capacity for repayment of short-term promissory obligations. PRIME-1 repayment capacity will normally be evidenced by the following characteristics: Conservative capitalization structures with moderate reliance on debt and ample asset protection; Broad margins in earning coverage of fixed financial charges and high internal cash generation; Well established access to a range of financial markets and assured sources of alternative liquidity. P-2--Issuers (or related supporting institutions) rated PRIME-2 have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATINGS A-1--This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) sign designation. A-2--Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS DEFINITIONS FITCH-1--(VERY STRONG CREDIT QUALITY) Issues assigned this rating reflect an assurance for timely payment. FITCH-2--(GOOD CREDIT QUALITY) Issues carrying this rating have a satisfactory degree for timely payment but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. 1111903B-SS (6/94) INTERMEDIATE INCOME FUND (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) INSTITUTIONAL SHARES PROSPECTUS The Institutional Shares of Intermediate Income Fund (the "Fund") offered by this prospectus represent interests in a no load, diversified portfolio of securities which is an investment portfolio in Federated Income Securities Trust (the "Trust"), an open-end, management investment company (a mutual fund). The investment objective of the Fund is current income. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in Institutional Shares of the Fund. Keep this prospectus for future reference. The Fund has also filed a Combined Statement of Additional Information for Institutional Shares and Institutional Service Shares dated June 30, 1994, with the Securities and Exchange Commission. The information contained in the Combined Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Combined Statement of Additional Information free of charge by calling 1-800-235-4669. To obtain other information, or to make inquiries about the Fund, contact the Fund at the address listed in the back of this prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated June 30, 1994 TABLE OF CONTENTS - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES 1 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 2 - ------------------------------------------------------ GENERAL INFORMATION 3 - ------------------------------------------------------ INVESTMENT INFORMATION 3 - ------------------------------------------------------ Investment Objective 3 Investment Policies 3 Acceptable Investments 3 U.S. Government Obligations 4 Corporate Debt Obligations 4 Floating Rate Corporate Debt Obligations 5 Fixed Rate Corporate Debt Obligations 5 Variable Rate Demand Notes 6 Credit Facilities 6 Asset-Backed Securities 6 Mortgage-Related Asset-Backed Securities 7 Adjustable Rate Mortgage Securities ("ARMS") 7 Collateralized Mortgage Obligations ("CMOs") 8 Real Estate Mortgage Investment Conduits ("REMICs") 8 Resets of Interest 8 Caps and Floors 9 Non-Mortgage Related Asset-Backed Securities 9 Bank Instruments 10 Foreign Securities 10 Interest Rate Swaps, Caps and Floors 11 Credit Enhancement 12 Demand Features 12 Repurchase Agreements 12 Restricted and Illiquid Securities 13 Lending of Portfolio Securities 13 When-Issued and Delayed Delivery Transactions 13 Special Considerations 14 Weighted Average Portfolio Duration 14 Investment Limitations 14 FEDERATED INCOME SECURITIES TRUST INFORMATION 15 - ------------------------------------------------------ Management of the Trust 15 Board of Trustees 15 Investment Adviser 15 Advisory Fees 15 Adviser's Background 15 Other Payments to Financial Institutions 16 Distribution of Institutional Shares 16 Administration of the Fund 16 Administrative Services 16 Shareholder Services Plan 17 Custodian 17 Transfer Agent and Dividend Disbursing Agent 17 Legal Counsel 17 Independent Auditors 17 Expenses of the Fund and Institutional Shares 17 NET ASSET VALUE 18 - ------------------------------------------------------ INVESTING IN INSTITUTIONAL SHARES 18 - ------------------------------------------------------ Share Purchases 18 By Wire 18 By Mail 18 Minimum Investment Required 19 What Shares Cost 19 Exchanging Securities for Fund Shares 19 Subaccounting Services 19 Exchange Privilege 20 Certificates and Confirmations 20 Dividends 20 Capital Gains 20 REDEEMING INSTITUTIONAL SHARES 20 - ------------------------------------------------------ Telephone Redemption 21 Written Requests 21 Signatures 21 Receiving Payment 21 Accounts with Low Balances 22 SHAREHOLDER INFORMATION 22 - ------------------------------------------------------ Voting Rights 22 Massachusetts Partnership Law 22 TAX INFORMATION 23 - ------------------------------------------------------ Federal Income Tax 23 Pennsylvania Corporate and Personal Property Taxes 23 PERFORMANCE INFORMATION 23 - ------------------------------------------------------ OTHER CLASSES OF SHARES 24 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES 25 - ------------------------------------------------------ FINANCIAL STATEMENTS 26 - ------------------------------------------------------ REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 36 - ------------------------------------------------------ ADDRESSES Inside Back Cover - ------------------------------------------------------ SUMMARY OF FUND EXPENSES--INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................................................... None Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)..................................................................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable)................................................... None Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None Exchange Fee.............................................................................................. None ANNUAL INSTITUTIONAL SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee (after waiver) (1)......................................................................... 0.00% 12b-1 Fee................................................................................................. None Total Other Expenses (after expense reimbursement)........................................................ 0.55% Shareholder Services Fee (2)................................................................. 0.00% Total Institutional Shares Operating Expenses (3)................................................ 0.55%
- --------- (1) The management fee has been reduced to reflect the voluntary waiver of the management fee. The adviser can terminate this voluntary waiver at any time at its sole discretion. The maximum management fee is 0.50%. (2) The maximum Shareholder Services Fee is 0.25%. (3) The Total Institutional Shares Operating Expenses in the table above are based on expenses expected during the fiscal year ending April 30, 1995. The Total Institutional Shares Operating Expenses were 0.00% for the fiscal year ended April 30, 1994 and were 1.40% absent the voluntary waiver of the management fee and the voluntary reimbursement of certain other operating expenses. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SHARES OF THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SHARES" AND "FEDERATED INCOME SECURITIES TRUST INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to additional fees.
EXAMPLE 1 year 3 years You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period.................................................. $6 $18
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth in the foregoing table and example relates only to Institutional Shares of the Fund. The Fund also offers another class of shares called Institutional Service Shares. Institutional Shares and Institutional Service Shares are subject to certain of the same expenses; however, Institutional Service Shares are subject to a 12b-1 fee of up to 0.25%. See "Other Classes of Shares." INTERMEDIATE INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors, on page 36.
PERIOD ENDED APRIL 30, 1994* - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 - --------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------------------------------------------------------------------------- Net investment income 0.23 - --------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (0.47) - --------------------------------------------------------------------------------------------- --------------- Total from investment operations (0.24) - --------------------------------------------------------------------------------------------- --------------- LESS DISTRIBUTIONS - --------------------------------------------------------------------------------------------- Dividends to shareholders from net investment income (0.23) - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, END OF PERIOD $ 9.53 - --------------------------------------------------------------------------------------------- --------------- TOTAL RETURN** (2.48)% - --------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------------------------------------------------------------------------- Expenses 0.00%(a) - --------------------------------------------------------------------------------------------- Net investment income 6.36%(a) - --------------------------------------------------------------------------------------------- Expense waiver/reimbursement (b) 1.40%(a) - --------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - --------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $17,702 - --------------------------------------------------------------------------------------------- Portfolio turnover rate 0% - ---------------------------------------------------------------------------------------------
* Reflects operations for the period from December 15, 1993 (date of initial public offering) to April 30, 1994. ** Based on net asset value which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) Computed on an annualized basis. (b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) GENERAL INFORMATION - -------------------------------------------------------------------------------- The Trust was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. The Trust may offer separate series of shares of beneficial interest representing interests in separate portfolios of securities. The shares in any one portfolio may be offered in separate classes. As of the date of this prospectus the Board of Trustees ("Trustees") has established two classes of shares of Intermediate Income Fund, Institutional Shares and Institutional Service Shares. This prospectus relates only to Institutional Shares ("Shares") of the Fund. A minimum initial investment of $25,000 over a 90-day period is required. Shares are currently sold and redeemed at net asset value without a sales charge imposed by the Fund. INVESTMENT INFORMATION - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE The investment objective of the Fund is current income. This investment objective cannot be changed without approval of shareholders. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. INVESTMENT POLICIES The Fund pursues its investment objective by investing in a diversified portfolio of high grade debt securities, which are securities rated in one of the three highest categories (A or better) by a nationally recognized statistical rating organization ("NRSRO")(for example, rated Aaa, Aa, or A by Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's Corporation ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch")) or if unrated, of comparable quality as determined by the Fund's adviser. If a security is subsequently downgraded, the adviser will determine whether it continues to be an acceptable investment; if not, the security will be sold. A description of the rating categories is contained in the Appendix to the Combined Statement of Additional Information. Under normal market conditions, the dollar-weighted average portfolio maturity of the Fund will be between three and ten years, and the Fund's average-weighted duration will be between three and seven years. Unless indicated otherwise, the investment policies may be changed by the Board of Trustees without the approval of shareholders. Shareholders will be notified before any material change in these investment policies becomes effective. ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed, diversified portfolio consisting of U.S. government obligations, corporate debt obligations, and asset-backed securities. The Fund may also invest in derivative instruments of such securities, including instruments with demand features or credit enhancement, as well as money market instruments. The securities in which the Fund invests are: obligations issued or guaranteed as to payment of principal and interest by the U.S. government, its agencies and instrumentalities including bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S. government agencies or instrumentalities, such as Federal Home Loan Banks, Federal National Mortgage Association, Government National Mortgage Association, Federal Farm Credit Banks, Tennessee Valley Authority, Export-Import Bank of the United States, Commodity Credit Corporation, Federal Financing Bank, The Student Loan Marketing Association, Federal Home Loan Mortgage Corporation, or National Credit Union Administration; domestic and foreign issues of corporate debt obligations (including Eurobonds, Medium Term Notes and Deposit Notes) having floating or fixed rates of interest; asset-backed securities, including mortgage-related securities; commercial paper (including Europaper and Canadian Commercial Paper) which matures in 270 days or less so long as at least two ratings are high quality ratings by an NRSRO. Such ratings would include: Prime-1 or Prime-2 by Moody's, A-1 or A-2 by Standard & Poor's, or F-1 or F-2 by Fitch; foreign currency transactions (including spot, futures, options and swaps); time and savings deposits and deposit notes and bankers acceptances (including certificates of deposit) in commercial or savings banks whose accounts are insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"), both of which are administered by the Federal Deposit Insurance Corporation ("FDIC"), including certificates of deposit issued by and other time deposits in foreign branches of FDIC insured banks or who have at least $100,000,000 in capital; and repurchase agreements collateralized by eligible investments. U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in which the Fund may invest generally include direct obligations of the U.S. Treasury (such as U.S. Treasury Bills, notes, and bonds) and obligations issued or guaranteed by U.S. government agencies or instrumentalities. These securities may be backed by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or the credit of the agency or instrumentality issuing the obligations. Examples of agencies and instrumentalities which may not always receive financial support from the U.S. government are: Federal Farm Credit Banks; Federal Home Loan Banks; The Student Loan Marketing Association; Federal Home Loan Mortgage Corporation; and Federal National Mortgage Association. CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations, including corporate bonds, notes, and debentures, which may have floating or fixed rates of interest. FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating rate corporate debt obligations, including increasing rate securities. Floating rate securities are generally offered at an initial interest rate which is at or above prevailing market rates. The interest rate paid on these securities is then reset periodically (commonly every 90 days) to an increment over some predetermined interest rate index. Commonly utilized indices include the three-month Treasury Bill rate, the 180-day Treasury Bill rate, the one-month or three-month London Interbank Offered Rate ("LIBOR"), the prime rate of a bank, the commercial paper rates, or the longer-term rates on U.S. Treasury securities. Some of the floating rate corporate debt obligations in which the Fund may invest include floating rate corporate debt securities issued by savings and loans and collateralized by adjustable rate mortgage loans, also known as collateralized thrift notes. Many of these collateralized thrift notes have received AAA ratings from recognized rating agencies. Collateralized thrift notes differ from traditional "pass through" certificates in which payments made are linked to monthly payments made by individual borrowers net of any fees paid to the issuer or guarantor of such securities. Collateralized thrift notes pay a floating interest rate which is tied to a predetermined index, such as the 180-day Treasury Bill rate. Floating rate corporate debt obligations also include securities issued to fund commercial real estate construction. Increasing rate securities, which currently do not make up a significant share of the market in corporate debt securities, are generally offered at an initial interest rate which is at or above prevailing market rates. Interest rates are reset periodically (most commonly every 90 days) at different levels on a predetermined scale. These levels of interest are ordinarily set at progressively higher increments over time. Some increasing rate securities may, by agreement, revert to a fixed rate status. These securities may also contain features which allow the issuer the option to convert the increasing rate of interest to a fixed rate under such terms, conditions, and limitations as are described in each issue's prospectus. FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed rate securities, including fixed rate securities with short-term characteristics. Fixed rate securities with short-term characteristics are long-term debt obligations but are treated in the market as having short maturities because call features of the securities may make them callable within a short period of time. A fixed rate security with short-term characteristics would include a fixed income security priced close to call or redemption price or a fixed income security approaching maturity, where the expectation of call or redemption is high. Fixed rate securities tend to exhibit more price volatility during times of rising or falling interest rates than securities with floating rates of interest. This is because floating rate securities, as described above, behave like short-term instruments in that the rate of interest they pay is subject to periodic adjustments based on a designated interest rate index. Fixed rate securities pay a fixed rate of interest and are more sensitive to fluctuating interest rates. In periods of rising interest rates the value of a fixed rate security is likely to fall. Fixed rate securities with short-term characteristics are not subject to the same price volatility as fixed rate securities without such characteristics. Therefore, they behave more like floating rate securities with respect to price volatility. VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate debt instruments that have variable or floating interest rates and provide the Fund with the right to tender the security for repurchase at its stated principal amount plus accrued interest. Such securities typically bear interest at a rate that is intended to cause the securities to trade at par. The interest rate may float or be adjusted at regular intervals (ranging from daily to annually), and is normally based on a published interest rate or interest rate index. Many variable rate demand notes allow the Fund to demand the repurchase of the security on not more than seven days prior notice. Other notes only permit the Fund to tender the security at the time of each interest rate adjustment or at other fixed intervals. See "Demand Features." CREDIT FACILITIES. Demand notes are borrowing arrangements between a corporation and an institutional lender (such as the Fund) payable upon demand by either party. The notice period for demand typically ranges from one to seven days, and the party may demand full or partial payment. Revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. As the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the facility. The Fund generally acquires a participation interest in a revolving credit facility from a bank or other financial institution. The terms of the participation require the Fund to make a pro rata share of all loans extended to the borrower and entitles the Fund to a pro rata share of all payments made by the borrower. Demand notes and revolving facilities usually provide for floating or variable rates of interest. ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of certain governmental, government related and private loans, receivables and other lender assets into pools. Interests in these pools are sold as individual securities. Payments from the asset pools may be divided into several different tranches of debt securities, with some tranches entitled to receive regular installments of principal and interest, other tranches entitled to receive regular installments of interest, with principal payable at maturity or upon specified call dates, and other tranches only entitled to receive payments of principal and accrued interest at maturity or upon specified call dates. Different tranches of securities will bear different interest rates, which may be fixed or floating. Because the loans held in the asset pool often may be prepaid without penalty or premium, asset-backed securities are generally subject to higher prepayment risks than most other types of debt instruments. Prepayment risks on mortgage securities tend to increase during periods of declining mortgage interest rates, because many borrowers refinance their mortgages to take advantage of the more favorable rates. Depending upon market conditions, the yield that the Fund receives from the reinvestment of such prepayments, or any scheduled principal payments, may be lower than the yield on the original mortgage security. As a consequence, mortgage securities may be a less effective means of "locking in" interest rates than other types of debt securities having the same stated maturity and may also have less potential for capital appreciation. For certain types of asset pools, such as collateralized mortgage obligations, prepayments may be allocated to one tranche of securities ahead of other tranches, in order to reduce the risk of prepayment for the other tranches. Prepayments may result in a capital loss to the Fund to the extent that the prepaid mortgage securities were purchased at a market premium over their stated amount. Conversely, the prepayment of mortgage securities purchased at a market discount from their stated principal amount will accelerate the recognition of interest income by the Fund, which would be taxed as ordinary income when distributed to the shareholders. The credit characteristics of asset-backed securities also differ in a number of respects from those of traditional debt securities. The credit quality of most asset-backed securities depends primarily upon the credit quality of the assets underlying such securities, how well the entity issuing the securities is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement to such securities. MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in various mortgage-related asset-backed securities. These types of investments may include adjustable rate mortgage securities, collateralized mortgage obligations, real estate mortgage investment conduits, or other securities collateralized by or representing an interest in real estate mortgages (collectively, "mortgage securities"). Mortgage securities are: (i) issued or guaranteed by the U.S. government or one of its agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; (iii) those issued by private issuers that represent an interest in or are collateralized by whole loans or mortgage-backed securities without a government guarantee but usually having some form of private credit enhancement; and (iv) privately issued securities which are collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government. The privately issued mortgage-related securities provide for a periodic payment consisting of both interest and principal. The interest portion of these payments will be distributed by the Fund as income, and the capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage securities representing interests in adjustable rather than fixed interest rate mortgages. Typically, the ARMS in which the Fund may invest are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be collateralized by whole loans or private pass-through securities. The underlying mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are typically conventional residential mortgages conforming to strict underwriting size and maturity constraints. Unlike conventional bonds, ARMS pay back principal over the life of the ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly scheduled payments of principal and/or interest and may receive unscheduled principal payments representing payments on the underlying mortgages. At the time that a holder of the ARMS reinvests the payments and any unscheduled prepayments of principal that it receives, the holder may receive a rate of interest which is actually lower than the rate of interest paid on the existing ARMS. As a consequence, ARMS may be a less effective means of "locking in" long-term interest rates than other types of fixed-income securities. Not unlike other fixed-income securities, the market value of ARMS will generally vary inversely with changes in market interest rates. Thus, the market value of ARMS generally declines when interest rates rise and generally rises when interest rates decline. While ARMS generally entail less risk of a decline during periods of rapidly rising rates, ARMS may also have less potential for capital appreciation than other similar investments (e.g., investments with comparable maturities) because, as interest rates decline, the likelihood increases that mortgages will be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal payments may result in some loss of a holder's principal investment to the extent of the premium paid. Conversely, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal would increase current and total returns and would accelerate the recognition of income, which would be taxed as ordinary income when distributed to shareholders. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but may be collateralized by whole loans or private pass-through securities. The CMOs in which the Fund may invest may be: (a) collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government; (b) collateralized by pools of mortgages in which payment of principal and interest is guaranteed by the issuer and such guarantee is collateralized by U.S. government securities; or (c) collateralized by pools of mortgages without a government guarantee as to payment of principal and interest, but which have some form of credit enhancement. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the Fund may invest are offerings of multiple class real estate mortgage-backed securities which qualify and elect treatment as such under provisions of the Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts, partnerships, corporations, associations, or segregated pools of mortgages. Once REMIC status is elected and obtained, the entity is not subject to federal income taxation. Instead, income is passed through the entity and is taxed to the person or persons who hold interests in the REMIC. A REMIC interest must consist of one or more classes of "regular interests," some of which may offer adjustable rates of interest, and a single class of "residual interests." To qualify as a REMIC, substantially all the assets of the entity must be in assets directly or indirectly secured principally by real property. RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and REMICs in which the Fund may invest will be readjusted at intervals of one year or less to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month LIBOR, the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to have somewhat less volatile interest rates. To the extent that the adjusted interest rate on the mortgage security reflects current market rates, the market value of an adjustable rate mortgage security will tend to be less sensitive to interest rate changes than a fixed rate debt security of the same stated maturity. Hence, adjustable rate mortgage securities which use indices that lag changes in market rates should experience greater price volatility than adjustable rate mortgage securities that closely mirror the market. Certain residual interest tranches of CMOs may have adjustable interest rates that deviate significantly from prevailing market rates, even after the interest rate is reset, and are subject to correspondingly increased price volatility. In the event that the Fund purchases such residual interest mortgage securities, it will factor in the increased interest and price volatility of such securities when determining its dollar-weighted average portfolio maturity and duration. CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which the Fund may invest will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage securities in which the Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage securities in which the Fund invests to be shorter than the maturities stated in the underlying mortgages. NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in non-mortgage related asset-backed securities, including interests in pools of receivables, such as credit card and accounts receivable and motor vehicle and other installment purchase obligations and leases. These securities may be in the form of pass-through instruments or asset-backed obligations. The securities are structured similarly to collateralized mortgage obligations and mortgage pass-through securities, which are described above. Also, these securities may be issued either by non- governmental entities and carry no direct or indirect governmental guarantees, or by governmental entities (i.e., Small Business Administration) and carry varying degrees of governmental support. Non-mortgage related asset backed securities have structural characteristics similar to mortgage-related asset-backed securities but have underlying assets that are not mortgage loans or interests in mortgage loans. The Fund may invest in non-mortgage related asset-backed securities including, but not limited to, interests in pools of receivables, such as motor vehicle installment purchase obligations and credit card receivables. These securities may be in the form of pass-through instruments or asset-backed bonds. The securities are issued by non-governmental entities and carry no direct or indirect government guarantee. Mortgage-backed and asset-backed securities generally pay back principal and interest over the life of the security. At the time the Fund reinvests the payments and any unscheduled prepayments of principal received, the Fund may receive a rate of interest which is actually lower than the rate of interest paid on these securities ("prepayment risks"). Although non-mortgage related asset-backed securities generally are less likely to experience substantial prepayments than are mortgage-related asset-backed securities, certain of the factors that affect the rate of prepayments on mortgage-related asset-backed securities also affect the rate of prepayments on non-mortgage related asset-backed securities. Non-mortgage related asset-backed securities present certain risks that are not presented by mortgage-related asset-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of asset-backed securities backed by motor vehicle installment purchase obligations permit the servicer of such receivables to retain the possession of the underlying obligations. If the servicer sells these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset- backed securities. Further, if a vehicle is registered in one state and is then reregistered because the owner and obligor moves to another state, such registration could defeat the original security interest in the vehicle in certain cases. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an institution having capital, surplus and undivided profits over $100 million or insured by BIF or SAIF. Bank Instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits ("ETDs"). FOREIGN SECURITIES. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper, Eurobonds and Europaper are subject to somewhat different risks than domestic obligations of domestic issuers. Examples of these risks include international, economic and political developments, foreign governmental restrictions that may adversely affect the payment of principal or interest, foreign withholdings or other taxes on interest income, difficulties in obtaining or enforcing a judgment against the issuing bank, and the possible impact of interruptions of the flow of international currency transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject to the same regulatory requirements that apply to domestic banks, such as reserve requirements, loan requirements, loan limitations, examinations, accounting, auditing, and record keeping and the public availability of information. These factors will be carefully considered by the Fund's adviser in selecting investments for the Fund. INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate swaps and may purchase or sell (i.e., write) interest rate caps and floors. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed-rate payments) on a notional principal amount. The principal amount of an interest rate swap is notional in that it only provides the basis for determining the amount of interest payments under the swap agreement, and does not represent an actual loan. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate on $10 million principal amount in exchange for the right to receive the equivalent of a fixed rate of interest on $10 million principal amount. Neither party to the swap would actually advance $10 million to the other. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of the amount of excess interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of the amount of the interest shortfall on a notional principal amount from the party selling the interest rate floor. The Fund expects to enter into interest rate transactions primarily to hedge against changes in the price of other portfolio securities. For example, the Fund may hedge against changes in the market value of a fixed rate note by entering into a concurrent swap that requires the Fund to pay the same or a lower fixed rate of interest on a notional principal amount equal to the principal amount of the note in exchange for a variable rate of interest based on a market index. Interest accrued on the hedged note would then equal or exceed the Fund's obligations under the swap, while changes in the market value of the swap would largely offset any changes in the market value of the note. The Fund may also enter into swaps and caps to preserve or enhance a return or spread on a portfolio security. The Fund does not intend to use these transactions in a speculative manner. The Fund will usually enter into interest rate swaps on a net basis (i.e., the two payment streams are netted out), with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and the Fund will segregate liquid assets in an aggregate net asset value at least equal to the accrued excess, if any, on each business day. If the Fund enters into an interest rate swap on other than a net basis, the Fund will segregate liquid assets in the full amount accrued on a daily basis of the Fund's obligations with respect to the swap. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. The Fund's investment adviser has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent interest rate swaps, caps or floors are determined by the investment adviser to be illiquid, they will be included in the Fund's limitation on investments in illiquid securities. To the extent the Fund sells caps and floors, it will maintain in a segregated account cash and/or U.S. government securities having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Fund's obligations with respect to the caps or floors. The use of interest rate swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Fund's investment adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these investment techniques were not utilized. Moreover, even if the Fund's investment adviser is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the portfolio security being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to a default on an interest rate swap is limited to the net asset value of the swap together with the net amount of interest payments owed to the Fund by the defaulting party. A default on a portfolio security hedged by an interest rate swap would also expose the Fund to the risk of having to cover its net obligations under the swap with income from other portfolio securities. The Fund may purchase and sell caps and floors without limitation, subject to the segregated account requirement described above. CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been credit enhanced by a guaranty, letter of credit or insurance. The Fund typically evaluates the credit quality and ratings of credit enhanced securities based upon the financial condition and ratings of the party providing the credit enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund will not treat credit enhanced securities as having been issued by the credit enhancer for diversification purposes. However, under certain circumstances applicable regulations may require the Fund to treat the securities as having been issued by both the issuer and the credit enhancer. The bankruptcy, receivership or default of the credit enhancer will adversely affect the quality and marketability of the underlying security. DEMAND FEATURES. The Fund may acquire securities that are subject to puts and standby commitments ("demand features") to purchase the securities at their principal amount (usually with accrued interest) within a fixed period following a demand by the Fund. The demand feature may be issued by the issuer of the underlying securities, a dealer in the securities or by another third party, and may not be transferred separately from the underlying security. The Fund uses these arrangements to provide the Fund with liquidity and not to protect against changes in the market value of the underlying securities. The bankruptcy, receivership or default by the issuer of the demand feature, or a default on the underlying security or other event that terminates the demand feature before its exercise, will adversely affect the liquidity of the underlying security. Demand features that are exercisable even after a payment default on the underlying security are treated as a form of credit enhancement. REPURCHASE AGREEMENTS. Certain of the securities in which the Fund invests may be purchased pursuant to repurchase agreements. Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or other securities to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. The Fund or its custodian will take possession of the securities subject to repurchase agreements and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions, such as broker/dealers, which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Trustees. RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may otherwise invest pursuant to its investment objective and policies, but which are subject to restriction on resale under federal securities law. The Fund will limit investments in illiquid securities, including certain restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, certain interest rate swaps, caps and floors determined by the Fund's investment adviser to be illiquid, and repurchase agreements providing for settlement in more than seven days after notice, to 15% of the value of its net assets. The Fund may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to disposition under federal securities law and is generally sold to institutional investors, such as the Fund, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(2) commercial paper is normally resold to other institutional investors like the Fund through or with the assistance of the issuer or investment dealers who make a market in Section 4(2) commercial paper, thus providing liquidity. The Fund believes that Section 4(2) commercial paper and possibly certain other restricted securities which meet the criteria for liquidity established by the Trustees are quite liquid. The Fund intends, therefore, to treat the restricted securities which meet the criteria for liquidity established by the Trustees, including Section 4(2) commercial paper, as determined by the Fund's investment adviser, as liquid and not subject to the investment limitation applicable to illiquid securities. In addition, because Section 4(2) commercial paper is liquid, the Fund intends to not subject such paper to the limitation applicable to restricted securities. LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the Fund may lend portfolio securities on a short-term or a long-term basis, or both, up to one-third of the value of its total assets to broker/dealers, banks, or other institutional borrowers of securities. The Fund will only enter into loan arrangements with broker/dealers, banks, or other institutions which the investment adviser has determined are creditworthy under guidelines established by the Trustees. In these loan arrangements, the Fund will receive collateral in the form of cash or U.S. government securities equal to at least 100% of the value of the securities loaned. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. Accordingly, the Fund may pay more/less than the market value of the securities on the settlement date. SPECIAL CONSIDERATIONS In the debt market, prices move inversely to interest rates. A decline in market interest rates results in a rise in the market prices of outstanding debt obligations. Conversely, an increase in market interest rates results in a decline in market prices of outstanding debt obligations. In either case, the amount of change in market prices of debt obligations in response to changes in market interest rates generally depends on the maturity of the debt obligations: the debt obligations with the longest maturities will experience the greatest market price changes. The market value of debt obligations, and therefore the Fund's net asset value, will fluctuate due to changes in economic conditions and other market factors such as interest rates which are beyond the control of the Fund's investment adviser. The Fund's investment adviser could be incorrect in its expectations about the direction or extent of these market factors. Although debt obligations with longer maturities offer potentially greater returns, they have greater exposure to market price fluctuation. Consequently, to the extent the Fund is significantly invested in debt obligations with longer maturities, there is a greater possibility of fluctuation in the Fund's net asset value. WEIGHTED AVERAGE PORTFOLIO DURATION Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Duration measures the magnitude of the change in the price of a debt security relative to a given change in the market rate of interest. The duration of a debt security depends upon three primary variables: the security's coupon rate, maturity date and the level of market interest rates for similar debt securities. Generally, debt securities with lower coupons or longer maturities will have a longer duration than securities with higher coupons or shorter maturities. For purposes of calculating its dollar-weighted average portfolio duration, the Fund will treat variable and floating rate instruments as having a remaining duration commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. INVESTMENT LIMITATIONS The Fund will not: borrow money directly or through reverse repurchase agreements or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 15% of the value of its total assets to secure such borrowings; with respect to 75% of its assets, invest more than 5% of the value of its total assets in securities of one issuer (except U.S. government obligations), or purchase more than 10% of the outstanding voting securities of any one issuer. The above investment limitations cannot be changed without shareholder approval. The following limitation however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change if this limitation becomes effective. The Fund will not: invest more than 15% of the value of its net assets in illiquid securities, including repurchase agreements providing for settlement more than seven days after notice, non-negotiable time deposits, certain interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and certain restricted securities not determined by the Trustees to be liquid. FEDERATED INCOME SECURITIES TRUST INFORMATION - -------------------------------------------------------------------------------- MANAGEMENT OF THE TRUST BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The Executive Committee of the Board of Trustees handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust, investment decisions for the Fund are made by Federated Management, the Fund's investment adviser (the "Adviser"), subject to direction by the Trustees. The Adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES. The Fund's Adviser receives an annual investment advisory fee equal to .50 of 1% of the Fund's average daily net assets. Under the investment advisory contract, the Adviser may voluntarily reimburse some of the operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement of expenses at any time in its sole discretion. The Adviser has also undertaken to reimburse the Fund for operating expenses in excess of limitations established by certain states. ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the Class A (voting) shares of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated Investors. Federated Management and other subsidiaries of Federated Investors serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. Total assets under management or administration by these and other subsidiaries of Federated Investors are approximately $70 billion. Federated Investors, which was founded in 1956 as Federated Investors, Inc., develops and manages mutual funds primarily for the financial industry. Federated Investors' track record of competitive performance and its disciplined, risk averse investment philosophy serve approximately 3,500 client institutions nationwide. Through these same client institutions, individual shareholders also have access to this same level of investment expertise. Joseph M. Balestrino has been the Fund's co-portfolio manager since January, 1994. Mr Balestrino joined Federated Investors in 1986 and has been an Assistant Vice President of the Fund's investment adviser since 1991. Mr. Balestrino served as an Investment Analyst of the investment adviser from 1989 until 1991, and from 1986 until 1989 he acted as Project Manager in the Product Development Department. Mr. Balestrino is a Chartered Financial Analyst and received his M.A. in Urban and Regional Planning from the University of Pittsburgh. Susan M. Nason has been the Fund's co-portfolio manager since the Fund's inception. Ms. Nason joined Federated Investors in 1987 and has been a Vice President of the Fund's investment adviser since January, 1993. Ms. Nason served as an Assistant Vice President of the investment adviser from 1990 until 1992, and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in Finance from Carnegie Mellon University. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to financial institutions under the Shareholder Services Plan, certain financial institutions may be compensated by the Adviser or its affiliates for the continuing investment of customers' assets in certain funds, including the Fund, advised by those entities. These payments will be made directly by the distributor or Adviser from their assets, and will not be made from the assets of the Fund or by the assessment of a sales charge on Shares. Furthermore, the distributor may offer to pay a fee from its own assets to financial institutions as financial assistance for providing substantial marketing and sales support. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of Shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. DISTRIBUTION OF INSTITUTIONAL SHARES Federated Securities Corp. is the principal distributor for shares of the Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Administrative Services provides these at an annual rate which relates to the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors ("Federated Funds") as specified below:
AVERAGE AGGREGATE DAILY NET ASSETS MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS 0.15 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.10 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Administrative Services may choose voluntarily to waive a portion of its fee. SHAREHOLDER SERVICES PLAN. The Trust has adopted a Shareholder Services Plan (the "Services Plan") under which it may make payments up to 0.25 of 1% of the average daily net asset value of Shares to obtain certain personal services for shareholders and the maintenance of shareholder accounts ("shareholder services"). The Trust has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, under which Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon Shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Trust and Federated Shareholder Services. CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston, Massachusetts, is custodian for the securities and cash of the Fund. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, Boston, Massachusetts, a subsidiary of Federated Investors, is transfer agent for the Shares of the Fund and dividend disbursing agent for the Fund. LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington, D.C. INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young, Pittsburgh, Pennsylvania. EXPENSES OF THE FUND AND INSTITUTIONAL SHARES Holders of Shares pay their allocable portion of Fund and Trust expenses. The Trust expenses for which holders of Shares pay their allocable portion include, but are not limited to: the cost of organizing the Trust and continuing its existence; registering the Trust with federal and state securities authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees; legal fees of the Trust; association membership dues; and such non-recurring and extraordinary items as may arise. The Fund expenses for which holders of Shares pay their allocable portion include, but are not limited to: registering the Fund and Shares of the Fund; investment advisory services; taxes and commissions; custodian fees; insurance premiums; auditors' fees; shareholder services; and such non-recurring and extraordinary items as may arise. At present, the only expenses allocated to shares as a class are expenses under the Fund's 12b-1 Plan which only relates to the Institutional Service Shares. However, the Trustees reserve the right to allocate certain other expenses to holders of Shares as they deem appropriate ("Class Expenses"). In any case, Class Expenses would be limited to: transfer agent fees as identified by the transfer agent as attributable to holders of Shares; printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses and proxies to current shareholders; registration fees paid to the Securities and Exchange Commission and registration fees paid to state securities commissions; expenses related to administrative personnel and services as required to support holders of Shares; legal fees relating solely to Shares; and Trustees' fees incurred as a result of issues relating solely to Shares. NET ASSET VALUE - -------------------------------------------------------------------------------- The Fund's net asset value per share fluctuates. The net asset value for Shares is determined by adding the interest of the Shares in the market value of all securities and other assets of the Fund, subtracting the interest of the Shares in the liabilities of the Fund and those attributable to Shares, and dividing the remainder by the total number of Shares outstanding. The net asset value for Shares will exceed that of Institutional Service Shares due to the variance in daily net income realized by each class. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. INVESTING IN INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- SHARE PURCHASES Shares are sold on days on which the New York Stock Exchange is open. Shares may be purchased either by wire or mail. To purchase Shares of the Fund, open an account by calling Federated Securities Corp. Information needed to establish the account will be taken over the telephone. The Fund reserves the right to reject any purchase request. BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund before 4:00 p.m. (Eastern time) to place an order. The order is considered received immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the next business day following the order. Federal funds should be wired as follows: Federated Services Company, c/o State Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Intermediate Income Fund--Institutional Shares; Fund Number (this number can be found on the account statement or by contacting the Fund); Group Number or Order Number; Nominee or Institution Name; ABA Number 011000028. BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to Intermediate Income Fund--Institutional Shares to the Fund's transfer agent, Federated Services Company, P.O. Box 8602, Boston, Massachusetts 02266-8602. Orders by mail are considered received after payment by check is converted by the transfer agent's bank, State Street Bank, into federal funds. This is normally the next business day after State Street Bank receives the check. MINIMUM INVESTMENT REQUIRED The minimum initial investment in shares is $25,000 plus any non-affiliated bank or broker's fee. However, an account may be opened with a smaller amount as long as the $25,000 minimum is reached within 90 days. An institutional investor's minimum investment will be calculated by combining all accounts it maintains with the Fund. Accounts established through a non-affiliated bank or broker may be subject to a smaller minimum investment. WHAT SHARES COST Shares are sold at their net asset value next determined after an order is received. There is no sales charge imposed by the Fund. Investors who purchase Shares through a non-affiliated bank or broker may be charged an additional service fee by that bank or broker. The net asset value is determined at 4:00 p.m. (Eastern time), Monday through Friday, except on: (i) days on which there are not sufficient changes in the value of the Fund's portfolio securities that its net asset value might be materially affected; (ii) days during which no Shares are tendered for redemption and no orders to purchase Shares are received; and (iii) the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. EXCHANGING SECURITIES FOR FUND SHARES The Fund may accept securities in exchange for Fund Shares. The Fund will allow such exchanges only upon the prior approval of the Fund and a determination by the Fund and the Adviser that the securities to be exchanged are acceptable. Any securities exchanged must meet the investment objective and policies of the Fund, must have a readily ascertainable market value, and must be liquid. The market value of any securities exchanged in an initial investment, plus any cash, must be at least equal to the minimum investment in the Fund. The Fund acquires the exchanged securities for investment and not for resale. Securities accepted by the Fund will be valued in the same manner as the Fund values its assets. The basis of the exchange will depend on the net asset value of Fund shares on the day the securities are valued. One share of the Fund will be issued for the equivalent amount of securities accepted. Any interest earned on the securities prior to the exchange will be considered in valuing the securities. All interest, dividends, subscription or other rights attached to the securities become the property of the Fund, along with the securities. If an exchange is permitted, it will be treated as a sale for federal income tax purposes. Depending upon the cost basis of the securities exchanged for Fund shares, a gain or loss may be realized by the investor. SUBACCOUNTING SERVICES Institutions are encouraged to open single master accounts. However, certain institutions may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent charges a fee based on the level of subaccounting services rendered. Institutions holding Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services provided which may be related to the ownership of Shares. This prospectus should, therefore, be read together with any agreement between the customer and the institution with regard to the services provided, the fees charged for those services, and any restrictions and limitations imposed. EXCHANGE PRIVILEGE Shares in certain Federated Funds which are advised by subsidiaries or affiliates of Federated Investors may be exchanged for Shares at net asset value (plus a sales charge, if applicable). The ability to exchange shares is available to shareholders residing in any state in which the shares being acquired may be legally sold and the exchange is subject to any initial or subsequent investment amounts of the fund being acquired. Prior to any exchange, the shareholder must receive a copy of the current prospectus of the fund or class thereof into which an exchange is to be effected. A shareholder may obtain further information on the exchange privilege by calling Federated Securities Corp. or the shareholder's financial institution. CERTIFICATES AND CONFIRMATIONS As transfer agent for the Fund, Federated Services Company maintains a Share account for each shareholder. Share certificates are not issued unless requested by contacting the Fund. Detailed confirmations of each purchase or redemption are sent to each shareholder. Monthly confirmations are sent to report dividends paid during the month. DIVIDENDS Dividends are declared daily and paid monthly. Dividends are declared just prior to determining net asset value. If an order for Shares is placed on the preceding business day, Shares purchased by wire begin earning dividends on the business day wire payment is received by Federated Services Company. If the order for Shares and payment by wire are received on the same day, Shares begin earning dividends on the next business day. Shares purchased by check begin earning dividends on the business day after the check is converted upon instruction of the transfer agent into federal funds. Dividends are automatically reinvested on payment dates in additional Shares of the Fund unless cash payments are requested by contacting the Fund. CAPITAL GAINS Capital gains realized by the Fund, if any, will be distributed at least once every 12 months. REDEEMING INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at their net asset value next determined after the Fund receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests must be received in proper form and can be made by telephone request or by written request. TELEPHONE REDEMPTION Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m. (Eastern time). The proceeds will normally be wired the following business day, but in no event more than seven days, to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System. If at any time the Fund shall determine it is necessary to terminate or modify this method of redemption, shareholders would be promptly notified. An authorization form permitting the Fund to accept telephone requests must first be completed. Authorization forms and information on this service are available from Federated Securities Corp. Telephone redemption instructions may be recorded. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming by telephone. If such a case should occur, another method of redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS Shares may also be redeemed by sending a written request to the Fund. Call the Fund for specific instructions before redeeming by letter. The shareholder will be asked to provide in the request his or her name, the Fund name and class name, the shareholder's account number, and the share or dollar amount requested. If Share certificates have been issued, they must be properly endorsed and should be sent by registered or certified mail with the written request. SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable other than to the shareholder of record must have signatures on written redemption requests guaranteed by: a trust company or commercial bank whose deposits are insured by the BIF, which is administered by the FDIC; a member of the New York, American, Boston, Midwest, or Pacific Stock Exchanges; a savings bank or savings and loan association whose deposits are insured by the SAIF, which is adminstered by the FDIC; or any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. The Fund and its transfer agent have adopted standards for accepting signature guarantees from the above institutions. The Fund may elect in the future to limit eligible signature guarantors to institutions that are members of a signature guarantee program. The Fund and its transfer agent reserve the right to amend these standards at any time without notice. RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request, provided that the transfer agent has received payment for the Shares from the shareholder. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem Shares in any account and pay the proceeds to the shareholder if the account balance falls below a required minimum value of $25,000 due to shareholder redemptions. This requirement does not apply, however, if the balance falls below $25,000 because of changes in the Fund's net asset value. Before Shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional Shares to meet the minimum requirement. SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- VOTING RIGHTS Each Share of the Fund gives the shareholder one vote in Trustee elections and other matters submitted to shareholders of the Trust for vote. All shares of each portfolio in the Trust have equal voting rights, except that, in matters affecting only a particular fund or class, only shares of that particular Fund or class are entitled to vote. As of June 3, 1994, First National Bank & Trust, Escanaba, Michigan, owned 38.47% of the Institutional Shares of the Fund, and, therefore, may, for certain purposes, be deemed to control the Fund and be able to affect the outcome of certain matters presented for a vote of shareholders. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will be sought only for certain changes in the Trust's or the Fund's operation and for the election of Trustees under certain circumstances. Trustees may be removed by the Trustees or by a two-thirds vote of the shareholders at a special meeting. A special meeting of shareholders shall be called by the Trustees upon the written request of shareholders owning at least 10% of the Trust's outstanding shares of all portfolios entitled to vote. MASSACHUSETTS PARTNERSHIP LAW Under certain circumstances, shareholders may be held personally liable as partners under Massachusetts law for acts or obligations of the Trust. To protect shareholders, the Trust has filed legal documents with Massachusetts that expressly disclaim the liability of shareholders for acts or obligations of the Trust. These documents require notice of this disclaimer to be given in each agreement, obligation, or instrument the Trust or its Trustees enter into or sign. In the unlikely event a shareholder is held personally liable for the Trust's obligations, the Trust is required by the Declaration of Trust to use its property to protect or compensate the shareholder. On request, the Trust will defend any claim made and pay any judgment against a shareholder for any act or obligation of the Trust. Therefore, financial loss resulting from liability as a shareholder will occur only if the Trust cannot meet its obligations to indemnify shareholders and pay judgments against them from its assets. TAX INFORMATION - -------------------------------------------------------------------------------- FEDERAL INCOME TAX The Fund will pay no federal income tax because the Fund expects to meet requirements of the Internal Revenue Code, as amended, applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. The Fund will be treated as a single, separate entity for federal income tax purposes so that income (including capital gains) and losses realized by the Trust's other portfolios, if any, will not be combined for tax purposes with those realized by the Fund. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions received. This applies whether dividends and distributions are received in cash or as additional shares. Information on the tax status of dividends and distributions is provided annually. There are tax uncertainties with respect to whether increasing rate securities will be treated as having an original issue discount. If it is determined that the increasing rate securities have original issue discount, a holder will be required to include as income in each taxable year, in addition to interest paid on the security for that year, an amount equal to the sum of the daily portions of original issue discount for each day during the taxable year that such holder holds the security. There may also be tax uncertainties with respect to whether an extension of maturity on an increasing rate note will be treated as a taxable exchange. In the event it is determined that an extension of maturity is a taxable exchange, a holder will recognize a taxable gain or loss, which will be a short-term capital gain or loss if he holds the security as a capital asset, to the extent that the value of the security with an extended maturity differs from the adjusted basis of the security deemed exchanged therefor. PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES In the opinion of Houston, Houston & Donnelly, counsel to the Trust: The Trust is not subject to Pennsylvania corporate or personal property taxes; and Fund shares may be subject to personal property taxes imposed by counties, municipalities, and school districts in Pennsylvania to the extent that the portfolio securities in the Fund would be subject to such taxes if owned directly by residents of those jurisdictions. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local laws. PERFORMANCE INFORMATION - -------------------------------------------------------------------------------- From time to time, the Fund advertises its total return and yield for Institutional Shares. Total return represents the change, over a specified period of time, in the value of an investment in Institutional Shares after reinvesting all income and capital gains distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of Institutional Shares is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by Institutional Shares over a thirty-day period by the maximum offering price per share of Institutional Shares on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by Institutional Shares and, therefore, may not correlate to the dividends or other distributions paid to shareholders. Total return and yield will be calculated separately for Institutional Shares and Institutional Service Shares. Because Institutional Service Shares are subject to 12b-1 fees, total return and yield of Institutional Shares, for the same period, will exceed that of Institutional Service Shares. From time to time, the Fund may advertise its performance using certain financial publications and/or compare its performance to certain indices. OTHER CLASSES OF SHARES - -------------------------------------------------------------------------------- Institutional Service Shares are sold primarily to banks and other institutions that hold assets in an agency capacity. Institutional Service Shares are sold at net asset value. Investments in Institutional Service Shares are subject to a minimum initial investment of $25,000. Institutional Service Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust whereby the distributor is paid a fee of up to .25 of 1% of the Institutional Service Shares' average net assets. Financial institutions and brokers providing sales and/or administrative services may receive different compensation from one class of shares than from another class of shares. The amount of dividends payable to Institutional Shares will exceed that of Institutional Service Shares by the difference between Class Expenses and distribution and shareholder services expenses borne by shares of each respective class. The stated advisory fee is the same for both classes of the Fund. INTERMEDIATE INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors, on page 36.
PERIOD ENDED APRIL 30, 1994* - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 - --------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------------------------------------------------------------------------- Net investment income 0.22 - --------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (0.47) - --------------------------------------------------------------------------------------------- --------------- Total from investment operations (0.25) - --------------------------------------------------------------------------------------------- --------------- LESS DISTRIBUTIONS - --------------------------------------------------------------------------------------------- Dividends to shareholders from net investment income (0.22) - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, END OF PERIOD $ 9.53 - --------------------------------------------------------------------------------------------- --------------- TOTAL RETURN** (2.57)% - --------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------------------------------------------------------------------------- Expenses 0.25%(a) - --------------------------------------------------------------------------------------------- Net investment income 6.12%(a) - --------------------------------------------------------------------------------------------- Expense waiver/reimbursement (b) 1.40%(a) - --------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - --------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $225 - --------------------------------------------------------------------------------------------- Portfolio turnover rate 0% - ---------------------------------------------------------------------------------------------
* Reflects operations for the period from December 15, 1993 (date of initial public offering) to April 30, 1994. ** Based on net asset value which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) Computed on an annualized basis. (b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) INTERMEDIATE INCOME FUND PORTFOLIO OF INVESTMENTS APRIL 30, 1994 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE - ------------- ----------------------------------------------------------------------------------- -------------- ASSET-BACKED SECURITIES--15.4% - -------------------------------------------------------------------------------------------------- BANKING--7.5% ----------------------------------------------------------------------------------- $ 300,000 American Express Master Trust, 1993-1, Class A, 5.375%, 7/15/2001 $ 270,549 ----------------------------------------------------------------------------------- 200,000 First Chicago Master Trust,1990-A, Class A, 9.25%, 6/15/95 208,658 ----------------------------------------------------------------------------------- 150,000 First Chicago Master Trust, 1991-D, Class A, 8.40%, 6/15/98 156,048 ----------------------------------------------------------------------------------- 350,000 Signet Credit Card Trust, 1993-1, Class B, 5.40%, 2/15/2002 326,546 ----------------------------------------------------------------------------------- 400,000 Standard Credit Card Master Trust, 1993-1, Class B, 5.50%, 9/7/98 382,736 ----------------------------------------------------------------------------------- -------------- Total 1,344,537 ----------------------------------------------------------------------------------- -------------- HOME EQUITY RECEIVABLES--1.6% ----------------------------------------------------------------------------------- 280,987 TMS Home Equity Loan Trust 1993-B, Class A, 6.90%, 7/15/2007 279,374 ----------------------------------------------------------------------------------- -------------- NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--6.3% ----------------------------------------------------------------------------------- 400,000 Prudential Bache CMO, Series 8, Class F, 7.965%, 3/1/2019 396,136 ----------------------------------------------------------------------------------- 500,000 Residential Funding Mortgage Securities, Inc. Series 1993-S26, Class A-10, 7.50%, 7/25/2023 485,690 ----------------------------------------------------------------------------------- 300,000 Residential Funding Mortgage Securities, Inc. Series 1993-S31, Class A-7, 7.00%, 9/25/2023 253,830 ----------------------------------------------------------------------------------- -------------- Total 1,135,656 ----------------------------------------------------------------------------------- -------------- TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $2,918,984) 2,759,567 ----------------------------------------------------------------------------------- -------------- CORPORATE BONDS--57.2% - -------------------------------------------------------------------------------------------------- BANKING & FINANCE--18.6% ----------------------------------------------------------------------------------- 900,000 Bank of Montreal, Note, 6.10%, 9/15/2005 784,278 ----------------------------------------------------------------------------------- 500,000 Bank One, Milwaukee, Note, 6.625%, 4/15/2003 467,890 ----------------------------------------------------------------------------------- 1,100,000 Credit Lyonnais, Sub. Floating Rate Note, 5.00%, 7/19/94\ 1,098,625 ----------------------------------------------------------------------------------- 200,000 Meridian Bank, Reading, Note, 6.625%, 3/15/2003 184,004 ----------------------------------------------------------------------------------- 100,000 Northern Trust Corp., Note, 9.125%, 8/1/94 100,952 ----------------------------------------------------------------------------------- 150,000 Norwest Financial, Inc., Note, 6.875%, 12/15/99 147,886 ----------------------------------------------------------------------------------- 400,000 PNC Funding Corp., Note, 6.875%, 3/1/2003 379,248 ----------------------------------------------------------------------------------- 200,000 U.S. Bancorp., Note, 7.00%, 3/15/2003 188,366 ----------------------------------------------------------------------------------- -------------- Total 3,351,249 ----------------------------------------------------------------------------------- -------------- BROADCASTING--2.9% ----------------------------------------------------------------------------------- 500,000 CBS, Inc., Sr. Deb., 8.875%, 6/1/2022 521,370 ----------------------------------------------------------------------------------- -------------- CONSUMER PRODUCTS--3.1% ----------------------------------------------------------------------------------- 200,000 Eastman Kodak Co., 9.20%, 1/15/95 204,862 ----------------------------------------------------------------------------------- 150,000 Eastman Kodak Co., 9.125%, 3/1/98 154,372 ----------------------------------------------------------------------------------- 200,000 Philip Morris Cos., Inc., Note, 8.25%, 10/15/2003 204,558 ----------------------------------------------------------------------------------- -------------- Total 563,792 ----------------------------------------------------------------------------------- -------------- ECOLOGICAL SERVICES--2.8% ----------------------------------------------------------------------------------- 500,000 Waste Management Inc., 6.375%, 7/1/97 498,720 ----------------------------------------------------------------------------------- -------------- FINANCE--6.2% ----------------------------------------------------------------------------------- 100,000 Ford Capital Bv, Note, 9.00%, 8/15/98 106,820 ----------------------------------------------------------------------------------- 200,000 General Motors Acceptance Corp., 9.40%, 5/18/95 207,242 ----------------------------------------------------------------------------------- 105,000 Household Finance Corp., Note, 8.875%, 7/5/99 110,369 ----------------------------------------------------------------------------------- 140,000 Household Finance Corp., Note, 8.95%, 9/15/99 151,112 ----------------------------------------------------------------------------------- 200,000 ITT Financial Corp., Note, 8.125%, 11/15/98 206,516 ----------------------------------------------------------------------------------- 300,000 Texaco Capital, Inc., Note, 9.00%, 12/15/99 323,643 ----------------------------------------------------------------------------------- -------------- Total 1,105,702 ----------------------------------------------------------------------------------- -------------- OIL & GAS--1.7% ----------------------------------------------------------------------------------- 200,000 B.P. America, Inc., Note, 7.875%, 5/15/2002 205,528 ----------------------------------------------------------------------------------- 100,000 Sun, Inc., Note, 7.95%, 12/15/2001 101,062 ----------------------------------------------------------------------------------- -------------- Total 306,590 ----------------------------------------------------------------------------------- -------------- SOVEREIGN GOVERNMENT--11.3% ----------------------------------------------------------------------------------- 500,000 Province of Manitoba, Deb., 9.50%, 10/1/2000 559,760 ----------------------------------------------------------------------------------- 500,000 Province of Ontario, Sr. Unsecured Notes, 7.375%, 1/27/2003 492,870 ----------------------------------------------------------------------------------- 500,000 Province of Quebec, Note, 7.50%, 7/15/2002 499,710 ----------------------------------------------------------------------------------- 500,000 Republic of Malta, 7.50%, 3/29/2009 474,065 ----------------------------------------------------------------------------------- -------------- Total 2,026,405 ----------------------------------------------------------------------------------- -------------- TRANSPORTATION--1.5% ----------------------------------------------------------------------------------- 250,000 CSX Corp., Note, 9.50%, 11/15/95 263,033 ----------------------------------------------------------------------------------- -------------- UTILITIES--9.1% ----------------------------------------------------------------------------------- 100,000 Baltimore Gas & Electric Co., 8.375%, 8/15/2001 106,026 ----------------------------------------------------------------------------------- 400,000 Duke Power, 5.78%, 7/8/99 379,616 ----------------------------------------------------------------------------------- 500,000 GTE Corp., Deb., 8.50%, 4/1/2017 497,935 ----------------------------------------------------------------------------------- 180,000 Minnesota Power & Light Co., 7.75%, 6/1/2007 181,984 ----------------------------------------------------------------------------------- 500,000 Wisconsin Telephone Co., 6.25%, 8/1/2004 458,155 ----------------------------------------------------------------------------------- -------------- Total 1,623,716 ----------------------------------------------------------------------------------- -------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $10,785,534) 10,260,577 ----------------------------------------------------------------------------------- -------------- U.S. TREASURY NOTE--1.1% - -------------------------------------------------------------------------------------------------- 200,000 3.875%, 4/30/95 (IDENTIFIED COST $199,998) 197,582 ----------------------------------------------------------------------------------- -------------- *REPURCHASE AGREEMENTS--36.8% - -------------------------------------------------------------------------------------------------- 3,000,000 B.T. Securities, Inc., 3.61%, dated 4/29/94 due 5/2/94 3,000,000 ----------------------------------------------------------------------------------- 3,589,000 UBS Securities, Inc., 3.62%, dated 4/29/94, due 5/2/94 3,589,000 ----------------------------------------------------------------------------------- -------------- TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) (NOTE 2B) 6,589,000 ----------------------------------------------------------------------------------- -------------- TOTAL INVESTMENTS (IDENTIFIED COST $20,493,516) (NOTE 2A) $ 19,806,726\\ ----------------------------------------------------------------------------------- --------------
* The repurchase agreements are fully collateralized by U.S. Treasury obligations based on market prices at the date of the portfolio. The investments in repurchase agreements are through participation in joint accounts with other Federated Funds. \ Denotes floating rate obligation for which the current rate and next reset date is shown. \\ The cost of investments for federal tax purposes amounts to $20,493,516. The net unrealized depreciation of investments on a federal income tax basis amounts to $686,790, which is comprised of $6,285 appreciation and $693,075 depreciation at April 30,1994. The following abbreviation is used in this portfolio: CMO--Collateralized Mortgage Obligation Note: The categories of investments are shown as a percentage of net assets ($17,927,250) at April 30, 1994. INTERMEDIATE INCOME FUND STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1994 - -------------------------------------------------------------------------------- ASSETS: - ------------------------------------------------------------------------------------------------- Investments in repurchase agreements (Note 2B) $ 6,589,000 - --------------------------------------------------------------------------------- Investments in other securities (Note 2A) 13,217,726 - --------------------------------------------------------------------------------- -------------- Total investments, at value (identified and tax cost, $20,493,516) $ 19,806,726 - ------------------------------------------------------------------------------------------------- Cash 133,515 - ------------------------------------------------------------------------------------------------- Interest receivable 206,796 - ------------------------------------------------------------------------------------------------- Receivable for Fund shares sold 117,093 - ------------------------------------------------------------------------------------------------- Deferred expenses (Note 2F) 8,416 - ------------------------------------------------------------------------------------------------- -------------- Total assets 20,272,546 - ------------------------------------------------------------------------------------------------- LIABILITIES: - ------------------------------------------------------------------------------------------------- Payable for investments purchased 2,234,876 - --------------------------------------------------------------------------------- Dividends payable 77,054 - --------------------------------------------------------------------------------- Payable to Transfer and Dividend Disbursing Agent (Note 4) 2,592 - --------------------------------------------------------------------------------- Payable to Administrator (Note 4) 1,076 - --------------------------------------------------------------------------------- Accrued expenses and other liabilities 29,698 - --------------------------------------------------------------------------------- -------------- Total liabilities 2,345,296 - ------------------------------------------------------------------------------------------------- -------------- NET ASSETS for 1,881,796 shares of beneficial interest outstanding $ 17,927,250 - ------------------------------------------------------------------------------------------------- -------------- NET ASSETS CONSIST OF: - ------------------------------------------------------------------------------------------------- Paid-in capital $ 18,621,894 - ------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) on investments (686,790) - ------------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) on investments (7,854) - ------------------------------------------------------------------------------------------------- -------------- Total Net Assets $ 17,927,250 - ------------------------------------------------------------------------------------------------- -------------- NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE: - ------------------------------------------------------------------------------------------------- Institutional Shares (net assets of $17,702,269 / 1,858,178 shares of beneficial interest) $9.53 - ------------------------------------------------------------------------------------------------- -------------- Institutional Service Shares (net assets of $224,981 / 23,618 shares of beneficial interest) $9.53 - ------------------------------------------------------------------------------------------------- --------------
(See Notes which are an integral part of the Financial Statements). INTERMEDIATE INCOME FUND STATEMENT OF OPERATIONS PERIOD ENDED APRIL 30, 1994* - -------------------------------------------------------------------------------- INVESTMENT INCOME: - --------------------------------------------------------------------------------------------------- Interest income (Note 2C) $ 279,962 - --------------------------------------------------------------------------------------------------- EXPENSES: - --------------------------------------------------------------------------------------------------- Investment advisory fee (Note 4) $ 22,003 - ---------------------------------------------------------------------------------------- Administrative personnel and services fees (Note 4) 1,077 - ---------------------------------------------------------------------------------------- Custodian fees 28,474 - ---------------------------------------------------------------------------------------- Transfer and dividend disbursing agent fees and expenses (Note 4) 4,082 - ---------------------------------------------------------------------------------------- Fund share registration costs 765 - ---------------------------------------------------------------------------------------- Legal fees 2,000 - ---------------------------------------------------------------------------------------- Printing and postage 1,584 - ---------------------------------------------------------------------------------------- Distribution services fees--Institutional Service Shares (Note 4) 146 - ---------------------------------------------------------------------------------------- Miscellaneous 1,373 - ---------------------------------------------------------------------------------------- --------- Total expenses 61,504 - ---------------------------------------------------------------------------------------- Deduct-- - ---------------------------------------------------------------------------------------- Waiver of investment advisory fee (Note 4) $ 22,003 - ----------------------------------------------------------------------------- Reimbursement of other operating expenses (Note 4) 39,355 61,358 - ----------------------------------------------------------------------------- --------- --------- Net expenses 146 - --------------------------------------------------------------------------------------------------- ----------- Net investment income 279,816 - --------------------------------------------------------------------------------------------------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: - --------------------------------------------------------------------------------------------------- Net realized gain (loss) on investment transactions (identified cost basis) (7,854) - --------------------------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments (686,790) - --------------------------------------------------------------------------------------------------- ----------- Net realized and unrealized gain (loss) on investments (694,644) - --------------------------------------------------------------------------------------------------- ----------- Change in net assets resulting from operations $ (414,828) - --------------------------------------------------------------------------------------------------- -----------
*For the period from December 15, 1993 (date of initial public offering) to April 30, 1994. (See Notes which are an integral part of the Financial Statements). INTERMEDIATE INCOME FUND STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD ENDED APRIL 30, 1994* - ---------------------------------------------------------------------------------------------- ------------------ INCREASE (DECREASE) IN NET ASSETS: - ---------------------------------------------------------------------------------------------- OPERATIONS-- - ---------------------------------------------------------------------------------------------- Net investment income $ 279,816 - ---------------------------------------------------------------------------------------------- Net realized gain (loss) on investment transactions ($0 as computed for federal income tax purposes) (Note 2D) (7,854) - ---------------------------------------------------------------------------------------------- Change in unrealized appreciation (depreciation) on investments (686,790) - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets resulting from operations (414,828) - ---------------------------------------------------------------------------------------------- ------------------ DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)-- - ---------------------------------------------------------------------------------------------- Dividends to shareholders from net investment income: - ---------------------------------------------------------------------------------------------- Institutional Shares (276,248) - ---------------------------------------------------------------------------------------------- Institutional Service Shares (3,568) - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets from distributions to shareholders (279,816) - ---------------------------------------------------------------------------------------------- ------------------ FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)-- - ---------------------------------------------------------------------------------------------- Net proceeds from sale of shares 25,769,938 - ---------------------------------------------------------------------------------------------- Net asset value of shares issued to shareholders in payment of dividends declared 11,515 - ---------------------------------------------------------------------------------------------- Cost of shares redeemed (7,159,559) - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets from fund share transactions 18,621,894 - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets 17,927,250 - ---------------------------------------------------------------------------------------------- NET ASSETS: - ---------------------------------------------------------------------------------------------- Beginning of period -- - ---------------------------------------------------------------------------------------------- ------------------ End of period $ 17,927,250 - ---------------------------------------------------------------------------------------------- ------------------
*For the period from December 15, 1993 (date of initial public offering) to April 30, 1994. (See Notes which are an integral part of the Financial Statements). INTERMEDIATE INCOME FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1994 - -------------------------------------------------------------------------------- (1) ORGANIZATION Federated Income Securities Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. The Trust consists of two diversified portfolios. The financial statements included herein present only those of Intermediate Income Fund (the "Fund"). The financial statements of the other portfolio are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund provides two classes of shares: Institutional Shares, and Institutional Service Shares. Institutional Service Shares are identical in all respects to Institutional Shares except that Institutional Service Shares will be sold pursuant to a distribution plan ("Plan") adopted in accordance with Investment Company Act Rule 12b-1. (2) SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP). A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at the mean between the over-the-counter bid and asked prices as furnished by an independent pricing service. Corporate bonds and other fixed income securities/asset backed securities are valued at the last sale price reported on national securities exchanges on that day, if available. Otherwise, corporate bonds and other fixed income securities/asset backed securities and short-term obligations are valued at the prices provided by an independent pricing service. Short-term securities with remaining maturities of sixty days or less at the time of purchase, may be stated at amortized cost, which approximates value. B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian bank's vault, all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by the Fund to monitor, on a daily basis, the value of each repurchase agreements underlying collateral to ensure the value at least equals the principal amount of the repurchase agreement, including accrued interest. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Board of Trustees ("Trustees"). Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, the Fund could receive less than the repurchase price on the sale of collateral securities. C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued daily. Bond premium and discount are amortized as required by the Internal Revenue Code, as amended ("Code"). Distributions to shareholders are recorded on the ex-dividend date. D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its taxable income. Accordingly, no provisions for federal tax are necessary. Net capital losses of $7,854 attributable to security transactions incurred after October 31, 1993, are treated as arising on May 1, 1994, the first day of the Fund's next taxable year. E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its shares in its first fiscal year, excluding the initial expense of registering the shares, have been deferred and are being amortized using the straight-line method over a period of five years from the Fund's commencement date. G. OTHER--Investment transactions are accounted for on the trade date. (3) SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in Fund shares were as follows:
YEAR ENDED APRIL 30, 1994* INSTITUTIONAL SHARES SHARES AMOUNT - ------------------------------------------------------------------------------------ ----------- -------------- Shares sold 2,565,565 $ 25,464,130 - ------------------------------------------------------------------------------------ Shares issued to shareholders in payment of dividends declared 1,194 11,509 - ------------------------------------------------------------------------------------ Shares redeemed (708,581) (7,091,038) - ------------------------------------------------------------------------------------ ----------- -------------- 1,858,178 $ 18,384,601 - ------------------------------------------------------------------------------------ ----------- --------------
*For the period from December 15, 1993 (date of initial public offering) to April 30, 1994.
YEAR ENDED APRIL 30, 1994* INSTITUTIONAL SERVICE SHARES SHARES AMOUNT - ------------------------------------------------------------------------------------ ----------- -------------- Shares sold 30,700 $ 305,815 - ------------------------------------------------------------------------------------ Shares issued to shareholders in payment of dividends declared -- -- - ------------------------------------------------------------------------------------ Shares redeemed (7,082) (68,522) - ------------------------------------------------------------------------------------ ----------- -------------- 23,618 $ 237,293 - ------------------------------------------------------------------------------------ ----------- -------------- Net change resulting from Fund share transactions 1,881,796 $ 18,621,894 - ------------------------------------------------------------------------------------ ----------- --------------
*For the period from December 15, 1993 (date of initial public offering), to April 30, 1994. (4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser ("Adviser"), receives for its services an annual investment advisory fee equal to 0.50 of 1% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive its fee and reimburse certain operating expenses of the Fund. Adviser can modify or terminate this voluntary waiver and reimbursement at any time at its sole discretion. ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund administrative personnel and services. Prior to March 1, 1994, these services were provided at approximate cost. Effective March 1, 1994, the fee is based on the level of average aggregate net assets of all funds advised by subsidiaries of Federated Investors. The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Institutional Service Shares. The Plan provides that the Fund may incur distribution expenses up to 0.25 of 1% of the average daily net assets of the shares, annually, to compensate FSC. Under the terms of a shareholder service agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets for each class of shares for the period. This fee is to obtain certain personal services for shareholders and the maintenance of shareholder accounts. TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves as transfer and dividend disbursing agent for the Fund. The fee is based on the size, type and number of accounts and transactions made by shareholders. ORGANIZATIONAL EXPENSES--Organizational expenses ($47,948) and start-up administrative service expenses ($38,751) were borne initially by Adviser. The Fund has agreed to reimburse the Adviser for the organizational expenses and start-up administrative expenses during the five year period following December 15, 1993 (date the Fund's portfolio first became effective). For the period ended April 30, 1994, the Fund paid ($1,331) and ($1,076), respectively pursuant to this agreement. Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. (5) INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the period ended April 30, 1994 were as follows: - -------------------------------------------------------------------------------------------------- PURCHASES-- $ 14,487,562 - -------------------------------------------------------------------------------------------------- -------------- SALES-- $ 21,423 - -------------------------------------------------------------------------------------------------- --------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Trustees and Shareholders of INTERMEDIATE INCOME FUND (a portfolio of Federated Income Securities Trust): We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Intermediate Income Fund (one of the portfolios comprising Federated Income Securities Trust), as of April 30, 1994, and the related statement of operations, the statement of changes in net assets and the financial highlights (see pages 2 and 25 of this prospectus) for the period from December 15, 1993 (date of initial public offering) to April 30, 1994. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of April 30, 1994, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Intermediate Income Fund at April 30, 1994, and the results of its operations, the changes in its net assets and the financial highlights for the period from December 15, 1993 to April 30, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG Pittsburgh, Pennsylvania June 9, 1994 ADDRESSES - -------------------------------------------------------------------------------- Intermediate Income Fund Institutional Shares Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Custodian State Street Bank and P.O. Box 8602 Trust Company Boston, Massachusetts 02266-8602 - --------------------------------------------------------------------------------------------------------------------- Transfer Agent and Dividend Disbursing Agent Federated Services Company Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Shareholder Servicing Agent Federated Shareholder Services Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Houston, Houston & Donnelly 2510 Centre City Tower Pittsburgh, Pennsylvania 15222 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W. Washington, D.C. 20037 - --------------------------------------------------------------------------------------------------------------------- Independent Auditors Ernst & Young One Oxford Centre Pittsburgh, Pennsylvania 15219 - ---------------------------------------------------------------------------------------------------------------------
INTERMEDIATE INCOME FUND INSTITUTIONAL SHARES PROSPECTUS A Diversified Portfolio of Federated Income Securities Trust, An Open-End, Management Investment Company June 30, 1994 3090804A-IS (6/94) INTERMEDIATE INCOME FUND (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) INSTITUTIONAL SERVICE SHARES PROSPECTUS The Institutional Service Shares of Intermediate Income Fund (the "Fund") offered by this prospectus represent interests in a no load, diversified portfolio of securities which is an investment portfolio in Federated Income Securities Trust (the "Trust"), an open-end, management investment company (a mutual fund). The investment objective of the Fund is current income. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in Institutional Service Shares of the Fund. Keep this prospectus for future reference. The Fund has also filed a Combined Statement of Additional Information for Institutional Service Shares and Institutional Shares dated June 30, 1994, with the Securities and Exchange Commission. The information contained in the Combined Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Combined Statement of Additional Information free of charge by calling 1-800-235-4669. To obtain other information or to make inquiries about the Fund, contact the Fund at the address listed in the back of this prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated June 30, 1994 TABLE OF CONTENTS - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES 1 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS-- INSTITUTIONAL SERVICE SHARES 2 - ------------------------------------------------------ GENERAL INFORMATION 3 - ------------------------------------------------------ INVESTMENT INFORMATION 3 - ------------------------------------------------------ Investment Objective 3 Investment Policies 3 Acceptable Investments 3 U.S. Government Obligations 4 Corporate Debt Obligations 4 Floating Rate Corporate Debt Obligations 5 Fixed Rate Corporate Debt Obligations 5 Variable Rate Demand Notes 6 Credit Facilities 6 Asset-Backed Securities 6 Mortgage-Related Asset-Backed Securities 7 Adjustable Rate Mortgage Securities ("ARMS") 7 Collateralized Mortgage Obligations ("CMOs") 8 Real Estate Mortgage Investment Conduits ("REMICs") 8 Resets of Interest 8 Caps and Floors 9 Non-Mortgage Related Asset-Backed Securities 9 Bank Instruments 10 Foreign Securities 10 Interest Rate Swaps, Caps and Floors 11 Credit Enhancement 12 Demand Features 12 Repurchase Agreements 12 Restricted and Illiquid Securities 13 Lending of Portfolio Securities 13 When-Issued and Delayed Delivery Transactions 13 Special Considerations 14 Weighted Average Portfolio Duration 14 Investment Limitations 14 FEDERATED INCOME SECURITIES TRUST INFORMATION 15 - ------------------------------------------------------ Management of the Trust 15 Board of Trustees 15 Investment Adviser 15 Advisory Fees 15 Adviser's Background 15 Other Payments to Financial Institutions 16 Distribution of Institutional Service Shares 16 Distribution and Shareholder Services Plans 16 Administration of the Fund 17 Administrative Services 17 Custodian 17 Transfer Agent and Dividend Disbursing Agent 18 Legal Counsel 18 Independent Auditors 18 Expenses of the Fund and Institutional Service Shares 18 NET ASSET VALUE 18 - ------------------------------------------------------ INVESTING IN INSTITUTIONAL SERVICE SHARES 19 - ------------------------------------------------------ Share Purchases 19 By Wire 19 By Mail 19 Minimum Investment Required 19 What Shares Cost 19 Exchanging Securities for Fund Shares 20 Subaccounting Services 20 Exchange Privilege 20 Certificates and Confirmations 20 Dividends 21 Capital Gains 21 REDEEMING INSTITUTIONAL SERVICE SHARES 21 - ------------------------------------------------------ Telephone Redemption 21 Written Requests 21 Signatures 22 Receiving Payment 22 Accounts with Low Balances 22 SHAREHOLDER INFORMATION 22 - ------------------------------------------------------ Voting Rights 22 Massachusetts Partnership Law 23 TAX INFORMATION 23 - ------------------------------------------------------ Federal Income Tax 23 Pennsylvania Corporate and Personal Property Taxes 24 PERFORMANCE INFORMATION 24 - ------------------------------------------------------ OTHER CLASSES OF SHARES 24 - ------------------------------------------------------ FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 26 - ------------------------------------------------------ FINANCIAL STATEMENTS 27 - ------------------------------------------------------ REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS 37 - ------------------------------------------------------ ADDRESSES Inside Back Cover - ------------------------------------------------------ SUMMARY OF FUND EXPENSES-- INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... None Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable)................................................... None Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None Exchange Fee.............................................................................................. None ANNUAL INSTITUTIONAL SERVICE SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee (after waiver) (1)......................................................................... 0.00% 12b-1 Fee (after waiver) (2).............................................................................. 0.02% Total Other Expenses (after expense reimbursement)........................................................ 0.78% Shareholder Services Fee (3).................................................................... 0.23% Total Institutional Service Shares Operating Expenses (4)........................................ 0.80%
- --------- (1) The management fee has been reduced to reflect the voluntary waiver of the management fee. The adviser can terminate this voluntary waiver at any time at its sole discretion. The maximum management fee is 0.50%. (2) The maximum 12b-1 fee is 0.25%. (3) The maximum Shareholder Services Fee is 0.25%. (4) The Total Institutional Service Shares Operating Expenses in the table above are based on expenses expected during the fiscal year ending April 30, 1995. The Total Institutional Service Shares Operating Expenses were 0.25% for the fiscal year ended April 30, 1994 and were 1.65% absent the voluntary waiver of the management fee and the voluntary reimbursement of certain other operating expenses. The purpose of this table is to assist an investor in understanding the various costs and expenses that a shareholder of Institutional Service Shares of the Fund will bear, either directly or indirectly. For more complete descriptions of the various costs and expenses, see "Investing in Institutional Service Shares" and "Federated Income Securities Trust Information." Wire-transferred redemptions of less than $5,000 may be subject to additional fees. Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted under the rules of the National Association of Securities Dealers, Inc.
EXAMPLE 1 year 3 years You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2) redemption at the end of each time period.................................................. $8 $26
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The information set forth in the foregoing table and example relates only to Institutional Service Shares of the Fund. The Fund also offers another class of shares called Institutional Shares. Institutional Service Shares and Institutional Shares are subject to certain of the same expenses; however, Institutional Shares are not subject to a 12b-1 fee. See "Other Classes of Shares." INTERMEDIATE INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors, on page 37.
PERIOD ENDED APRIL 30, 1994* - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 - --------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------------------------------------------------------------------------- Net investment income 0.22 - --------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (0.47) - --------------------------------------------------------------------------------------------- --------------- Total from investment operations (0.25) - --------------------------------------------------------------------------------------------- --------------- LESS DISTRIBUTIONS - --------------------------------------------------------------------------------------------- Dividends to shareholders from net investment income (0.22) - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, END OF PERIOD $ 9.53 - --------------------------------------------------------------------------------------------- --------------- TOTAL RETURN** (2.57)% - --------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------------------------------------------------------------------------- Expenses 0.25%(a) - --------------------------------------------------------------------------------------------- Net investment income 6.12%(a) - --------------------------------------------------------------------------------------------- Expense waiver/reimbursement (b) 1.40%(a) - --------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - --------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $225 - --------------------------------------------------------------------------------------------- Portfolio turnover rate 0% - ---------------------------------------------------------------------------------------------
* Reflects operations for the period from December 15, 1993 (date of initial public offering) to April 30, 1994. ** Based on net asset value which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) Computed on an annualized basis. (b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) GENERAL INFORMATION - -------------------------------------------------------------------------------- The Trust was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. The Trust may offer separate series of shares of beneficial interest representing interests in separate portfolios of securities. The shares in any one portfolio may be offered in separate classes. As of the date of this prospectus, the Board of Trustees ("Trustees") has established two classes of shares of Intermediate Income Fund, Institutional Service Shares and Institutional Shares. This prospectus relates only to Institutional Service Shares ("Shares") of the Fund. A minimum initial investment of $25,000 over a 90-day period is required. Shares are currently sold and redeemed at net asset value without a sales charge imposed by the Fund. INVESTMENT INFORMATION - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE The investment objective of the Fund is current income. This investment objective cannot be changed without approval of shareholders. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. INVESTMENT POLICIES The Fund pursues its investment objective by investing in a diversified portfolio of high grade debt securities, which are securities rated in one of the three highest categories (A or better) by a nationally recognized statistical rating organization ("NRSRO")(for example, rated Aaa, Aa, or A by Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's Corporation ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch")) or if unrated, of comparable quality as determined by the Fund's adviser. If a security is subsequently downgraded, the adviser will determine whether it continues to be an acceptable investment; if not, the security will be sold. A description of the rating categories is contained in the Appendix to the Combined Statement of Additional Information. Under normal market conditions, the dollar-weighted average portfolio maturity of the Fund will be between three and ten years, and the Fund's average-weighted duration will be between three and seven years. Unless indicated otherwise, the investment policies may be changed by the Board of Trustees without the approval of shareholders. Shareholders will be notified before any material change in these investment policies becomes effective. ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed, diversified portfolio consisting of U.S. government obligations, corporate debt obligations, and asset-backed securities. The Fund may also invest in derivative instruments of such securities, including instruments with demand features or credit enhancement, as well as money market instruments. The securities in which the Fund invests are: obligations issued or guaranteed as to payment of principal and interest by the U.S. government, its agencies and instrumentalities including bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S. government agencies or instrumentalities, such as Federal Home Loan Banks, Federal National Mortgage Association, Government National Mortgage Association, Federal Farm Credit Banks, Tennessee Valley Authority, Export-Import Bank of the United States, Commodity Credit Corporation, Federal Financing Bank, The Student Loan Marketing Association, Federal Home Loan Mortgage Corporation, or National Credit Union Administration; domestic and foreign issues of corporate debt obligations (including Eurobonds, Medium Term Notes and Deposit Notes) having floating or fixed rates of interest; asset-backed securities, including mortgage-related securities; commercial paper (including Europaper and Canadian Commerical Paper) which matures in 270 days or less so long as at least two ratings are high quality ratings by an NRSRO. Such ratings would include: Prime-1 or Prime-2 by Moody's, A-1 or A-2 by Standard & Poor's, or F-1 or F-2 by Fitch; foreign currency transactions (including spot, futures, options and swaps); time and savings deposits and deposit notes and bankers acceptances (including certificates of deposit) in commercial or savings banks whose accounts are insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"), both of which are administered by the Federal Deposit Insurance Corporation ("FDIC"), including certificates of deposit issued by and other time deposits in foreign branches of FDIC insured banks or who have at least $100,000,000 in capital; and repurchase agreements collateralized by eligible investments. U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in which the Fund may invest generally include direct obligations of the U.S. Treasury (such as U.S. Treasury Bills, notes, and bonds) and obligations issued or guaranteed by U.S. government agencies or instrumentalities. These securities may be backed by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the discretionary authority of the U.S. government to purchase certain obligations of agencies or instrumentalities; or the credit of the agency or instrumentality issuing the obligations. Examples of agencies and instrumentalities which may not always receive financial support from the U.S. government are: Federal Farm Credit Banks; Federal Home Loan Banks; The Student Loan Marketing Association; Federal Home Loan Mortgage Corporation; and Federal National Mortgage Association. CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations, including corporate bonds, notes, and debentures, which may have floating or fixed rates of interest. FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating rate corporate debt obligations, including increasing rate securities. Floating rate securities are generally offered at an initial interest rate which is at or above prevailing market rates. The interest rate paid on these securities is then reset periodically (commonly every 90 days) to an increment over some predetermined interest rate index. Commonly utilized indices include the three-month Treasury Bill rate, the 180-day Treasury Bill rate, the one-month or three-month London Interbank Offered Rate ("LIBOR"), the prime rate of a bank, the commercial paper rates, or the longer-term rates on U.S. Treasury securities. Some of the floating rate corporate debt obligations in which the Fund may invest include floating rate corporate debt securities issued by savings and loans and collateralized by adjustable rate mortgage loans, also known as collateralized thrift notes. Many of these collateralized thrift notes have received AAA ratings from recognized rating agencies. Collateralized thrift notes differ from traditional "pass through" certificates in which payments made are linked to monthly payments made by individual borrowers net of any fees paid to the issuer or guarantor of such securities. Collateralized thrift notes pay a floating interest rate which is tied to a predetermined index, such as the 180-day Treasury Bill rate. Floating rate corporate debt obligations also include securities issued to fund commercial real estate construction. Increasing rate securities, which currently do not make up a significant share of the market in corporate debt securities, are generally offered at an initial interest rate which is at or above prevailing market rates. Interest rates are reset periodically (most commonly every 90 days) at different levels on a predetermined scale. These levels of interest are ordinarily set at progressively higher increments over time. Some increasing rate securities may, by agreement, revert to a fixed rate status. These securities may also contain features which allow the issuer the option to convert the increasing rate of interest to a fixed rate under such terms, conditions, and limitations as are described in each issue's prospectus. FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed rate securities, including fixed rate securities with short-term characteristics. Fixed rate securities with short-term characteristics are long-term debt obligations but are treated in the market as having short maturities because call features of the securities may make them callable within a short period of time. A fixed rate security with short-term characteristics would include a fixed income security priced close to call or redemption price or a fixed income security approaching maturity, where the expectation of call or redemption is high. Fixed rate securities tend to exhibit more price volatility during times of rising or falling interest rates than securities with floating rates of interest. This is because floating rate securities, as described above, behave like short-term instruments in that the rate of interest they pay is subject to periodic adjustments based on a designated interest rate index. Fixed rate securities pay a fixed rate of interest and are more sensitive to fluctuating interest rates. In periods of rising interest rates the value of a fixed rate security is likely to fall. Fixed rate securities with short-term characteristics are not subject to the same price volatility as fixed rate securities without such characteristics. Therefore, they behave more like floating rate securities with respect to price volatility. VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate debt instruments that have variable or floating interest rates and provide the Fund with the right to tender the security for repurchase at its stated principal amount plus accrued interest. Such securities typically bear interest at a rate that is intended to cause the securities to trade at par. The interest rate may float or be adjusted at regular intervals (ranging from daily to annually), and is normally based on a published interest rate or interest rate index. Many variable rate demand notes allow the Fund to demand the repurchase of the security on not more than seven days prior notice. Other notes only permit the Fund to tender the security at the time of each interest rate adjustment or at other fixed intervals. See "Demand Features." CREDIT FACILITIES. Demand notes are borrowing arrangements between a corporation and an institutional lender (such as the Fund) payable upon demand by either party. The notice period for demand typically ranges from one to seven days, and the party may demand full or partial payment. Revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. As the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the facility. The Fund generally acquires a participation interest in a revolving credit facility from a bank or other financial institution. The terms of the participation require the Fund to make a pro rata share of all loans extended to the borrower and entitles the Fund to a pro rata share of all payments made by the borrower. Demand notes and revolving facilities usually provide for floating or variable rates of interest. ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of certain governmental, government related and private loans, receivables and other lender assets into pools. Interests in these pools are sold as individual securities. Payments from the asset pools may be divided into several different tranches of debt securities, with some tranches entitled to receive regular installments of principal and interest, other tranches entitled to receive regular installments of interest, with principal payable at maturity or upon specified call dates, and other tranches only entitled to receive payments of principal and accrued interest at maturity or upon specified call dates. Different tranches of securities will bear different interest rates, which may be fixed or floating. Because the loans held in the asset pool often may be prepaid without penalty or premium, asset-backed securities are generally subject to higher prepayment risks than most other types of debt instruments. Prepayment risks on mortgage securities tend to increase during periods of declining mortgage interest rates, because many borrowers refinance their mortgages to take advantage of the more favorable rates. Depending upon market conditions, the yield that the Fund receives from the reinvestment of such prepayments, or any scheduled principal payments, may be lower than the yield on the original mortgage security. As a consequence, mortgage securities may be a less effective means of "locking in" interest rates than other types of debt securities having the same stated maturity and may also have less potential for capital appreciation. For certain types of asset pools, such as collateralized mortgage obligations, prepayments may be allocated to one tranche of securities ahead of other tranches, in order to reduce the risk of prepayment for the other tranches. Prepayments may result in a capital loss to the Fund to the extent that the prepaid mortgage securities were purchased at a market premium over their stated amount. Conversely, the prepayment of mortgage securities purchased at a market discount from their stated principal amount will accelerate the recognition of interest income by the Fund, which would be taxed as ordinary income when distributed to the shareholders. The credit characteristics of asset-backed securities also differ in a number of respects from those of traditional debt securities. The credit quality of most asset-backed securities depends primarily upon the credit quality of the assets underlying such securities, how well the entity issuing the securities is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement to such securities. MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in various mortgage-related asset-backed securities. These types of investments may include adjustable rate mortgage securities, collateralized mortgage obligations, real estate mortgage investment conduits, or other securities collateralized by or representing an interest in real estate mortgages (collectively, "mortgage securities"). Mortgage securities are: (i) issued or guaranteed by the U.S. government or one of its agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; (iii) those issued by private issuers that represent an interest in or are collateralized by whole loans or mortgage-backed securities without a government guarantee but usually having some form of private credit enhancement; and (iv) privately issued securities which are collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government. The privately issued mortgage-related securities provide for a periodic payment consisting of both interest and principal. The interest portion of these payments will be distributed by the Fund as income, and the capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage securities representing interests in adjustable rather than fixed interest rate mortgages. Typically, the ARMS in which the Fund may invest are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be collateralized by whole loans or private pass-through securities. The underlying mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are typically conventional residential mortgages conforming to strict underwriting size and maturity constraints. Unlike conventional bonds, ARMS pay back principal over the life of the ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly scheduled payments of principal and/or interest and may receive unscheduled principal payments representing payments on the underlying mortgages. At the time that a holder of the ARMS reinvests the payments and any unscheduled prepayments of principal that it receives, the holder may receive a rate of interest which is actually lower than the rate of interest paid on the existing ARMS. As a consequence, ARMS may be a less effective means of "locking in" long-term interest rates than other types of fixed-income securities. Not unlike other fixed-income securities, the market value of ARMS will generally vary inversely with changes in market interest rates. Thus, the market value of ARMS generally declines when interest rates rise and generally rises when interest rates decline. While ARMS generally entail less risk of a decline during periods of rapidly rising rates, ARMS may also have less potential for capital appreciation than other similar investments (e.g., investments with comparable maturities) because, as interest rates decline, the likelihood increases that mortgages will be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal payments may result in some loss of a holder's principal investment to the extent of the premium paid. Conversely, if ARMS are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal would increase current and total returns and would accelerate the recognition of income, which would be taxed as ordinary income when distributed to shareholders. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but may be collateralized by whole loans or private pass-through securities. The CMOs in which the Fund may invest may be: (a) collateralized by pools of mortgages in which each mortgage is guaranteed as to payment of principal and interest by an agency or instrumentality of the U.S. government; (b) collateralized by pools of mortgages in which payment of principal and interest is guaranteed by the issuer and such guarantee is collateralized by U.S. government securities; or (c) collateralized by pools of mortgages without a government guarantee as to payment of principal and interest, but which have some form of credit enhancement. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the Fund may invest are offerings of multiple class real estate mortgage-backed securities which qualify and elect treatment as such under provisions of the Internal Revenue Code. Issuers of REMICs may take several forms, such as trusts, partnerships, corporations, associations, or segregated pools of mortgages. Once REMIC status is elected and obtained, the entity is not subject to federal income taxation. Instead, income is passed through the entity and is taxed to the person or persons who hold interests in the REMIC. A REMIC interest must consist of one or more classes of "regular interests," some of which may offer adjustable rates of interest, and a single class of "residual interests." To qualify as a REMIC, substantially all the assets of the entity must be in assets directly or indirectly secured principally by real property. RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and REMICs in which the Fund may invest will be readjusted at intervals of one year or less to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month LIBOR, the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to have somewhat less volatile interest rates. To the extent that the adjusted interest rate on the mortgage security reflects current market rates, the market value of an adjustable rate mortgage security will tend to be less sensitive to interest rate changes than a fixed rate debt security of the same stated maturity. Hence, adjustable rate mortgage securities which use indices that lag changes in market rates should experience greater price volatility than adjustable rate mortgage securities that closely mirror the market. Certain residual interest tranches of CMOs may have adjustable interest rates that deviate significantly from prevailing market rates, even after the interest rate is reset, and are subject to correspondingly increased price volatility. In the event that the Fund purchases such residual interest mortgage securities, it will factor in the increased interest and price volatility of such securities when determining its dollar-weighted average portfolio maturity and duration. CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which the Fund may invest will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage securities in which the Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage securities in which the Fund invests to be shorter than the maturities stated in the underlying mortgages. NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in non-mortgage related asset-backed securities, including interests in pools of receivables, such as credit card and accounts receivable and motor vehicle and other installment purchase obligations and leases. These securities may be in the form of pass-through instruments or asset-backed obligations. The securities are structured similarly to collateralized mortgage obligations and mortgage pass-through securities, which are described above. Also, these securities may be issued either by non- governmental entities and carry no direct or indirect governmental guarantees, or by governmental entities (i.e., Small Business Administration) and carry varying degrees of governmental support. Non-mortgage related asset backed securities have structural characteristics similar to mortgage-related asset-backed securities but have underlying assets that are not mortgage loans or interests in mortgage loans. The Fund may invest in non-mortgage related asset-backed securities including, but not limited to, interests in pools of receivables, such as motor vehicle installment purchase obligations and credit card receivables. These securities may be in the form of pass-through instruments or asset-backed bonds. The securities are issued by non-governmental entities and carry no direct or indirect government guarantee. Mortgage-backed and asset-backed securities generally pay back principal and interest over the life of the security. At the time the Fund reinvests the payments and any unscheduled prepayments of principal received, the Fund may receive a rate of interest which is actually lower than the rate of interest paid on these securities ("prepayment risks"). Although non-mortgage related asset-backed securities generally are less likely to experience substantial prepayments than are mortgage-related asset-backed securities, certain of the factors that affect the rate of prepayments on mortgage-related asset-backed securities also affect the rate of prepayments on non-mortgage related asset-backed securities. Non-mortgage related asset-backed securities present certain risks that are not presented by mortgage-related asset-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of asset-backed securities backed by motor vehicle installment purchase obligations permit the servicer of such receivables to retain the possession of the underlying obligations. If the servicer sells these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset- backed securities. Further, if a vehicle is registered in one state and is then reregistered because the owner and obligor moves to another state, such registration could defeat the original security interest in the vehicle in certain cases. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an institution having capital, surplus and undivided profits over $100 million or insured by BIF or SAIF. Bank Instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits ("ETDs"). FOREIGN SECURITIES. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper, Eurobonds and Europaper are subject to somewhat different risks than domestic obligations of domestic issuers. Examples of these risks include international, economic and political developments, foreign governmental restrictions that may adversely affect the payment of principal or interest, foreign withholdings or other taxes on interest income, difficulties in obtaining or enforcing a judgment against the issuing bank, and the possible impact of interruptions of the flow of international currency transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject to the same regulatory requirements that apply to domestic banks, such as reserve requirements, loan requirements, loan limitations, examinations, accounting, auditing, and record keeping and the public availability of information. These factors will be carefully considered by the Fund's adviser in selecting investments for the Fund. INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate swaps and may purchase or sell (i.e., write) interest rate caps and floors. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed-rate payments) on a notional principal amount. The principal amount of an interest rate swap is notional in that it only provides the basis for determining the amount of interest payments under the swap agreement, and does not represent an actual loan. For example, a $10 million LIBOR swap would require one party to pay the equivalent of the London Interbank Offer Rate on $10 million principal amount in exchange for the right to receive the equivalent of a fixed rate of interest on $10 million principal amount. Neither party to the swap would actually advance $10 million to the other. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of the amount of excess interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of the amount of the interest shortfall on a notional principal amount from the party selling the interest rate floor. The Fund expects to enter into interest rate transactions primarily to hedge against changes in the price of other portfolio securities. For example, the Fund may hedge against changes in the market value of a fixed rate note by entering into a concurrent swap that requires the Fund to pay the same or a lower fixed rate of interest on a notional principal amount equal to the principal amount of the note in exchange for a variable rate of interest based on a market index. Interest accrued on the hedged note would then equal or exceed the Fund's obligations under the swap, while changes in the market value of the swap would largely offset any changes in the market value of the note. The Fund may also enter into swaps and caps to preserve or enhance a return or spread on a portfolio security. The Fund does not intend to use these transactions in a speculative manner. The Fund will usually enter into interest rate swaps on a net basis (i.e., the two payment streams are netted out), with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and the Fund will segregate liquid assets in an aggregate net asset value at least equal to the accrued excess, if any, on each business day. If the Fund enters into an interest rate swap on other than a net basis, the Fund will segregate liquid assets in the full amount accrued on a daily basis of the Fund's obligations with respect to the swap. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. The Fund's investment adviser has determined that, as a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps. To the extent interest rate swaps, caps or floors are determined by the investment adviser to be illiquid, they will be included in the Fund's limitation on investments in illiquid securities. To the extent the Fund sells caps and floors, it will maintain in a segregated account cash and/or U.S. government securities having an aggregate net asset value at least equal to the full amount, accrued on a daily basis, of the Fund's obligations with respect to the caps or floors. The use of interest rate swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Fund's investment adviser is incorrect in its forecasts of market values, interest rates and other applicable factors, the investment performance of the Fund would diminish compared with what it would have been if these investment techniques were not utilized. Moreover, even if the Fund's investment adviser is correct in its forecasts, there is a risk that the swap position may correlate imperfectly with the price of the portfolio security being hedged. There is no limit on the amount of interest rate swap transactions that may be entered into by the Fund. These transactions do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to a default on an interest rate swap is limited to the net asset value of the swap together with the net amount of interest payments owed to the Fund by the defaulting party. A default on a portfolio security hedged by an interest rate swap would also expose the Fund to the risk of having to cover its net obligations under the swap with income from other portfolio securities. The Fund may purchase and sell caps and floors without limitation, subject to the segregated account requirement described above. CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been credit enhanced by a guaranty, letter of credit or insurance. The Fund typically evaluates the credit quality and ratings of credit enhanced securities based upon the financial condition and ratings of the party providing the credit enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund will not treat credit enhanced securities as having been issued by the credit enhancer for diversification purposes. However, under certain circumstances applicable regulations may require the Fund to treat the securities as having been issued by both the issuer and the credit enhancer. The bankruptcy, receivership or default of the credit enhancer will adversely affect the quality and marketability of the underlying security. DEMAND FEATURES. The Fund may acquire securities that are subject to puts and standby commitments ("demand features") to purchase the securities at their principal amount (usually with accrued interest) within a fixed period following a demand by the Fund. The demand feature may be issued by the issuer of the underlying securities, a dealer in the securities or by another third party, and may not be transferred separately from the underlying security. The Fund uses these arrangements to provide the Fund with liquidity and not to protect against changes in the market value of the underlying securities. The bankruptcy, receivership or default by the issuer of the demand feature, or a default on the underlying security or other event that terminates the demand feature before its exercise, will adversely affect the liquidity of the underlying security. Demand features that are exercisable even after a payment default on the underlying security are treated as a form of credit enhancement. REPURCHASE AGREEMENTS. Certain of the securities in which the Fund invests may be purchased pursuant to repurchase agreements. Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or other securities to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. The Fund or its custodian will take possession of the securities subject to repurchase agreements and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions, such as broker/dealers, which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Trustees. RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may otherwise invest pursuant to its investment objective and policies, but which are subject to restriction on resale under federal securities law. The Fund will limit investments in illiquid securities, including certain restricted securities not determined by the Trustees to be liquid, non-negotiable time deposits, certain interest rate swaps, caps and floors determined by the Fund's investment adviser to be illiquid, and repurchase agreements providing for settlement in more than seven days after notice, to 15% of the value of its net assets. The Fund may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to disposition under federal securities law and is generally sold to institutional investors, such as the Fund, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(2) commercial paper is normally resold to other institutional investors like the Fund through or with the assistance of the issuer or investment dealers who make a market in Section 4(2) commercial paper, thus providing liquidity. The Fund believes that Section 4(2) commercial paper and possibly certain other restricted securities which meet the criteria for liquidity established by the Trustees are quite liquid. The Fund intends, therefore, to treat the restricted securities which meet the criteria for liquidity established by the Trustees, including Section 4(2) commercial paper, as determined by the Fund's investment adviser, as liquid and not subject to the investment limitation applicable to illiquid securities. In addition, because Section 4(2) commercial paper is liquid, the Fund intends to not subject such paper to the limitation applicable to restricted securities. LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the Fund may lend portfolio securities on a short-term or a long-term basis, or both, up to one-third of the value of its total assets to broker/dealers, banks, or other institutional borrowers of securities. The Fund will only enter into loan arrangements with broker/dealers, banks, or other institutions which the investment adviser has determined are creditworthy under guidelines established by the Trustees. In these loan arrangements, the Fund will receive collateral in the form of cash or U.S. government securities equal to at least 100% of the value of the securities loaned. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The seller's failure to complete the transaction may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. Accordingly, the Fund may pay more/less than the market value of the securities on the settlement date. SPECIAL CONSIDERATIONS In the debt market, prices move inversely to interest rates. A decline in market interest rates results in a rise in the market prices of outstanding debt obligations. Conversely, an increase in market interest rates results in a decline in market prices of outstanding debt obligations. In either case, the amount of change in market prices of debt obligations in response to changes in market interest rates generally depends on the maturity of the debt obligations: the debt obligations with the longest maturities will experience the greatest market price changes. The market value of debt obligations, and therefore the Fund's net asset value, will fluctuate due to changes in economic conditions and other market factors such as interest rates which are beyond the control of the Fund's investment adviser. The Fund's investment adviser could be incorrect in its expectations about the direction or extent of these market factors. Although debt obligations with longer maturities offer potentially greater returns, they have greater exposure to market price fluctuation. Consequently, to the extent the Fund is significantly invested in debt obligations with longer maturities, there is a greater possibility of fluctuation in the Fund's net asset value. WEIGHTED AVERAGE PORTFOLIO DURATION Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Duration measures the magnitude of the change in the price of a debt security relative to a given change in the market rate of interest. The duration of a debt security depends upon three primary variables: the security's coupon rate, maturity date and the level of market interest rates for similar debt securities. Generally, debt securities with lower coupons or longer maturities will have a longer duration than securities with higher coupons or shorter maturities. For purposes of calculating its dollar-weighted average portfolio duration, the Fund will treat variable and floating rate instruments as having a remaining duration commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. INVESTMENT LIMITATIONS The Fund will not: borrow money directly or through reverse repurchase agreements or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 15% of the value of its total assets to secure such borrowings; with respect to 75% of its assets, invest more than 5% of the value of its total assets in securities of one issuer (except U.S. government obligations), or purchase more than 10% of the outstanding voting securities of any one issuer. The above investment limitations cannot be changed without shareholder approval. The following limitation, however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in this limitation becomes effective. The Fund will not: invest more than 15% of the value of its net assets in illiquid securities, including repurchase agreements providing for settlement more than seven days after notice, non-negotiable time deposits, certain interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and certain restricted securities not determined by the Trustees to be liquid. FEDERATED INCOME SECURITIES TRUST INFORMATION - -------------------------------------------------------------------------------- MANAGEMENT OF THE TRUST BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The Executive Committee of the Board of Trustees handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust, investment decisions for the Fund are made by Federated Management, the Fund's investment adviser (the "Adviser"), subject to direction by the Trustees. The Adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES. The Fund's Adviser receives an annual investment advisory fee equal to .50 of 1% of the Fund's average daily net assets. Under the investment advisory contract, the Adviser may voluntarily reimburse some of the operating expenses of the Fund. The Adviser can terminate this voluntary reimbursement of expenses at any time in its sole discretion. The Adviser has also undertaken to reimburse the Fund for operating expenses in excess of limitations established by certain states. ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the Class A (voting) shares of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated Investors. Federated Management and other subsidiaries of Federated Investors serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. Total assets under management or administration by these and other subsidiaries of Federated Investors are approximately $70 billion. Federated Investors, which was founded in 1956 as Federated Investors, Inc., develops and manages mutual funds primarily for the financial industry. Federated Investors' track record of competitive performance and its disciplined, risk averse investment philosophy serve approximately 3,500 client institutions nationwide. Through these same client institutions, individual shareholders also have access to this same level of investment expertise. Joseph M. Balestrino has been the Fund's portfolio manager since January, 1994. Mr. Balestrino joined Federated Investors in 1986 and has been an Assistant Vice President of the Fund's investment adviser since 1991. Mr. Balestrino served as an Investment Analyst of the investment adviser from 1989 until 1991, and from 1986 until 1989 he acted as Project Manager in the Product Development Department. Mr. Balestrino is a Chartered Financial Analyst and received his M.A. in Urban and Regional Planning from the University of Pittsburgh. Susan M. Nason has been the Fund's co-portfolio manager since the Fund's inception. Ms. Nason joined Federated Investors in 1987 and has been a Vice President of the Fund's investment adviser since January, 1993. Ms. Nason served as an Assistant Vice President of the investment adviser from 1990 until 1992, and from 1987 until 1990 she acted as an investment analyst. Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in Finance from Carnegie Mellon University. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to financial institutions under the Distribution and Shareholder Services Plans, certain financial institutions may be compensated by the adviser or its affiliates for the continuing investment of customers' assets in certain funds, including the Fund, advised by those entities. These payments will be made directly by the distributor or adviser from their assets, and will not be made from the assets of the Fund or by the assessment of a sales charge on Shares. Furthermore, the distributor may offer to pay a fee from its own assets to financial institutions as financial assistance for providing substantial marketing and sales support. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of Shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES Federated Securities Corp. is the principal distributor for shares of the Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors. DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted in accordance with the Investment Company Act Rule 12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an amount, computed at an annual rate of 0.25 of 1% of the average daily net asset value of Shares to finance any activity which is principally intended to result in the sale of Shares subject to the Distribution Plan. The distributor may select financial institutions such as banks, fiduciaries, custodians for public funds, investment advisers, and broker/dealers to provide sales support services as agents for their clients or customers. The Distribution Plan is a compensation-type plan. As such, the Fund makes no payments to the distributor expect as described above. Therefore, the Fund does not pay for unreimbursed expenses of the distributor, including amounts expended by the distributor in excess of amounts received by it from the Fund, interest, carrying or other financing charges in connection with excess amounts expended, or the distributor's overhead expenses. However, the distributor may be able to recover such amount or may earn a profit from future payments made by the Fund under the Distribution Plan. In addition, the Trust has adopted a Shareholder Services Plan (the "Services Plan") under which it may make payments up to 0.25 of 1% of the average daily net asset value of the Shares to obtain certain personal services for shareholders and the maintenance of shareholder accounts ("shareholder services"). The Trust has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, under which Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon Shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Trust and Federated Shareholder Services. The Glass-Steagall Act limits the ability of a depository institution (such as a commercial bank or a savings and loan association) to become an underwriter or distributor of securities. In the event the Glass-Steagall Act is deemed to prohibit depository institutions from acting in the capacities described above or should Congress relax current restrictions on depository institutions, the Trustees will consider appropriate changes in the services. State securities laws governing the ability of depository institutions to act as underwriters or distributors of securities may differ from interpretations given to the Glass-Steagall Act and, therefore, banks and financial institutions may be required to register as dealers pursuant to state law. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Administrative Services provides these at an annual rate which relates to the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors ("Federated Funds") as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS ------------------ --------------------------------- 0.15 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.10 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Administrative Services may choose voluntarily to waive a portion of its fee. CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston, Massachusetts, is custodian for the securities and cash of the Fund. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, Boston, Massachusetts, a subsidiary of Federated Investors, is transfer agent for the Shares of the Fund, and dividend disbursing agent for the Fund. LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, Pittsburgh, Pennsylvania, and Dickstein, Shapiro & Morin, L.L.P., Washington, D.C. INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young, Pittsburgh, Pennsylvania. EXPENSES OF THE FUND AND INSTITUTIONAL SERVICE SHARES Holders of Shares pay their allocable portion of Fund and Trust expenses. The Trust expenses for which holders of Shares pay their allocable portion include, but are not limited to: the cost of organizing the Trust and continuing its existence; registering the Trust with federal and state securities authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees; legal fees of the Trust; association membership dues; and such non-recurring and extraordinary items as may arise. The Fund expenses for which holders of Shares pay their allocable portion include, but are not limited to: registering the Fund and Shares of the Fund; investment advisory services; taxes and commissions; custodian fees; insurance premiums; auditors' fees; shareholder services; and such non-recurring and extraordinary items as may arise. At present, the only expenses allocated to shares as a class are expenses under the Fund's 12b-1 Plan which relate to the Shares. However, the Trustees reserve the right to allocate certain other expenses to holders of Shares as they deem appropriate ("Class Expenses"). In any case, Class Expenses would be limited to: transfer agent fees as identified by the transfer agent as attributable to holders of Shares; distribution fees; printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses and proxies to current shareholders; registration fees paid to the Securities and Exchange Commission and registration fees paid to state securities commissions; expenses related to administrative personnel and services as required to support holders of Shares; legal fees relating solely to Shares; and Trustees' fees incurred as a result of issues relating solely to Shares. NET ASSET VALUE - -------------------------------------------------------------------------------- The Fund's net asset value per share fluctuates. The net asset value for Shares is determined by adding the interest of the Shares in the market value of all securities and other assets of the Fund, subtracting the interest of the Shares in the liabilities of the Fund and those attributable to Shares, and dividing the remainder by the total number of Shares outstanding. The net asset value for Institutional Shares will exceed that of Shares due to the variance in daily net income realized by each class. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. INVESTING IN INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- SHARE PURCHASES Shares are sold on days on which the New York Stock Exchange is open. Shares may be purchased either by wire or mail. To purchase Shares of the Fund, open an account by calling Federated Securities Corp. Information needed to establish the account will be taken over the telephone. The Fund reserves the right to reject any purchase request. BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund before 4:00 p.m. (Eastern time) to place an order. The order is considered received immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the next business day following the order. Federal funds should be wired as follows: Federated Services Company, c/o State Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Intermediate Income Fund--Institutional Service Shares; Fund Number (this number can be found on the account statement or by contacting the Fund); Group Number or Order Number; Nominee or Institution Name; ABA Number 011000028. BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to Intermediate Income Fund--Institutional Service Shares to the Fund's transfer agent, Federated Services Company, P.O. Box 8602, Boston, Massachusetts 02266-8602. Orders by mail are considered received after payment by check is converted by the transfer agent's bank, State Street Bank into federal funds. This is normally the next business day after State Street Bank receives the check. MINIMUM INVESTMENT REQUIRED The minimum initial investment in Shares is $25,000 plus any non-affiliated bank or broker's fee. However, an account may be opened with a smaller amount as long as the $25,000 minimum is reached within 90 days. An institutional investor's minimum investment will be calculated by combining all accounts it maintains with the Fund. Accounts established through a non-affiliated bank or broker may be subject to a smaller minimum investment. WHAT SHARES COST Shares are sold at their net asset value next determined after an order is received. There is no sales charge imposed by the Fund. Investors who purchase Shares through a non-affiliated bank or broker may be charged an additional service fee by that bank or broker. The net asset value is determined at 4:00 p.m. (Eastern time), Monday through Friday, except on: (i) days on which there are not sufficient changes in the value of the Fund's portfolio securities that its net asset value might be materially affected; (ii) days during which no Shares are tendered for redemption and no orders to purchase Shares are received; and (iii) the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. EXCHANGING SECURITIES FOR FUND SHARES The Fund may accept securities in exchange for Fund Shares. The Fund will allow such exchanges only upon the prior approval of the Fund and a determination by the Fund and the Adviser that the securities to be exchanged are acceptable. Any securities exchanged must meet the investment objective and policies of the Fund, must have a readily ascertainable market value, and must be liquid. The market value of any securities exchanged in an initial investment, plus any cash, must be at least equal to the minimum investment in the Fund. The Fund acquires the exchanged securities for investment and not for resale. Securities accepted by the Fund will be valued in the same manner as the Fund values its assets. The basis of the exchange will depend on the net asset value of Fund shares on the day the securities are valued. One share of the Fund will be issued for the equivalent amount of securities accepted. Any interest earned on the securities prior to the exchange will be considered in valuing the securities. All interest, dividends, subscription or other rights attached to the securities become the property of the Fund, along with the securities. If an exchange is permitted, it will be treated as a sale for federal income tax purposes. Depending upon the cost basis of the securities exchanged for Fund shares, a gain or loss may be realized by the investor. SUBACCOUNTING SERVICES Institutions are encouraged to open single master accounts. However, certain institutions may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent charges a fee based on the level of subaccounting services rendered. Institutions holding Shares in a fiduciary, agency, custodial, or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services provided which may be related to the ownership of Shares. This prospectus should, therefore, be read together with any agreement between the customer and the institution with regard to the services provided, the fees charged for those services, and any restrictions and limitations imposed. EXCHANGE PRIVILEGE Shares in certain Federated Funds which are advised by subsidiaries or affiliates of Federated Investors may be exchanged for Shares at net asset value (plus a sales charge, if applicable). The ability to exchange shares is available to shareholders residing in any state in which the shares being acquired may be legally sold and the exchange is subject to any minimum initial or subsequent investment amounts of the fund being acquired. Prior to any exchange, the shareholder must receive a copy of the current prospectus of the fund or class thereof into which an exchange is to be effected. A shareholder may obtain further information on the exchange privilege by calling Federated Securities Corp. or the shareholder's financial institution. CERTIFICATES AND CONFIRMATIONS As transfer agent for the Fund, Federated Services Company maintains a Share account for each shareholder. Share certificates are not issued unless requested by contacting the Fund. Detailed confirmations of each purchase or redemption are sent to each shareholder. Monthly confirmations are sent to report dividends paid during the month. DIVIDENDS Dividends are declared daily and paid monthly. Dividends are declared just prior to determining net asset value. If an order for Shares is placed on the preceding business day, Shares purchased by wire begin earning dividends on the business day wire payment is received by Federated Services Company. If the order for Shares and payment by wire are received on the same day, Shares begin earning dividends on the next business day. Shares purchased by check begin earning dividends on the business day after the check is converted upon instruction of the transfer agent into federal funds. Dividends are automatically reinvested on payment dates in additional Shares of the Fund unless cash payments are requested by contacting the Fund. CAPITAL GAINS Capital gains realized by the Fund, if any, will be distributed at least once every 12 months. REDEEMING INSTITUTIONAL SERVICE SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at their net asset value next determined after the Fund receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests must be received in proper form and can be made by telephone request or by written request. TELEPHONE REDEMPTION Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m. (Eastern time). The proceeds will normally be wired the following business day, but in no event more than seven days, to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System. If at any time the Fund shall determine it is necessary to terminate or modify this method of redemption, shareholders would be promptly notified. An authorization form permitting the Fund to accept telephone requests must first be completed. Authorization forms and information on this service are available from Federated Securities Corp. Telephone redemption instructions may be recorded. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fradulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming by telephone. If such a case should occur, another method of redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS Shares may also be redeemed by sending a written request to the Fund. Call the Fund for specific instructions before redeeming by letter. The shareholder will be asked to provide in the request his or her name, the Fund name and class name, the shareholder's account number, and the share or dollar amount requested. If Share certificates have been issued, they must be properly endorsed and should be sent by registered or certified mail with the written request. SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable other than to the shareholder of record must have signatures on written redemption requests guaranteed by: a trust company or commercial bank whose deposits are insured by the BIF, which is administered by the FDIC; a member of the New York, American, Boston, Midwest, or Pacific Stock Exchanges; a savings bank or savings and loan association whose deposits are insured by the SAIF, which is administered by the FDIC; or any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. The Fund and its transfer agent have adopted standards for accepting signature guarantees from the above institutions. The Fund may elect in the future to limit eligible signature guarantors to institutions that are members of a signature guarantee program. The Fund and its transfer agent reserve the right to amend these standards at any time without notice. RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request, provided that the transfer agent has received payment for the shares from the shareholder. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem Shares in any account and pay the proceeds to the shareholder if the account balance falls below a required minimum value of $25,000 due to shareholder redemptions. This requirement does not apply, however, if the balance falls below $25,000 because of changes in the Fund's net asset value. Before Shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional Shares to meet the minimum requirement. SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- VOTING RIGHTS Each Share of the Fund gives the shareholder one vote in Trustee elections and other matters submitted to shareholders of the Trust for vote. All shares of each portfolio in the Trust have equal voting rights, except that, in matters affecting only a particular fund or class, only shares of that particular fund or class are entitled to vote. As of June 3, 1994, Green Mountain Bank, Rutland, Vermont owned 97.42% of the voting securities of the Fund, and, therefore, may, for certain purposes, be deemed to control the Fund and be able to affect the outcome of certain matters presented for a vote of shareholders. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will be sought only for certain changes in the Trust's or the Fund's operation and for the election of Trustees under certain circumstances. Trustees may be removed by Trustees or by a two-thirds vote of the shareholders at a special meeting. A special meeting of shareholders shall be called by the Trustees upon the written request of shareholders owning at least 10% of the Trust's outstanding shares of all portfolios entitled to vote. MASSACHUSETTS PARTNERSHIP LAW Under certain circumstances, shareholders may be held personally liable as partners under Massachusetts law for acts or obligations of the Trust. To protect shareholders, the Trust has filed legal documents with Massachusetts that expressly disclaim the liability of shareholders for acts or obligations of the Trust. These documents require notice of this disclaimer to be given in each agreement, obligation, or instrument the Trust or its Trustees enter into or sign. In the unlikely event a shareholder is held personally liable for the Trust's obligations, the Trust is required by the Declaration of Trust to use its property to protect or compensate the shareholder. On request, the Trust will defend any claim made and pay any judgment against a shareholder for any act or obligation of the Trust. Therefore, financial loss resulting from liability as a shareholder will occur only if the Trust cannot meet its obligations to indemnify shareholders and pay judgments against them from its assets. TAX INFORMATION - -------------------------------------------------------------------------------- FEDERAL INCOME TAX The Fund will pay no federal income tax because the Fund expects to meet requirements of the Internal Revenue Code, as amended, applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. The Fund will be treated as a single, separate entity for federal income tax purposes so that income (including capital gains) and losses realized by the Trust's other portfolios, if any, will not be combined for tax purposes with those realized by the Fund. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions received. This applies whether dividends and distributions are received in cash or as additional Shares. Information on the tax status of dividends and distributions is provided annually. There are tax uncertainties with respect to whether increasing rate securities will be treated as having an original issue discount. If it is determined that the increasing rate securities have original issue discount, a holder will be required to include as income in each taxable year, in addition to interest paid on the security for that year, an amount equal to the sum of the daily portions of original issue discount for each day during the taxable year that such holder holds the security. There may also be tax uncertainties with respect to whether an extension of maturity on an increasing rate note will be treated as a taxable exchange. In the event it is determined that an extension of maturity is a taxable exchange, a holder will recognize a taxable gain or loss, which will be a short-term capital gain or loss if he holds the security as a capital asset, to the extent that the value of the security with an extended maturity differs from the adjusted basis of the security deemed exchanged therefor. PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES In the opinion of Houston, Houston & Donnelly, counsel to the Trust: The Trust is not subject to Pennsylvania corporate or personal property taxes; and Fund shares may be subject to personal property taxes imposed by counties, municipalities, and school districts in Pennsylvania to the extent that the portfolio securities in the Fund would be subject to such taxes if owned directly by residents of those jurisdictions. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local laws. PERFORMANCE INFORMATION - -------------------------------------------------------------------------------- From time to time, the Fund advertises its total return and yield for Institutional Service Shares. Total return represents the change, over a specified period of time, in the value of an investment in Institutional Service Shares after reinvesting all income and capital gains distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of Institutional Service Shares is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by Institutional Service Shares over a thirty-day period by the maximum offering price per share of Institutional Service Shares on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by Institutional Service Shares and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The Institutional Service Shares are sold without any sales load on other similar non-recurring charges other than a Rule 12b-1 fee. Total return and yield will be calculated separately for Institutional Service Shares and Institutional Shares. Because Institutional Service Shares are subject to 12b-1 fees, total return and yield of Institutional Shares, for the same period, will exceed that of Institutional Service Shares. From time to time, the Fund may advertise its performance using certain financial publications and/or compare its performance to certain indices. OTHER CLASSES OF SHARES - -------------------------------------------------------------------------------- Institutional Shares are sold to banks and other institutions that hold assets as principals or in a fiduciary capacity for individuals, trusts, estates or partnerships and are subject to a minimum initial investment of $25,000. Institutional Shares are sold at net asset value and are distributed without a Rule 12b-1 Plan. Financial institutions and brokers providing sales and/or administrative services may receive different compensation from one class of shares than from another class of shares. The amount of dividends payable to Institutional Shares will be greater than those payable to Institutional Service Shares by the difference between Class Expenses and distribution and shareholder services expenses borne by shares of each respective class. The stated advisory fee is the same for both classes of the Fund. INTERMEDIATE INCOME FUND FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Reference is made to the Report of Ernst & Young, Independent Auditors, on page 37.
PERIOD ENDED APRIL 30, 1994* - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 - --------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------------------------------------------------------------------------- Net investment income 0.23 - --------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (0.47) - --------------------------------------------------------------------------------------------- --------------- Total from investment operations (0.24) - --------------------------------------------------------------------------------------------- --------------- LESS DISTRIBUTIONS - --------------------------------------------------------------------------------------------- Dividends to shareholders from net investment income (0.23) - --------------------------------------------------------------------------------------------- --------------- NET ASSET VALUE, END OF PERIOD $ 9.53 - --------------------------------------------------------------------------------------------- --------------- TOTAL RETURN** (2.48)% - --------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------------------------------------------------------------------------- Expenses 0.00%(a) - --------------------------------------------------------------------------------------------- Net investment income 6.36%(a) - --------------------------------------------------------------------------------------------- Expense waiver/reimbursement (b) 1.40%(a) - --------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - --------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $17,702 - --------------------------------------------------------------------------------------------- Portfolio turnover rate 0% - ---------------------------------------------------------------------------------------------
* Reflects operations for the period from December 15, 1993 (date of initial public offering) to April 30, 1994. ** Based on net asset value which does not reflect the sales load or contingent deferred sales charge, if applicable. (a) Computed on an annualized basis. (b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above (Note 4). Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended April 30, 1994, which can be obtained free of charge. (See Notes which are an integral part of the Financial Statements) INTERMEDIATE INCOME FUND PORTFOLIO OF INVESTMENTS APRIL 30, 1994 - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE - ------------- ----------------------------------------------------------------------------------- -------------- ASSET-BACKED SECURITIES--15.4% - -------------------------------------------------------------------------------------------------- BANKING--7.5% ----------------------------------------------------------------------------------- $ 300,000 American Express Master Trust, 1993-1, Class A, 5.375%, 7/15/2001 $ 270,549 ----------------------------------------------------------------------------------- 200,000 First Chicago Master Trust,1990-A, Class A, 9.25%, 6/15/95 208,658 ----------------------------------------------------------------------------------- 150,000 First Chicago Master Trust, 1991-D, Class A, 8.40%, 6/15/98 156,048 ----------------------------------------------------------------------------------- 350,000 Signet Credit Card Trust, 1993-1, Class B, 5.40%, 2/15/2002 326,546 ----------------------------------------------------------------------------------- 400,000 Standard Credit Card Master Trust, 1993-1, Class B, 5.50%, 9/7/98 382,736 ----------------------------------------------------------------------------------- -------------- Total 1,344,537 ----------------------------------------------------------------------------------- -------------- HOME EQUITY RECEIVABLES--1.6% ----------------------------------------------------------------------------------- 280,987 TMS Home Equity Loan Trust 1993-B, Class A, 6.90%, 7/15/2007 279,374 ----------------------------------------------------------------------------------- -------------- NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--6.3% ----------------------------------------------------------------------------------- 400,000 Prudential Bache CMO, Series 8, Class F, 7.965%, 3/1/2019 396,136 ----------------------------------------------------------------------------------- 500,000 Residential Funding Mortgage Securities, Inc. Series 1993-S26, Class A-10, 7.50%, 7/25/2023 485,690 ----------------------------------------------------------------------------------- 300,000 Residential Funding Mortgage Securities, Inc. Series 1993-S31, Class A-7, 7.00%, 9/25/2023 253,830 ----------------------------------------------------------------------------------- -------------- Total 1,135,656 ----------------------------------------------------------------------------------- -------------- TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $2,918,984) 2,759,567 ----------------------------------------------------------------------------------- -------------- CORPORATE BONDS--57.2% - -------------------------------------------------------------------------------------------------- BANKING & FINANCE--18.6% ----------------------------------------------------------------------------------- 900,000 Bank of Montreal, Note, 6.10%, 9/15/2005 784,278 ----------------------------------------------------------------------------------- 500,000 Bank One, Milwaukee, Note, 6.625%, 4/15/2003 467,890 ----------------------------------------------------------------------------------- 1,100,000 Credit Lyonnais, Sub. Floating Rate Note, 5.00%, 7/19/94\ 1,098,625 ----------------------------------------------------------------------------------- 200,000 Meridian Bank, Reading, Note, 6.625%, 3/15/2003 184,004 ----------------------------------------------------------------------------------- 100,000 Northern Trust Corp., Note, 9.125%, 8/1/94 100,952 ----------------------------------------------------------------------------------- 150,000 Norwest Financial, Inc., Note, 6.875%, 12/15/99 147,886 ----------------------------------------------------------------------------------- 400,000 PNC Funding Corp., Note, 6.875%, 3/1/2003 379,248 ----------------------------------------------------------------------------------- 200,000 U.S. Bancorp., Note, 7.00%, 3/15/2003 188,366 ----------------------------------------------------------------------------------- -------------- Total 3,351,249 ----------------------------------------------------------------------------------- -------------- BROADCASTING--2.9% ----------------------------------------------------------------------------------- 500,000 CBS, Inc., Sr. Deb., 8.875%, 6/1/2022 521,370 ----------------------------------------------------------------------------------- -------------- CONSUMER PRODUCTS--3.1% ----------------------------------------------------------------------------------- 200,000 Eastman Kodak Co., 9.20%, 1/15/95 204,862 ----------------------------------------------------------------------------------- 150,000 Eastman Kodak Co., 9.125%, 3/1/98 154,372 ----------------------------------------------------------------------------------- 200,000 Philip Morris Cos., Inc., Note, 8.25%, 10/15/2003 204,558 ----------------------------------------------------------------------------------- -------------- Total 563,792 ----------------------------------------------------------------------------------- -------------- ECOLOGICAL SERVICES--2.8% ----------------------------------------------------------------------------------- 500,000 Waste Management Inc., 6.375%, 7/1/97 498,720 ----------------------------------------------------------------------------------- -------------- FINANCE--6.2% ----------------------------------------------------------------------------------- 100,000 Ford Capital Bv, Note, 9.00%, 8/15/98 106,820 ----------------------------------------------------------------------------------- 200,000 General Motors Acceptance Corp., 9.40%, 5/18/95 207,242 ----------------------------------------------------------------------------------- 105,000 Household Finance Corp., Note, 8.875%, 7/5/99 110,369 ----------------------------------------------------------------------------------- 140,000 Household Finance Corp., Note, 8.95%, 9/15/99 151,112 ----------------------------------------------------------------------------------- 200,000 ITT Financial Corp., Note, 8.125%, 11/15/98 206,516 ----------------------------------------------------------------------------------- 300,000 Texaco Capital, Inc., Note, 9.00%, 12/15/99 323,643 ----------------------------------------------------------------------------------- -------------- Total 1,105,702 ----------------------------------------------------------------------------------- -------------- OIL & GAS--1.7% ----------------------------------------------------------------------------------- 200,000 B.P. America, Inc., Note, 7.875%, 5/15/2002 205,528 ----------------------------------------------------------------------------------- 100,000 Sun, Inc., Note, 7.95%, 12/15/2001 101,062 ----------------------------------------------------------------------------------- -------------- Total 306,590 ----------------------------------------------------------------------------------- -------------- SOVEREIGN GOVERNMENT--11.3% ----------------------------------------------------------------------------------- 500,000 Province of Manitoba, Deb., 9.50%, 10/1/2000 559,760 ----------------------------------------------------------------------------------- 500,000 Province of Ontario, Sr. Unsecured Notes, 7.375%, 1/27/2003 492,870 ----------------------------------------------------------------------------------- 500,000 Province of Quebec, Note, 7.50%, 7/15/2002 499,710 ----------------------------------------------------------------------------------- 500,000 Republic of Malta, 7.50%, 3/29/2009 474,065 ----------------------------------------------------------------------------------- -------------- Total 2,026,405 ----------------------------------------------------------------------------------- -------------- TRANSPORTATION--1.5% ----------------------------------------------------------------------------------- 250,000 CSX Corp., Note, 9.50%, 11/15/95 263,033 ----------------------------------------------------------------------------------- -------------- UTILITIES--9.1% ----------------------------------------------------------------------------------- 100,000 Baltimore Gas & Electric Co., 8.375%, 8/15/2001 106,026 ----------------------------------------------------------------------------------- 400,000 Duke Power, 5.78%, 7/8/99 379,616 ----------------------------------------------------------------------------------- 500,000 GTE Corp., Deb., 8.50%, 4/1/2017 497,935 ----------------------------------------------------------------------------------- 180,000 Minnesota Power & Light Co., 7.75%, 6/1/2007 181,984 ----------------------------------------------------------------------------------- 500,000 Wisconsin Telephone Co., 6.25%, 8/1/2004 458,155 ----------------------------------------------------------------------------------- -------------- Total 1,623,716 ----------------------------------------------------------------------------------- -------------- TOTAL CORPORATE BONDS (IDENTIFIED COST $10,785,534) 10,260,577 ----------------------------------------------------------------------------------- -------------- U.S. TREASURY NOTE--1.1% - -------------------------------------------------------------------------------------------------- 200,000 3.875%, 4/30/95 (IDENTIFIED COST $199,998) 197,582 ----------------------------------------------------------------------------------- -------------- *REPURCHASE AGREEMENTS--36.8% - -------------------------------------------------------------------------------------------------- 3,000,000 B.T. Securities, Inc., 3.61%, dated 4/29/94 due 5/2/94 3,000,000 ----------------------------------------------------------------------------------- 3,589,000 UBS Securities, Inc., 3.62%, dated 4/29/94, due 5/2/94 3,589,000 ----------------------------------------------------------------------------------- -------------- TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) (NOTE 2B) 6,589,000 ----------------------------------------------------------------------------------- -------------- TOTAL INVESTMENTS (IDENTIFIED COST $20,493,516) (NOTE 2A) $ 19,806,726\\ ----------------------------------------------------------------------------------- --------------
* The repurchase agreements are fully collateralized by U.S. Treasury obligations based on market prices at the date of the portfolio. The investments in repurchase agreements are through participation in joint accounts with other Federated Funds. \ Denotes floating rate obligation for which the current rate and next reset date is shown. \\ The cost of investments for federal tax purposes amounts to $20,493,516. The net unrealized depreciation of investments on a federal income tax basis amounts to $686,790, which is comprised of $6,285 appreciation and $693,075 depreciation at April 30,1994. The following abbreviation is used in this portfolio: CMO--Collateralized Mortgage Obligation Note: The categories of investments are shown as a percentage of net assets ($17,927,250) at April 30, 1994. INTERMEDIATE INCOME FUND STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1994 - -------------------------------------------------------------------------------- ASSETS: - ------------------------------------------------------------------------------------------------- Investments in repurchase agreements (Note 2B) $ 6,589,000 - --------------------------------------------------------------------------------- Investments in other securities (Note 2A) 13,217,726 - --------------------------------------------------------------------------------- -------------- Total investments, at value (identified and tax cost, $20,493,516) $ 19,806,726 - ------------------------------------------------------------------------------------------------- Cash 133,515 - ------------------------------------------------------------------------------------------------- Interest receivable 206,796 - ------------------------------------------------------------------------------------------------- Receivable for Fund shares sold 117,093 - ------------------------------------------------------------------------------------------------- Deferred expenses (Note 2F) 8,416 - ------------------------------------------------------------------------------------------------- -------------- Total assets 20,272,546 - ------------------------------------------------------------------------------------------------- LIABILITIES: - ------------------------------------------------------------------------------------------------- Payable for investments purchased 2,234,876 - --------------------------------------------------------------------------------- Dividends payable 77,054 - --------------------------------------------------------------------------------- Payable to Transfer and Dividend Disbursing Agent (Note 4) 2,592 - --------------------------------------------------------------------------------- Payable to Administrator (Note 4) 1,076 - --------------------------------------------------------------------------------- Accrued expenses 29,698 - --------------------------------------------------------------------------------- -------------- Total liabilities 2,345,296 - ------------------------------------------------------------------------------------------------- -------------- NET ASSETS for 1,881,796 shares of beneficial interest outstanding $ 17,927,250 - ------------------------------------------------------------------------------------------------- -------------- NET ASSETS CONSIST OF: - ------------------------------------------------------------------------------------------------- Paid-in capital $ 18,621,894 - ------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) on investments (686,790) - ------------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) on investments (7,854) - ------------------------------------------------------------------------------------------------- -------------- Total Net Assets $ 17,927,250 - ------------------------------------------------------------------------------------------------- -------------- NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE: - ------------------------------------------------------------------------------------------------- Institutional Shares (net assets of $17,702,269 / 1,858,178 shares of beneficial interest) $9.53 - ------------------------------------------------------------------------------------------------- -------------- Institutional Service Shares (net assets of $224,981 / 23,618 shares of beneficial interest) $9.53 - ------------------------------------------------------------------------------------------------- --------------
(See Notes which are an integral part of the Financial Statements). INTERMEDIATE INCOME FUND STATEMENT OF OPERATIONS PERIOD ENDED APRIL 30, 1994* - -------------------------------------------------------------------------------- INVESTMENT INCOME: - --------------------------------------------------------------------------------------------------- Interest income (Note 2C) $ 279,962 - --------------------------------------------------------------------------------------------------- EXPENSES: - --------------------------------------------------------------------------------------------------- Investment advisory fee (Note 4) $ 22,003 - ---------------------------------------------------------------------------------------- Administrative personnel and services fees (Note 4) 1,077 - ---------------------------------------------------------------------------------------- Custodian and recordkeeper fees and expenses 28,474 - ---------------------------------------------------------------------------------------- Transfer and dividend disbursing agent fees and expenses (Note 4) 4,082 - ---------------------------------------------------------------------------------------- Fund share registration costs 765 - ---------------------------------------------------------------------------------------- Distribution services fees--Institutional Service Shares (Note 4) 146 - ---------------------------------------------------------------------------------------- Legal fees 2,000 - ---------------------------------------------------------------------------------------- Printing and postage 1,584 - ---------------------------------------------------------------------------------------- Miscellaneous 1,373 - ---------------------------------------------------------------------------------------- --------- Total expenses 61,504 - ---------------------------------------------------------------------------------------- Deduct-- - ---------------------------------------------------------------------------------------- Waiver of investment advisory fee (Note 4) $ 22,003 - ----------------------------------------------------------------------------- Reimbursement of other operating expenses (Note 4) 39,355 61,358 - ----------------------------------------------------------------------------- --------- --------- Net expenses 146 - --------------------------------------------------------------------------------------------------- ----------- Net investment income 279,816 - --------------------------------------------------------------------------------------------------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: - --------------------------------------------------------------------------------------------------- Net realized gain (loss) on investment transactions (identified cost basis) (7,854) - --------------------------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments (686,790) - --------------------------------------------------------------------------------------------------- ----------- Net realized and unrealized gain (loss) on investments (694,644) - --------------------------------------------------------------------------------------------------- ----------- Change in net assets resulting from operations $ (414,828) - --------------------------------------------------------------------------------------------------- -----------
* For the period from December 15, 1993 (date of initial public offering) to April 30, 1994. (See Notes which are an integral part of the Financial Statements). INTERMEDIATE INCOME FUND STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD ENDED APRIL 30, 1994* ------------------ INCREASE (DECREASE) IN NET ASSETS: - ---------------------------------------------------------------------------------------------- OPERATIONS-- - ---------------------------------------------------------------------------------------------- Net investment income $ 279,816 - ---------------------------------------------------------------------------------------------- Net realized gain (loss) on investment transactions ($0 as computed for federal income tax purposes) (Note 2D) (7,854) - ---------------------------------------------------------------------------------------------- Change in unrealized appreciation (depreciation) on investments (686,790) - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets resulting from operations (414,828) - ---------------------------------------------------------------------------------------------- ------------------ DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)-- - ---------------------------------------------------------------------------------------------- Dividends to shareholders from net investment income: - ---------------------------------------------------------------------------------------------- Institutional Shares (276,248) - ---------------------------------------------------------------------------------------------- Institutional Service Shares (3,568) - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets from distributions to shareholders (279,816) - ---------------------------------------------------------------------------------------------- ------------------ FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)-- - ---------------------------------------------------------------------------------------------- Net proceeds from sale of shares 25,769,938 - ---------------------------------------------------------------------------------------------- Net asset value of shares issued to shareholders in payment of dividends declared 11,515 - ---------------------------------------------------------------------------------------------- Cost of shares redeemed (7,159,559) - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets from fund share transactions 18,621,894 - ---------------------------------------------------------------------------------------------- ------------------ Change in net assets 17,927,250 - ---------------------------------------------------------------------------------------------- NET ASSETS: - ---------------------------------------------------------------------------------------------- Beginning of period -- - ---------------------------------------------------------------------------------------------- ------------------ End of period $ 17,927,250 - ---------------------------------------------------------------------------------------------- ------------------
*For the period from December 15, 1993 (date of initial public offering) to April 30, 1994. (See Notes which are an integral part of the Financial Statements). INTERMEDIATE INCOME FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1994 - -------------------------------------------------------------------------------- (1) ORGANIZATION Federated Income Securities Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. The Trust consists of two diversified portfolios. The financial statements included herein present only those of Intermediate Income Fund (the "Fund"). The financial statements of the other portfolio are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund provides two classes of shares: Institutional Shares, and Institutional Service Shares. Institutional Service Shares are identical in all respects to Institutional Shares except that Institutional Service Shares will be sold pursuant to a distribution plan ("Plan") adopted in accordance with Investment Company Act Rule 12b-1. (2) SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP). A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at the mean between the over-the-counter bid and asked prices as furnished by an independent pricing service. Corporate bonds and other fixed income securities/asset backed securities are valued at the last sale price reported on national securities exchanges on that day, if available. Otherwise, corporate bonds and other fixed income securities/asset backed securities and short-term obligations are valued at the prices provided by an independent pricing service. Short-term securities with remaining maturities of sixty days or less at the time of purchase may be stated at amortized cost, which approximates value. B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian bank's vault, all securities held as collateral in support of repurchase agreement investments. Additionally, procedures have been established by the Fund to monitor, on a daily basis, the value of each repurchase agreements underlying collateral to ensure the value at least equals the principal amount of the repurchase agreement, including accrued interest. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Board of Trustees ("Trustees"). Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. Accordingly, the Fund could receive less than the repurchase price on the sale of collateral securities. C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued daily. Bond premium and discount are amortized as required by the Internal Revenue Code, as amended ("Code"). Distributions to shareholders are recorded on the ex-dividend date. D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its taxable income. Accordingly, no provisions for federal tax are necessary. Net capital losses of $7,854 attributable to security transactions incurred after October 31, 1993 are treated as arising on May 1, 1994, the first day of the Fund's next taxable year. E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its shares in its first fiscal year, excluding the initial expense of registering the shares, have been deferred and are being amortized using the straight-line method over a period of five years from the Fund's commencement date. G. OTHER--Investment transactions are accounted for on the trade date. (3) SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in Fund shares were as follows:
YEAR ENDED APRIL 30, 1994* INSTITUTIONAL SHARES SHARES AMOUNT - ------------------------------------------------------------------------------------ ----------- -------------- Shares sold 2,565,565 $ 25,464,130 - ------------------------------------------------------------------------------------ Shares issued to shareholders in payment of dividends declared 1,194 11,509 - ------------------------------------------------------------------------------------ Shares redeemed (708,581) (7,091,038) - ------------------------------------------------------------------------------------ ----------- -------------- 1,858,178 $ 18,384,601 - ------------------------------------------------------------------------------------ ----------- --------------
* For the period from December 15, 1993 (date of initial public offering) to April 30, 1994.
YEAR ENDED APRIL 30, 1994* INSTITUTIONAL SERVICE SHARES SHARES AMOUNT - ------------------------------------------------------------------------------------ ----------- -------------- Shares sold 30,700 $ 305,815 - ------------------------------------------------------------------------------------ Shares issued to shareholders in payment of dividends declared -- -- - ------------------------------------------------------------------------------------ Shares redeemed (7,082) (68,522) - ------------------------------------------------------------------------------------ ----------- -------------- 23,618 $ 237,293 - ------------------------------------------------------------------------------------ ----------- -------------- Net change resulting from Fund Share transactions 1,881,796 $ 18,621,894 - ------------------------------------------------------------------------------------ ----------- --------------
* For the period from December 15, 1993 (date of initial public offering), to April 30, 1994. (4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser ("Adviser"), receives for its services an annual investment advisory fee equal to 0.50 of 1% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive its fee and reimburse certain operating expenses of the Fund. Adviser can modify or terminate this voluntary waiver and reimbursement at any time at its sole discretion. ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund administrative personnel and services. Prior to March 1, 1994, these services were provided at approximate cost. Effective March 1, 1994, the fee is based on the level of average aggregate net assets of all funds advised by subsidiaries of Federated Investors. The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION AND SERVICE PLAN--The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Institutional Service Shares. The Plan provides that the Fund may incur distribution expenses up to 0.25 of 1% of the average daily net assets of the shares, annually, to compensate FSC. Under the terms of a shareholder service agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets for each class of shares for the period. This fee is to obtain certain personal services for shareholders and the maintenance of shareholder accounts. TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company serves as transfer and dividend disbursing agent for the Fund. The fee is based on the size, type and number of accounts and transactions made by shareholders. ORGANIZATIONAL EXPENSES--Organizational expenses ($47,948) and start-up administrative service expenses ($38,751) were borne initially by Adviser. The Fund has agreed to reimburse the Adviser for the organizational expenses and start-up administrative expenses during the five year period following December 15, 1993 (date the Fund's portfolio first became effective). For the period ended April 30, 1994, the Fund paid ($1,331) and ($1,076), respectively pursuant to this agreement. Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. (5) INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the period ended April 30, 1994 were as follows: - -------------------------------------------------------------------------------------------------- PURCHASES-- $ 14,487,562 - -------------------------------------------------------------------------------------------------- -------------- SALES-- $ 21,423 - -------------------------------------------------------------------------------------------------- --------------
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Trustees and Shareholders of INTERMEDIATE INCOME FUND (a portfolio of Federated Income Securities Trust): We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Intermediate Income Fund (one of the portfolios comprising Federated Income Securities Trust), as of April 30, 1994, and the related statement of operations, the statement of changes in net assets and the financial highlights (see pages 2 and 26 of this prospectus) for the period from December 15, 1993 (date of initial public offering) to April 30, 1994. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of April 30, 1994, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Intermediate Income Fund at April 30, 1994 and the results of its operations, the changes in its net assets and the financial highlights for the period from December 15, 1993 to April 30, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG Pittsburgh, Pennsylvania June 9, 1994 ADDRESSES - -------------------------------------------------------------------------------- Intermediate Income Fund Federated Investors Tower Institutional Service Shares Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Custodian State Street Bank and P.O. Box 8602 Trust Company Boston, Massachusetts 02266-8602 - --------------------------------------------------------------------------------------------------------------------- Transfer Agent and Dividend Disbursing Agent Federated Services Company Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Shareholder Servicing Agent Federated Shareholder Services Federated Investors Tower Pittsburgh, Pennsylvania 15222-3779 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Houston, Houston & Donnelly 2510 Centre City Tower Pittsburgh, Pennsylvania 15222 - --------------------------------------------------------------------------------------------------------------------- Legal Counsel Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W. Washington, D.C. 20037 - --------------------------------------------------------------------------------------------------------------------- Independent Auditors Ernst & Young One Oxford Centre Pittsburgh, Pennsylvania 15219 - ---------------------------------------------------------------------------------------------------------------------
INTERMEDIATE INCOME FUND INSTITUTIONAL SERVICE SHARES PROSPECTUS A Diversified Portfolio of Federated Income Securities Trust, An Open-End, Management Investment Company June 30, 1994 3090804A-SS (6/94) INTERMEDIATE INCOME FUND (A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST) INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES COMBINED STATEMENT OF ADDITIONAL INFORMATION The Institutional Shares and Institutional Service Shares of Intermediate Income Fund (the "Fund") represent interests in a diversified investment portfolio in Federated Income Securities Trust (the "Trust"). This Combined Statement of Additional Information should be read with the respective prospectus for either class of shares dated June 30, 1994. This Statement is not a prospectus itself. To receive a copy of either prospectus, write or call the Fund. FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 Statement dated June 30, 1994 FEDERATED SECURITIES CORP. --------------------------------------------------------- Distributor A subsidiary of FEDERATED INVESTORS TABLE OF CONTENTS - -------------------------------------------------------------------------------- GENERAL INFORMATION ABOUT THE FUND 1 - --------------------------------------------------------------- INVESTMENT OBJECTIVE AND POLICIES 1 - --------------------------------------------------------------- Collateralized Mortgage Obligations 1 Medium Term Notes and Deposit Notes 1 Average Life 1 Weighted Average Portfolio Maturity 1 Weighted Average Portfolio Duration 2 When-Issued and Delayed Delivery Transactions 2 Foreign Currency Transactions 2 Risks 4 Lending of Portfolio Securities 4 Restricted and Illiquid Securities 4 Repurchase Agreements 4 Portfolio Turnover 5 Reverse Repurchase Agreements 5 Investment Limitations 5 TRUST MANAGEMENT 7 - --------------------------------------------------------------- Officers and Trustees 7 The Funds 10 Fund Ownership 10 Trustee Liability 10 INVESTMENT ADVISORY SERVICES 11 - --------------------------------------------------------------- Adviser to the Fund 11 Other Advisory Services 11 Other Related Services 11 ADMINISTRATIVE SERVICES 12 - --------------------------------------------------------------- BROKERAGE TRANSACTIONS 12 - --------------------------------------------------------------- PURCHASING SHARES 12 - --------------------------------------------------------------- Distribution Plan (Institutional Service Shares only) and Shareholder Services Plans 12 Other Payments to Financial Institutions 13 DETERMINING NET ASSET VALUE 13 - --------------------------------------------------------------- Determining Value of Securities 13 REDEEMING SHARES 13 - --------------------------------------------------------------- Redemption in Kind 13 TAX STATUS 13 - --------------------------------------------------------------- The Fund's Tax Status 13 Shareholders' Tax Status 14 TOTAL RETURN 14 - --------------------------------------------------------------- YIELD 14 - --------------------------------------------------------------- PERFORMANCE COMPARISONS 15 - --------------------------------------------------------------- APPENDIX 16 - --------------------------------------------------------------- GENERAL INFORMATION ABOUT THE FUND - -------------------------------------------------------------------------------- The Fund is a portfolio of Federated Income Securities Trust (the "Trust"), which was established as a Massachusetts business trust under a Declaration of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to permit the Trust to offer one or more separate series and classes of shares and to change the name of the Trust from "Federated Floating Rate Trust" to "Federated Income Securities Trust." Shares of the Fund are offered in two classes, Institutional Shares and Institutional Service Shares (individually and collectively referred to as the "Shares"). This Combined Statement of Additional Information relates to both classes of shares of the Fund. INVESTMENT OBJECTIVE AND POLICIES - -------------------------------------------------------------------------------- The Fund's investment objective is to provide current income. The investment objective may not be changed without the prior approval of the Fund's shareholders. The policies described below may be changed by the Board of Trustees without shareholder approval. Shareholders will be notified before any material change in these policies becomes effective. COLLATERALIZED MORTGAGE OBLIGATIONS The following example illustrates how mortgage cash flows are prioritized in the case of CMOs. Most of the CMOs in which the Fund invests use the same basic structure. (1) Several classes of securities are issued against a pool of mortgage collateral. The most common structure contains four tranches of securities: The first three (A, B, and C bonds) pay interest at their stated rates beginning with the issue date; the final tranche (Z bond) typically receives any excess income from the underlying investments after payments are made to the other tranches and receives no principal or interest payments until the shorter maturity tranches have been retired, but then receives all remaining principal and interest payments. (2) The cash flows from the underlying mortgages are applied first to pay interest and then to retire securities. (3) The tranches of securities are retired sequentially. All principal payments are directed first to the shortest-maturity tranche (or A bonds). When those securities are completely retired, all principal payments are then directed to the next-shortest-maturity security tranche (or B bond). This process continues until all of the tranches have been completely retired. Because the cash flow is distributed sequentially instead of pro rata, as with pass-through securities, the cash flows and average lives of CMOs are more predictable, and there is a period of time during which the investors in the longer-maturity classes receive no principal paydowns. One or more of the tranches often bear interest at an adjustable rate. The interest portion of these payments is distributed by the Fund as income, and the principal portion is reinvested. MEDIUM TERM NOTES AND DEPOSIT NOTES Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt obligations as described in the respective prospectuses. MTNs and Deposit Notes trade like commercial paper, but may have maturities from 9 months to ten years and are rated like corporate debt obligations. AVERAGE LIFE Average life, as applicable to asset-backed securities, is computed by multiplying each principal repayment by the time of payment (months or years from the evaluation date), summing these products, and dividing the sum by the total amount of principal repaid. The weighted-average life is calculated by multiplying the maturity of each security in a given pool by its remaining balance, summing the products, and dividing the result by the total remaining balance. WEIGHTED AVERAGE PORTFOLIO MATURITY The Fund will determine its dollar-weighted present average portfolio maturity by assigning a "weight" to each portfolio security based upon the pro rata market value of such portfolio security in comparison to the market value of the entire portfolio. The remaining maturity of each portfolio security is then multiplied by its weight, and the results are added together to determine the weighted average maturity of the portfolio. For purposes of calculating its dollar-weighted average portfolio maturity, the Fund will (a) treat asset-backed securities as having a maturity equal to their estimated weighted-average maturity and (b) treat variable and floating rate instruments as having a remaining maturity commensurate with the period remaining until the next scheduled adjustment to the instrument's interest rate. The average maturity of asset-backed securities will be calculated based upon assumptions established by the investment adviser as to the probable amount of principal prepayments weighted by the period until such prepayments are expected to be removed. Fixed rate securities hedged with interest rate swaps or caps will be treated as floating or variable rate securities based upon the interest rate index of the swap or cap; floating and variable rate securities hedged with interest rate swaps or floors will be treated as having a maturity equal to the term of the swap or floor. In the event that the Fund holds an interest rate swap, cap or floor that is not hedging another portfolio security, the swap, cap or floor will be treated as having a maturity equal to its term and a weight equal to its notional principal amount for such term. WEIGHTED AVERAGE PORTFOLIO DURATION Duration is calculated by dividing the sum of the time-weighted present values of cash flows of a security or portfolio of securities, including principal and interest payments, by the sum of the present values of the cash flows. Certain debt securities, such as asset-backed securities, may be subject to prepayment at irregular intervals. The duration of these instruments will be calculated based upon assumptions established by the investment adviser as to the probable amount and sequence of principal prepayments. Mathematically, duration is measured as follows: PVCF1(1) PVCF2(2) PVCF3(3) PVCFn(n) Duration = -------- + -------- + -------- + . . . . . + -------- PVTCF PVTCF PVTCF PVTCF where PVCFt = the present value of the cash flow in period t discounted at the prevailing yield-to-maturity t = the period when the cash flow is received n = remaining number of periods until maturity PVTCF = total present value of the cash flow from the bond where the present value is determined using the prevailing yield-to-maturity The duration of interest rate agreements, such as interest rate swaps, caps and floors, is calculated in the same manner as other securities. However, certain interest rate agreements have negative durations, which the Fund may use to reduce its weighted average portfolio duration. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. The Fund engages in when-issued and delayed delivery transactions only for the purpose of acquiring portfolio securities consistent with the Fund's investment objective and policies, and not for investment leverage. These transactions are made to secure what is considered to be an advantageous price and yield for the Fund. Settlement dates may be a month or more after entering into these transactions, and the market values of the securities purchased may vary from the purchase prices. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Fund sufficient to make payment for the securities to be purchased are segregated at the trade date. These securities are marked to market daily and are maintained until the transaction is settled. The Fund may engage in these transactions to an extent that would cause the segregation of an amount up to 20% of the total value of its assets. FOREIGN CURRENCY TRANSACTIONS When the Fund invests in foreign securities, such securities may be denominated in foreign currency, and the Fund may temporarily hold funds in foreign currencies. Thus, the value of the Fund's shares can be affected by changes in currency exchange rates. The value of the Fund's investments denominated in foreign currencies and any cash it holds in foreign currencies will depend on the relative strength of those currencies and the U.S. dollar, and the Fund may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rate between foreign currencies and the U.S. dollar. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange market as well as by political factors. Changes in the foreign currency exchange rates may also affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by the Fund. Accordingly, the Fund's ability to achieve its investment objective will depend, to a certain extent, on favorable exchange rates. Subject to certain percentage limitations, the Fund may engage in foreign currency exchange transactions to protect against uncertainty in the level of future exchange rates. The Fund expects to engage in foreign currency exchange transactions in connection with the purchase and sale of portfolio securities ("transaction hedging"), and to protect the value of specific portfolio positions ("position hedging"). The Fund may engage in "transaction hedging" to protect against a change in the foreign currency exchange rate between the date on which the Fund contracts to purchase or sell the security and the settlement date, or to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. For that purpose, the Fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. If conditions warrant, the Fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts as a hedge against changes in foreign currency exchange rates between the trade and settlement dates on particular transactions and not for speculation. A foreign currency forward contract is a negotiated agreement to exchange currency at a future time at a rate or rates that may be higher or lower than the spot rate. Foreign currency futures contracts are standardized exchange-traded contracts and have margin requirements. For transaction hedging purposes, the Fund may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. The Fund may engage in "position hedging" to protect against the decline in the value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of currency or securities which the Fund intends to buy, when the Fund holds cash reserves and short-term investments). For position hedging purposes, the Fund may purchase or sell foreign currency futures contracts and foreign currency forward contracts, and may purchase put or call options on foreign currency futures contracts and on foreign currencies on domestic and foreign exchanges or over-the-counter markets. In connection with position hedging, the Fund may also purchase or sell foreign currency on a spot basis. The Fund may write covered call options on foreign currencies to offset some of the costs of hedging those currencies. Over-the-counter transactions are less liquid than exchange-traded transactions, and are subject to the Fund's 15 percent limitation on illiquid investments. The Fund will engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of the Fund's investment adviser, the pricing mechanism and liquidity are satisfactory and the participants are responsible parties likely to meet their contractual obligations. The Fund's ability to engage in hedging and related option transactions may be limited by tax considerations. Hedging transactions involve costs and may result in losses. Unlike entering directly into a foreign currency futures contract or directly purchasing foreign currencies, which require the purchaser to buy the security on a set date at a specified price, the purchase of a put option entitles, but does not obligate, its purchaser to decide, on or before a future date, whether to assume a short position at the specified price. Generally, if the hedged portfolio securities decrease in value during the term of an option, the related foreign currency futures contract will also decrease in value and the option will increase in value. In such an event, the Fund will normally close out its option by selling an identical option. If the hedge is successful, the proceeds received by the Fund upon the sale of the second option will be large enough to offset both the premium paid by the Fund for the original option plus the decrease in value of the hedged securities. Alternatively, the Fund may exercise its put option to close out the position. To do so, it would simultaneously enter into the futures contract of the type underlying the option (for a price less than the strike price of the option) and exercise the option. The Fund would then deliver the foreign currency futures contract in return for payment of the strike price. If the Fund neither closes out nor exercises an option, the option will expire on the date provided in the option contract, and only the premium paid for the contract will be lost. When the Fund writes a call option on foreign currency, it is undertaking the obligation of assuming a short position (i.e., selling a foreign currency) at the fixed strike price at any time during the life of the option if the option is exercised. As currency exchange rates fall, the Fund's obligation under a call option on foreign currencies costs less to fulfill, causing the value of the Fund's call option position to increase. In other words, as the exchange rate goes down below the strike price, the buyer of the option has no reason to exercise the call, so that the Fund keeps the premium received for the option. This premium can offset some or all of the drop in value of the Fund's portfolio securities. Prior to the expiration of a call written by the Fund, or exercise of it by the buyer, the Fund may close out the option by buying an identical option. If the hedge is successful, the cost of the second option will be less than the premium received by the Fund for the initial option. The net premium income of the Fund will then offset some or all of the decrease in value of the hedged currencies. The Fund will not maintain open positions in foreign currency futures contracts it has sold or call options it has written on foreign currencies if, in the aggregate, the value of the open positions (marked to market) exceeds the current market value of its securities portfolio plus or minus the unrealized gain or loss on those open positions, adjusted for the correlation of volatility between the hedged securities and the futures contracts. If this limitation is exceeded at any time, the Fund will take prompt action to close out a sufficient number of open contracts to bring its open futures and options positions within this limitation. RISKS. When the Fund invests in foreign currency futures contracts and foreign currency forward contracts, and options thereon as hedging devices, there is a risk that the prices of the securities subject to the futures contract, forward contract, or option thereon may not correlate perfectly with the prices of the securities in the Fund's portfolio. This may cause the futures contract, forward contract, and any related options to react differently than the portfolio securities to market changes. In addition, the Fund's investment adviser could be incorrect in its expectations about the direction or extent of market factors, such as interest rate or currency exchange rate movements. In these events, the Fund may lose money on the futures contract, forward contract or option. With respect to futures contracts, the Fund may be unable to anticipate the extent of its losses. It is not certain that a secondary market for positions in futures contracts, forward contracts or for options will exist at all times. Although the investment adviser will consider liquidity before entering into such transactions, there is no assurance that a liquid secondary market on an exchange will exist for any particular futures contract, forward contract or option at any particular time. The Fund's ability to establish and close out futures and options positions depends on this secondary market. LENDING OF PORTFOLIO SECURITIES The collateral received when the Fund lends portfolio securities must be valued daily and, should the market value of the loaned securities increase, the borrower must furnish additional collateral to the Fund. During the time portfolio securities are on loan, the borrower pays the Fund any dividends or interest paid on such securities. Loans are subject to termination at the option of the Fund or the borrower. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. RESTRICTED AND ILLIQUID SECURITIES The ability of the Trustees to determine the liquidity of certain restricted securities is permitted under the Securities and Exchange Commission ("SEC") Staff position set forth in the adopting release for Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor for certain secondary market transactions involving securities subject to restrictions on resale under federal securities laws. The Rule provides an exemption from registration for resales of otherwise restricted securities to qualified institutional buyers. The Rule was expected to further enhance the liquidity of the secondary market for securities eligible for resale under Rule 144A. The Fund believes that the Staff of the SEC has left the question of determining the liquidity of all restricted securities eligible for resale under Rule 144A to the Trustees . The Trustees consider the following criteria in determining the liquidity of certain restricted securities: the frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security and the number of other potential buyers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace trades. REPURCHASE AGREEMENTS The Fund requires its custodian to take possession of the securities subject to repurchase agreements, and these securities are marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that a defaulting seller files for bankruptcy or becomes insolvent, disposition of securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund will only enter into repurchase agreements with banks and other recognized financial institutions such as broker/dealers which are deemed by the Fund's adviser to be creditworthy pursuant to guidelines established by the Trustees. PORTFOLIO TURNOVER While the Fund does not intend to engage in substantial short-term trading, from time to time it may sell portfolio securities for investment reasons without considering how long they have been held. For example, the Fund would do this: to take advantage of short-term differentials in yields or market values; to take advantage of new investment opportunities; to respond to changes in the creditworthiness of an issuer; or to try to preserve gains or limit losses. Any such trading would increase the Fund's portfolio turnover and its transaction costs. The Fund will not attempt to set or meet any arbitrary portfolio turnover rate since turnover is incidental to transactions considered necessary to achieve the Fund's investment objective. However, it is expected that the portfolio turnover rate generally will not exceed 100%. REVERSE REPURCHASE AGREEMENTS The Fund may also enter into reverse repurchase agreements. This transaction is similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers possession of a portfolio instrument to another person, such as a financial institution, broker, or dealer, in return for a percentage of the instrument's market value in cash, and agrees that on a stipulated date in the future the Fund will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed upon rate. When effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar amount sufficient to make payment for the obligations to be purchased, are segregated at the trade date. These securities are marked to market daily and maintained until the transaction is settled. INVESTMENT LIMITATIONS SELLING SHORT AND BUYING ON MARGIN The Fund will not sell any securities short or purchase any securities on margin, but may obtain such short-term credits as may be necessary for clearance of purchases and sales of portfolio securities. The deposit or payment by the Fund of initial or variation margin in connection with futures contracts or related options transactions is not considered the purchase of a security on margin. ISSUING SENIOR SECURITIES AND BORROWING MONEY The Fund will not issue senior securities except that the Fund may borrow money and engage in reverse repurchase agreements in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money or engage in reverse repurchase agreements for investment leverage, but rather as a temporary, extraordinary, or emergency measure to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. The Fund will not purchase any securities while borrowings in excess of 5% of the value of the Fund's total assets are outstanding. PLEDGING ASSETS The Fund will not mortgage, pledge, or hypothecate any assets except to secure permitted borrowings. In those cases, it may mortgage, pledge, or hypothecate assets having a market value not exceeding the lesser of the dollar amounts borrowed or 15% of the value of total assets at the time of the borrowing. For purposes of this limitation, the following are not deemed to be pledges: margin deposits for the purchase and sale of futures contracts and related options, and segregation or collateral arrangements made in connection with options activities or the purchase of securities on a when-issued basis. INVESTING IN REAL ESTATE The Fund will not buy or sell real estate, including limited partnership interests, although it may invest in the securities of companies whose business involves the purchase or sale of real estate or in securities which are secured by real estate or interests in real estate. INVESTING IN COMMODITIES The Fund will not purchase or sell commodities, commodity contracts, or commodity futures contracts except to the extent that the Fund may engage in transactions involving futures contracts and related options. UNDERWRITING The Fund will not underwrite any issue of securities, except as it may be deemed to be an underwriter under the Securities Act of 1933 in connection with the sale of restricted securities which the Fund may purchase pursuant to its investment objective, policies, and limitations. DIVERSIFICATION OF INVESTMENTS With respect to securities comprising 75% of the value of its total assets, the Fund will not purchase securities issued by any one issuer (other than cash, cash items or securities issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized by such securities) if as a result more than 5% of the value of its total assets would be invested in the securities of that issuer. Also, the Fund will not acquire more than 10% of the outstanding voting securities of any one issuer. CONCENTRATION OF INVESTMENTS The Fund will not invest 25% or more of the value of its total assets in any one industry except that the Fund may invest 25% or more of the value of its total assets in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, and repurchase agreements collateralized by such securities. LENDING CASH OR SECURITIES The Fund will not lend any of its assets, except portfolio securities up to one-third of the value of its total assets. This shall not prevent the Fund from purchasing or holding U.S. government obligations, money market instruments, variable rate demand notes, bonds, debentures, notes, certificates of indebtedness, or other debt securities, entering into repurchase agreements, or engaging in other transactions where permitted by the Fund's investment objective, policies, and limitations. The above investment limitations cannot be changed without shareholder approval. The following limitations, however, may be changed by the Trustees without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. INVESTING IN RESTRICTED SECURITIES The Fund will not invest more than 10% of its total assets in securities subject to restrictions on resale under the Securities Act of 1933, except for commercial paper issued under Section 4(2) of the Securities Act of 1933 and certain other restricted securities which meet the criteria for liquidity as established by the Trustees. INVESTING IN ILLIQUID SECURITIES The Fund will not invest more than 15% of its net assets in securities which are illiquid, including repurchase agreements providing for settlement in more than seven days after notice, non-negotiable time deposits with maturities over seven days, interest rate swaps, caps and floors determined by the investment adviser to be illiquid, and certain securities not determined to be liquid under guidelines established by the Trustees. INVESTING IN MINERALS The Fund will not purchase interests in oil, gas, or other mineral exploration or development programs or leases, except that the Fund may purchase the securities of issuers which invest in or sponsor such programs. INVESTING IN NEW ISSUERS The Fund will not invest more than 5% of the value of its total assets in portfolio instruments of unseasoned issuers, including their predecessors, that have been in operation for less than three years. INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF THE TRUST The Fund will not purchase or retain the securities of any issuer if the officers and Trustees of the Trust or the Fund's investment adviser owning, individually more than 1/2 of 1% of the issuer's securities, together own more than 5% of the issuer's securities. INVESTING IN PUT OPTIONS The Fund will not purchase put options on foreign currency futures and foreign currencies, unless the underlying securities are held in the Fund's portfolio and not more than 5% of the value of the Fund's total assets would be invested in premiums on open put options. WRITING COVERED CALL OPTIONS The Fund will not write call options on securities unless the underlying securities are held in a Fund's portfolio, or unless the Fund is entitled to them in deliverable form without further payment or after segregating cash in the amount of any further payment. The Fund will not write call options in excess of 25% of the value of its net assets. INVESTING IN WARRANTS The Fund will not invest more than 5% of its assets in warrants, including those acquired in units or attached to other securities. To comply with certain state restrictions, the Fund will limit its investment in such warrants not listed on nationally recognized stock exchanges to 2% of its total assets. (If state restrictions change, this latter restriction may be revised without notice to shareholders.) For purposes of this investment restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES The Fund will limit its investment in other investment companies to not more than 3% of the total outstanding voting stock of any investment company, will invest no more than 5% of its total assets in any one investment company, and will invest no more than 10% of its total assets in investment companies in general. PURCHASING SECURITIES TO EXERCISE CONTROL The Fund will not purchase securities of a company for purposes of exercising control or management. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. For purposes of its policies and limitations, the Fund considers certificates of deposit and demand and time deposits issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment to be cash items. In order to comply with certain state restrictions, the Fund will limit its investment in securities of other investment companies to those with sales loads of less than 1.00% of the offering price of such securities. The Fund will purchase securities of closed-end investment companies only in open market transactions involving any customary brokers' commissions. However, these limitations are not applicable if the securities are acquired in a merger, consolidation, reorganization, or acquisition of assets. While it is a policy to waive advisory fees on Fund assets invested in securities of other open-end investment companies, it should be noted that investment companies incur certain expenses such as custodian and transfer agency fees and, therefore, any investment by the Fund in shares of another investment company would be subject to such duplicate expenses. The Fund does not intend to borrow money or invest in reverse repurchase agreements during the coming year. TRUST MANAGEMENT - -------------------------------------------------------------------------------- OFFICERS AND TRUSTEES Officers and Trustees are listed with their addresses, principal occupations, and present positions, including any affiliation with Federated Management, Federated Investors, Federated Securities Corp., Federated Services Company, Federated Administrative Services, Federated Shareholder Services, and the Funds (as defined below).
POSITIONS WITH PRINCIPAL OCCUPATIONS NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and Trustee, Federated Investors Tower Trustee Federated Advisers, Federated Management, and Federated Research; Pittsburgh, PA Director, tna Life and Casualty Company; Chief Executive Officer and Director, Trustee, or Managing General Partner of the Funds; for- merly, Director, The Standard Fire Insurance Company. Mr. Donahue is the father of J. Christopher Donahue, Vice President of the Trust. John T. Conroy, Jr. Trustee President, Investment Properties Corporation; Senior Vice-President, Wood/IPC Commercial John R. Wood and Associates, Inc., Realtors; President, Northgate Department Village Development Corporation; General Partner or Trustee in John R. Wood and private real estate ventures in Southwest Florida; Director, Associates, Inc., Realtors Trustee, or Managing General Partner of the Funds; formerly, 3255 Tamiami Trail North President, Naples Property Management Inc. Naples, FL William J. Copeland Trustee Director and Member of the Executive Committee, Michael Baker, Inc.; One PNC Plaza-- Director, Trustee, or Managing General Partner of the Funds; 23rd Floor formerly, Vice Chairman and Director, PNC Bank, N.A. and PNC Bank Pittsburgh, PA Corp. and Director, Ryan Homes, Inc. James E. Dowd Trustee Attorney-at-law; Director, The Emerging Germany Fund, Inc.; 571 Hayward Mill Road Director, Trustee, or Managing General Partner of the Funds; Concord, MA formerly, Director, Blue Cross of Massachusetts, Inc.; Lawrence D. Ellis, M.D. Trustee Hematologist, Oncologist, and Internist, Presbyterian and Montefiore 3471 Fifth Avenue Hospitals; Clinical Professor of Medicine and Trustee, University of Suite 1111 Pittsburgh; Director, Trustee, or Managing General Partner of the Pittsburgh, PA Funds. Edward L. Flaherty, Jr.\ Trustee Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park 5916 Penn Mall Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Pittsburgh, PA Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A., Western Region. Peter E. Madden Trustee Consultant; State Representative, Commonwealth of Massachusetts; 225 Franklin Street Director, Trustee, or Managing General Partner of the Funds; Boston, MA formerly, President, State Street Bank and Trust Company and State Street Boston Corporation and Trustee, Lahey Clinic Foundation, Inc. Gregor F. Meyer Trustee Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, 5916 Penn Mall Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Pittsburgh, PA Managing General Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A. Wesley W. Posvar Trustee Professor Foreign Policy and Management Consultant; Trustee, 1202 Cathedral of Learning Carnegie Endowment for International Peace, Online Computer Library Pittsburgh, PA Center, Inc., RAND Corporation, and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director, Trustee or Managing General Partner of the Funds; President Emeritus, University of Pittsburgh; formerly, Chairman, National Advisory Council for Environmental Policy and Technology. Marjorie P. Smuts Trustee Public relations/marketing consultant; Director, Trustee, or 4905 Bayard Street Managing General Partner of the Funds. Pittsburgh, PA John A. Staley, IV* Vice President Vice President and Trustee, Federated Investors; Executive Vice Federated Investors Tower and Trustee President, Federated Securities Corp.; President and Trustee, Pittsburgh, PA Federated Advisers, Federated Management, and Federated Research; Trustee, Federated Services Company; Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds; formerly, Vice President, The Standard Fire Insurance Company and President of its Federated Research Division. Glen R. Johnson President Trustee, Federated Investors; President and/or Trustee of some of Federated Investors Tower the Funds; staff member, Federated Securities Corp. and Federated Pittsburgh, PA Administrative Services, Inc. J. Christopher Donahue Vice President President and Trustee, Federated Investors; Trustee, Federated Federated Investors Tower Advisers, Federated Management, and Federated Research; President Pittsburgh, PA and Director, Federated Administrative Services, Inc.; Trustee, Federated Services Company and Federated Shareholder Services; President or Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of the Trust. Richard B. Fisher Vice President Executive Vice President and Trustee, Federated Investors; Chairman Federated Investors Tower and Director, Federated Securities Corp.; President or Vice Pittsburgh, PA President of the Funds; Director or Trustee of some of the Funds. Edward C. Gonzales Vice President Vice President, Treasurer and Trustee, Federated Investors; Vice Federated Investors Tower and Treasurer President and Treasurer, Federated Advisers, Federated Management, Pittsburgh, PA and Federated Research; Executive Vice President, Treasurer, and Director, Federated Securities Corp.; Chairman, Treasurer, and Director, Federated Administrative Services, Inc.; Trustee, Federated Services Company and Federated Shareholder Services; Trustee or Director of some of the Funds; Vice President and Treasurer of the Funds. John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee, Federated Federated Investors Tower and Secretary Investors; Vice President, Secretary and Trustee, Federated Pittsburgh, PA Advisers, Federated Management, and Federated Research; Trustee, Federated Services Company; Executive Vice President, Secretary, and Director, Federated Administrative Services, Inc.; Trustee, Feder- ated Services Company and Federated Shareholder Services; Director and Executive Vice President, Federated Securities Corp.; Vice President and Secretary of the Funds.
*This Trustee is deemed to be an "interested person" of the Trust as defined in the Investment Company Act of 1940, as amended. \Members of the Executive Committee. The Executive Committee of the Board of Trustees handles the responsibilities of the Board of Trustees between meetings of the Board. THE FUNDS "The Funds" and "Funds" mean the following investment companies: American Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust; Automated Government Money Trust; California Municipal Cash Trust; Cash Trust Series, Inc.; Cash Trust Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust; Federated Short-Intermediate Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight Institutional Series; Insurance Management Series; Intermediate Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; World Investment Series, Inc. FUND OWNERSHIP Officers and Trustees own less than 1% of the Fund's outstanding shares. As of June 3, 1994, the following shareholders of record owned 5% or more of the outstanding Institutional Shares of the Fund: First National Bank & Trust Escanaba, Michigan, owned approximately 964,235 shares (38.47%); First Commonwealth Trust Company, Indiana, Pennsylvania, owned approximately 478,843 shares (19.11%); The Sunburst Bank, Jackson, Mississippi, owned approximately 402,367 shares (16.05%). As of June 3, 1994, the following shareholder of record owned 5% or more of the outstanding Institutional Service Shares of the Fund: Green Mountain Bank, Rutland, Vermont, owned approximately 21,095 shares (97.42%). TRUSTEE LIABILITY The Trust's Declaration of Trust provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. INVESTMENT ADVISORY SERVICES - -------------------------------------------------------------------------------- ADVISER TO THE FUND The Fund's investment adviser is Federated Management (the "Adviser"). It is a subsidiary of Federated Investors. All of the voting securities of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, his wife, and his son, J. Christopher Donahue. John F. Donahue, Chairman and Trustee of Federated Management, is Chairman and Trustee of Federated Investors and Chairman and Trustee of the Trust. John A. Staley, IV, President and Trustee of Federated Management, is Vice President and Trustee of Federated Investors, Executive Vice President of Federated Securities Corp., Trustee of Federated Services Company, and Vice President and Trustee of the Trust. J. Christopher Donahue, Trustee of Federated Management, is President and Trustee of Federated Investors, President and Director of Federated Administrative Services, Inc., Trustee of Federated Services Company and Federated Shareholder Services, and Vice President of the Trust. John W. McGonigle, Vice President, Secretary, and Trustee of Federated Management, is Vice President, Secretary, General Counsel and Trustee of Federated Investors, Director, Executive Vice President, and Secretary of Federated Administrative Services, Inc., Director and Executive Vice President of Federated Securities Corp., Trustee of Federated Services Company and Federated Shareholder Services, and Vice President and Secretary of the Trust. The Adviser shall not be liable to the Trust, the Fund, or any shareholder of the Fund for any losses that may be sustained in the purchase, holding, or sale of any security, or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Trust. ADVISORY FEES For its advisory services, the Adviser receives an annual investment advisory fee as described in the prospectus. During the period from December 15, 1993 (date of initial public offering) to April 30, 1994, the Fund's Adviser earned $22,003, all of which was waived because of undertakings to limit the Fund's expenses. In addition, the Adviser reimbursed other operating expenses of $39,355 for the same period. STATE EXPENSE LIMITATIONS The Adviser has undertaken to comply with the expense limitations established by certain states for investment companies whose shares are registered for sale in those states. If the Fund's normal operating expenses (including the investment advisory fee, but not including brokerage commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2% per year of the first $30 million of average net assets, 2% per year of the next $70 million of average net assets, and 1-1/2% per year of the remaining average net assets, the Adviser will reimburse the Fund for its expenses over the limitation. If the Fund's monthly projected operating expenses exceed this limitation, the investment advisory fee paid will be reduced by the amount of the excess, subject to an annual adjustment. If the expense limitation is exceeded, the amount to be reimbursed by the Adviser will be limited, in any single fiscal year, by the amount of the investment advisory fee. This arrangement is not part of the advisory contract and may be amended or rescinded in the future. OTHER ADVISORY SERVICES Federated Research Corp. receives fees from certain depository institutions for providing consulting and portfolio advisory services relating to each institution's program of asset management. Federated Research Corp. may advise such clients to purchase or redeem shares of investment companies, such as the Fund, which are managed, for a fee, by Federated Research Corp. or other affiliates of Federated Investors, such as the Adviser, and may advise such clients to purchase and sell securities in the direct markets. Further, Federated Research Corp., and other affiliates of the Adviser, may, from time to time, provide certain consulting services and equipment to depository institutions in order to facilitate the purchase of shares of funds offered by Federated Securities Corp. OTHER RELATED SERVICES Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of shares of funds offered by Federated Securities Corp. ADMINISTRATIVE SERVICES - -------------------------------------------------------------------------------- Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services to the Fund for a fee as described in the prospectus. Prior to March 1, 1994, Federated Administrative Services Inc. also a subsidiary of Federated Investors, served as the Fund's administrator. (For purposes of this Statement of Additional Information, Federated Administrative Services and Federated Administrative Services, Inc., may hereinafter collectively be referred to as the "Administrators".) For the period ended April 30, 1994, the Administrators collectively earned $1,077. John A. Staley, IV, an officer of the Trust and Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the Trust, each hold approximately 15% and 20%, respectively, of the outstanding common stock and serve as directors of Commercial Data Services, Inc., a company which provides computer processing services to the Administrators. BROKERAGE TRANSACTIONS - -------------------------------------------------------------------------------- When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. In working with dealers, the Adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Trustees. The Adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the Adviser and may include: advice as to the advisability of investing in securities; security analysis and reports; economic studies; industry studies; receipt of quotations for portfolio evaluations; and similar services. The Adviser and its affiliates exercise reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. Research services provided by brokers may be used by the Adviser or by affiliates of Federated Investors in advising other accounts. To the extent that receipt of these services may supplant services for which the Adviser or its affiliates might otherwise have paid, it would tend to reduce their expenses. PURCHASING SHARES - -------------------------------------------------------------------------------- Shares are sold at their net asset value without a sales charge on days on which the New York Stock Exchange is open for business. The procedure for purchasing Shares of the Fund is explained in the respective prospectuses under "Investing in Institutional Shares" and "Investing in Institutional Service Shares." DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER SERVICES PLANS These arrangements permit the payment of fees to financial institutions, the distributor, and Federated Shareholder Services, to stimulate distribution activities and to cause services to be provided to shareholders by a representative who has knowledge of the shareholder's particular circumstances and goals. These activities and services may include, but are not limited to, marketing efforts; providing office space, equipment, telephone facilities, and various clerical, supervisory, computer, and other personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries; and assisting clients in changing dividend options, account designations, and addresses. By adopting the Distribution Plan (Institutional Service Shares only), the Board of Trustees expects that the Fund will be able to achieve a more predictable flow of cash for investment purposes and to meet redemptions. This will facilitate more efficient portfolio management and assist the Fund in pursuing its investment objective. By identifying potential investors whose needs are served by the Fund's objective, and properly servicing these accounts, it may be possible to curb sharp fluctuations in rates of redemptions and sales. Other benefits, which may be realized under either arrangement, may include: (1) providing personal services to shareholders; (2) investing shareholder assets with a minimum of delay and administrative detail; (3) enhancing shareholder recordkeeping systems; and (4) responding promptly to shareholders' requests and inquiries concerning their accounts. For the fiscal period ending April 30, 1994, payments in the amount of $146 were made pursuant to the Distribution Plan, all of which was paid to financial institutions. In addition, for this period, no payments were made pursuant to the Shareholder Services Plan. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS The administrative services for which the distributor will pay financial institutions include, but are not limited to, providing office space, equipment, telephone facilities, and various clerical, supervisory, and computer personnel as is necessary or beneficial to establish and maintain shareholders' accounts and records, process purchase and redemption transactions, process automatic investments of client account cash balances, answer routine client inquiries regarding the Fund, assist clients in changing dividend options, account designations, and addresses, and providing such other services as the Fund may reasonably request. DETERMINING NET ASSET VALUE - -------------------------------------------------------------------------------- Net asset value generally changes each day. The days on which net asset value is calculated by the Fund are described in the respective prospectuses. DETERMINING VALUE OF SECURITIES The values of the Fund's portfolio securities are determined as follows: according to prices provided by independent pricing services, which may be determined without exclusive reliance on quoted prices from dealers but which use market prices when most representative, and which may take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data employed in determining valuations for such securities; or for short-term obligations with maturities of less than 60 days or less at the time of purchase at amortized cost unless the Trustees determine that particular circumstances of the security indicate otherwise. REDEEMING SHARES - -------------------------------------------------------------------------------- The Fund redeems Shares at the next computed net asset value after the Fund receives the redemption request. Redemption procedures are explained in the respective prospectuses under "Redeeming Institutional Shares" and "Redeeming Institutional Service Shares." Although State Street Bank does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions of less than $5,000. REDEMPTION IN KIND Although the Trust intends to redeem shares in cash, it reserves the right under certain circumstances to pay the redemption price in whole or in part by a distribution of securities from the Fund's portfolio. To the extent available, such securities will be readily marketable. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving their securities and selling them before their maturity could receive less than the redemption value of their securities and could incur transaction costs. Redemption in kind will be made in conformity with applicable Securities and Exchange Commission rules, taking such securities at the same value employed in determining net asset value and selecting the securities in a manner the Trustees determine to be fair and equitable. The Trust has elected to be governed by Rule 18f-1 under the Investment Company Act of 1940, which obligates the Fund to redeem Shares for any one shareholder in cash only up to the lesser of $250,000 or 1% of the respective class's net asset value during any 90-day period. TAX STATUS - -------------------------------------------------------------------------------- THE FUND'S TAX STATUS The Fund will pay no federal income tax because it expects to meet the requirements of Subchapter M of the Internal Revenue Code, as amended, applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, the Fund must, among other requirements: derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; derive less than 30% of its gross income from gains on the sale of securities held less than three months; invest in securities within certain statutory limits; and distribute to its shareholders at least 90% of its net income earned during the year. SHAREHOLDERS' TAX STATUS Shareholders are subject to federal income tax on dividends and capital gains received as cash or additional Shares. No portion of any income dividend paid by the Fund is expected to be eligible for the dividends received deduction available to corporations. These dividends, and any short-term capital gains, are taxable as ordinary income. CAPITAL GAINS Fixed income securities offering the current income sought by the Fund are often purchased at a discount from par value. Because the total yield on such securities when held to maturity and retired may include an element of capital gain, the Fund may achieve capital gains. However, the Fund will not hold securities to maturity for the purpose of realizing capital gains unless current yields on those securities remain attractive. Capital gains or losses may also be realized on the sale of securities. Sales would generally be made because of: the availability of higher relative yields; differentials in market values; new investment opportunities; changes in creditworthiness of an issuer; or an attempt to preserve gains or limit losses. Distributions of long-term capital gains are taxed as such, whether they are taken in cash or reinvested, and regardless of the length of time the shareholder has owned the Shares. TOTAL RETURN - -------------------------------------------------------------------------------- The average annual total return for Shares of the Fund is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of shares owned at the end of the period by the offering price per share at the end of the period. The number of shares owned at the end of the period is based on the number of shares purchased at the beginning of the period with $1,000, adjusted over the period by any additional shares, assuming the monthly reinvestment of all dividends and distributions. Cumulative total return reflects the Fund's performance over a specific period to time. The Fund's cumulative total return for Institutional Shares for the period from December 15, 1993 (date of initial public offering) to April 30, 1994 was -2.48%. The Fund's cumulative total return for Institutional Service Shares for the same period was -2.57%. YIELD - -------------------------------------------------------------------------------- The yield for both classes of Shares of the Fund is determined by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by either class of Shares over a thirty-day period by the maximum offering price per share of either class of Shares on the last day of the period. This value is then annualized using semi-annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a twelve-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by the Fund because of certain adjustments required by the Securities and Exchange Commission and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in either class of Shares, performance will be reduced for those shareholders paying those fees. The Fund's yield for Institutional Shares for the thirty-day period ended April 30, 1994 was 6.10%. The Fund's yield for Institutional Service Shares was 5.85% for the same period. PERFORMANCE COMPARISONS - -------------------------------------------------------------------------------- The performance of both classes of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type of instruments in which the portfolio is invested; changes in interest rates and market value of portfolio securities; changes in the Fund's or either class of Share's expenses; and various other factors. Either class of share's performance fluctuates on a daily basis largely because net earnings and the maximum offering price per share fluctuate daily. Both net earnings and net asset value per Share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specific period of time. From time to time, the Fund will quote its Lipper ranking in the "intermediate-term investment grade debt funds" category in advertising and sales literature. LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of approximately 5,000 issues which include: non-convertible bonds publicly issued by the U.S. government or its agencies; corporate bonds guaranteed by the U.S. government and quasi-federal corporations; and publicly issued, fixed rate, non-convertible domestic bonds of companies in industry, public utilities, and finance. The average maturity of these bonds approximates nine years. Tracked by Lehman Brothers, the index calculates total returns for one-month, three- month, twelve-month, and ten-year periods and year-to-date. Advertisements and other sales literature for both classes of Shares may quote total returns which are calculated on non-standardized base periods. These total returns also represent the historic change in the value of an investment in the either class of Shares based on monthly reinvestment of dividends over a specified period of time. APPENDIX - -------------------------------------------------------------------------------- STANDARD & POOR'S CORPORATION LONG TERM DEBT RATING DEFINITIONS AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Corporation. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A--Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa--Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high grade Bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS AAA--Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA--Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A--Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. PRIME-1 repayment capacity will normally be evidenced by the following characteristics: -- Leading market positions in well established industries. -- High rates of return on funds employed. -- Conservative capitalization structure with moderate reliance on debt and ample asset protection. -- Broad margins in earning coverage of fixed financial charges and high internal cash generation. -- Well-established access to a range of financial markets and assured sources of alternate liquidity. PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, will be subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATINGS A-1--This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) sign designation. A-2--Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS DEFINITIONS FITCH-1--(VERY STRONG CREDIT QUALITY) Issues assigned this rating reflect an assurance for timely payment only slightly less in degree than issues rated F-1+. FITCH-2--(GOOD CREDIT QUALITY) Issues carrying this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. 3090804B (6/94) PART C. OTHER INFORMATION. Item 24. Financial Statements and Exhibits: (a) Financial Statements (Filed in Part A) (b) Exhibits: (1) Copy of the Declaration of Trust of the Registrant (1.); (i) Conformed copy of Amendment No. 2. to the Declaration of Trust (5.); (ii) Conformed copy of Amendment No. 3. to the Declaration of Trust ; + (2) Copy of Amended and Restated By-Laws of the Registrant as of December 31, 1991 (5.); (3) Not applicable; (4) Conformed copy of Specimen Certificate of Shares of Beneficial Interest of the Registrant: Short-Term Income Fund (1.); Intermediate Income Fund; + (5) (i)Copy of the Investment Advisory Contract of the Registrant (4.); (ii) Conformed copy of Exhibit to the Investment Advisory Contract of the Registrant to add Intermediate Income Fund to the present Investment Advisory Contract; + (6) (i)Copy of the Distributor's Contract of the Registrant (3.); (ii) Conformed copy of Exhibit C to the Distributor's Contract of the Registrant (7); (iii) Conformed copy of Exhibit D to the Distributor's Contract of the Registrant (7); (7) Not applicable; (8) (i)Conformed copy of the Custodian Agreement of the Registrant (5.); (9) Conformed copy of the Transfer Agency and Service Agreement of the Registrant (5) (10) Not applicable; (11) Conformed Copy of the Consent of Independent Auditors+ (12) Not applicable; (13) Not applicable; (14) Not applicable; (15) (i)Copy of Distribution Plan of the Registrant (4.); (ii) Rule 12b-1 Agreement of the Registrant (4.); (iii) Conformed Copy of Exhibit B to the Plan (7); (iv) Not applicable; (16) Schedule for Computation of Funds Performance Data (i) Short-Term Income Fund (2); (ii) Intermediate Income Fund + (17) Conformed copy of Power of Attorney + (18) Conformed copy of Opinion and Consent of Counsel as to availability of Rule 485 (b)+ + All exhibits have been filed electronically. 1. Response is incorporated by reference to Registrant's Initial Registration Statement on Form N-1A filed February 6, 1986. (File Nos. 33-3164 and 811-4577) 2. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 3 on Form N-1A filed May 31, 1988. (File Nos. 33-3164 and 811-4577) 3. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 7 on Form N-1A filed April 25, 1990. (File Nos. 33-3164 and 811-4577) 4. Response is incorporated by reference to Registrant's Post- Effective Amendment No.12 on Form N-1A filed December 9, 1991. (File Nos. 33-3164 and 811-4577) 5. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 15 on Form N-1A filed April 30, 1993. (File Nos. 33-3164 and 811-4577) 6. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 17 on Form N-1A filed October 8, 1993. (File Nos. 33-3164 and 811-4577) 7. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 20 on Form N-1A filed June 7, 1994. (File Nos. 33-3164 and 811-4577) Item 25. Persons Controlled by or Under Common Control with Registrant: None Item 26. Number of Holders of Securities: Number of Record Holders Title of Class as of June 3, 1994 Shares of Beneficial Interest (no par value) Federated Short-Term Income Fund Institutional Shares 1,807 Institutional Service Shares 310 Intermediate Income Fund Institutional Shares 110 Institutional Service Shares 8 Item 27. Indemnification: (1.) Item 28. Business and Other Connections of Investment Adviser: (a) For a description of the other business of the investment adviser, see the section entitled "Trust Information - Management of the Trust" in Part A. The affiliations with the Registrant of four of the Trustees and one of the Officers of the investment adviser are included in Part B of this Registration Statement under "Trust Management - Officers and Trustees." The remaining Trustee of the investment adviser, his position with the investment adviser, and his principal occupation is: Mark D. Olson, Partner, Wilson, Halbrook & Bayard, 107 W. Market Street, Georgetown, Delaware 19947. The remaining Officers of the investment adviser are: William D. Dawson, III, J. Thomas Madden, and Mark L. Mallon, Executive Vice Presidents; Henry J. Gailliot, Senior Vice President- Economist; Peter R. Anderson, Gary Madich, and J. Alan Minteer, Senior Vice Presidents; Randall A.Bauer, Jonathan C. Conley, Deborah A. Cunningham, Mark Durbiano, Roger Early, Kathleen M. Foody-Malus, David C. Francis, 1. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 11 on Form N-1a filed on June 25, 1991. (File Nos. 33-3164 and 811-4577 Thomas M. Franks, Edward C. Gonzales, Jeff A. Kozemchak, John W. McGonigle, Gregory M. Melvin, Susan M. Nason, Mary Jo Ochson, Robert J. Ostrowski, and Christopher H. Wiles, Vice Presidents; Edward C. Gonzales, Treasurer; and John W. McGonigle, Secretary. The business address of each of the Officers of the investment adviser is Federated Investors Tower, Pittsburgh, PA 15222-3779. These individuals are also officers of a majority of the investment advisers to the Funds listed in Part B of this Registration Statement under "The Funds." Item 29. Principal Underwriters: (a) Federated Securities Corp., the Distributor for shares of the Registrant, also acts as principal underwriter for the following open-end investment companies: Alexander Hamilton Funds; American Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust; Automated Government Money Trust; BayFunds; The Biltmore Funds; The Biltmore Municipal Funds; California Municipal Cash Trust; Cambridge Series Trust; Cash Trust Series, Inc.; Cash Trust Series II; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; FT Series, Inc.; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated Master Trust; Federated Municipal Trust; Federated Short- Intermediate Government Trust; Federated Short- Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund; Financial Reserves Fund; First Priority Funds; First Union Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fountain Square Funds; Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Independence One Mutual Funds; Insight Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal Trust; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain Funds; Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; The Monitor Funds; Municipal Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; SouthTrust Vulcan Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Tower Mutual Funds; Trademark Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; Vision Fiduciary Funds, Inc.; Vision Group of Funds, Inc.; and World Investment Series, Inc. Federated Securities Corp. also acts as principal underwriter for the following closed-end investment company: Liberty Term Trust, Inc.- 1999. (b) (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Underwriter With Registrant Richard B. Fisher Director, Chairman, Chief Vice President Federated Investors Tower Executive Officer, Chief Pittsburgh, PA 15222-3779 Operating Officer, and Asst. Treasurer, Federated Securities Corp. Edward C. Gonzales Director, Executive Vice Vice President and Federated Investors Tower President, and Treasurer, Treasurer Pittsburgh, PA 15222-3779 Federated Securities Corp. John W. McGonigle Director, Executive Vice Vice President and Federated Investors Tower President, and Assistant Secretary Pittsburgh, PA 15222-3779 Secretary, Federated Securities Corp. John A. Staley, IV Executive Vice President Vice President Federated Investors Tower and Assistant Secretary, Pittsburgh, PA 15222-3779 Federated Securities Corp. John B. Fisher President-Institutional Sales, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James F. Getz President-Broker/Dealer, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark R. Gensheimer Executive Vice President of -- Federated Investors Tower Bank/Trust Pittsburgh, PA 15222-3779 Federated Securities Corp. Mark W. Bloss Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Theodore Fadool, Jr. Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Bryant R. Fisher Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Christopher T. Fives Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James S. Hamilton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James M. Heaton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 H. Joseph Kennedy Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Keith Nixon Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Timothy C. Pillion Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James R. Ball Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard W. Boyd Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jane E. Broeren-Lambesis Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mary J. Combs Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 R. Edmond Connell, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Laura M. Deger Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jill Ehrenfeld Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark D. Fisher Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Joseph D. Gibbons Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David C. Glabicki Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard C. Gonzales Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Scott A. Hutton Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William J. Kerns Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William E. Kugler Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Dennis M. Laffey Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Francis J. Matten, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark J. Miehl Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 J. Michael Miller Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 R. Jeffrey Niss Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Michael P. O'Brien Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Solon A. Person, IV Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Robert F. Phillips Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Eugene B. Reed Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Paul V. Riordan Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Charles A. Robison Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David W. Spears Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jeffrey A. Stewart Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Thomas E. Territ Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William C. Tustin Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard B. Watts Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Philip C. Hetzel Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Ernest L. Linane Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 S. Elliott Cohan Secretary, Federated Assistant Federated Investors Tower Securities Corp. Secretary Pittsburgh, PA 15222-3779 (c) Not applicable. Item 30. Location of Accounts and Records: All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at one of the following locations: Registrant Federated Investors Tower Pittsburgh, PA 15222-3779 Federated Services Company Federated Investors Tower ("Transfer Agent, Dividend Pittsburgh, PA 15222-3779 Disbursing Agent and Portfolio Recordkeeper") Federated Administrative Services Federated Investors Tower ("Administrator") Pittsburgh, PA 15222-3779 Federated Management Federated Investors Tower ("Adviser") Pittsburgh, PA 15222-3779 State Street Bank and Trust Compnay P.O. Box 8604 ("Custodian") Boston, MA 02266-8604 Item 31. Management Services: Not applicable. Item 32. Undertakings: Registrant hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act with respect to removal of Trustees and the calling of special shareholder meetings by shareholders. Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, FEDERATED INCOME SECURITIES TRUST, certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Pittsburgh and Commonwealth of Pennsylvania, on the 24th day of June, 1994. FEDERATED INCOME SECURITIES TRUST BY: /s/Victor R. Siclari Victor R. Siclari, Assistant Secretary Attorney in Fact for John F. Donahue June 24, 1994 Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following person in the capacity and on the date indicated: NAME TITLE DATE By: /s/Victor R. Siclari Victor R. Siclari Attorney In Fact June 24, 1994 ASSISTANT SECRETARY For the Persons Listed Below NAME TITLE John F. Donahue* Chairman and Trustee (Chief Executive Officer) Glen R. Johnson* President Edward C. Gonzales* Vice President and Treasurer (Principal Financial and Accounting Officer) John T. Conroy, Jr.* Trustee William J. Copeland* Trustee James E. Dowd* Trustee Lawrence D. Ellis, M.D.* Trustee Edward L. Flaherty, Jr.* Trustee Peter E. Madden* Trustee Gregor F. Meyer* Trustee Wesley W. Posvar* Trustee Marjorie P. Smuts* Trustee * By Power of Attorney EX-99.CONSENT 2 AUDITOR'S CONSENT Exhibit 11 under Form N-1A Exhibit 23 under Item 601/Reg SK CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Financial Highlights" and "Independent Auditors" and to the use of our report dated June 9, 1994, in Post-Effective Amendment Number 21 to the Registration Statement (Form N-1A Number 33-3164) and the related Prospectuses of Federated Income Securities Trust (comprisingly respectively, Federated Short-Term Income Fund and Federated Intermediate Income Fund). By: ERNST & YOUNG Ernst & Young Pittsburgh, Pennsylvania June 21, 1994 EX-99.OPINION 3 DONNELLY'S OPINION Exhibit 18 under Form N-1A Exhibit 99 under Item 601/Reg. S-K HOUSTON, HOUSTON & DONNELLY ATTORNEYS-AT-LAW 2510 CENTRE CITY TOWER WILLIAM McC. HOUSTONPITTSBURGH, PA. 15222 FRED CHALMERS HOUSTON, JR.__________ THOMAS J. DONNELLY JOHN F. MECK (412) 471-5828 FRED CHALMERS HOUSTON FAX (412) 471-0736 (1914 -1971) MARIO SANTILLI, JR. THEODORE M. HAMMER June 22, 1994 FEDERATED INCOME SECURITIES TRUST Federated Investors Tower Pittsburgh, PA 15222-3779 Gentlemen: As counsel to FEDERATED INCOME SECURITIES TRUST ("Trust"), we have reviewed Post-effective Amendment No. 21 to the Trust's Registration Statement to be filed with the Securities and Exchange Commission under the Securities Act of 1933 (File No. 33-3164). The subject Post-effective Amendment will be filed pursuant to Paragraph (b) of Rule 485 and become effective pursuant to said Rule (immediately upon filing/on _______________.) Our review also included an examination of other relevant portions of the amended 1933 Act Registration Statement of the Fund/Trust and such other documents and records deemed appropriate. On the basis of this review we are of the opinion that Post-effective Amendment No. does not contain disclosure which would render it ineligible to become effective pursuant to Paragraph (b) of Rule 485. We hereby consent to the filing of this representation letter as part of the Fund's/Trust's Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and as part of any application or registration statement filed under the Securities Laws of the States of the United States. Very truly yours, HOUSTON, HOUSTON & DONNELLY By: /s/ Thomas J. Donnelly TJD:amn EX-99.POWER 4 POWER OF ATTORNEY Exhibit 17 under Form N-1A Exhibit 24 under Item 601/Reg. S-K POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints the Secretary and Assistant Secretary of FEDERATED INCOME SECURITIES TRUST__________ and the Assistant General Counsel of Federated Investors, and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for them and in their names, place and stead, in any and all capacities, to sign any and all documents to be filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means of the Securities and Exchange Commission's electronic disclosure system known as EDGAR; and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to sign and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. SIGNATURES TITLE DATE /s/ John F. Donahue Chairman and Trustee June 23, 1994 John F. Donahue (Chief Executive Officer) /s/ Glen R. Johnson President June 23, 1994 Glen R. Johnson /s/ E. C. Gonzales Vice President and Treasurer June 23, 1994 Edward C. Gonzales (Principal Financial and Accounting Officer) /s/ William J. Copeland Trustee June 23, 1994 William J. Copeland /s/ James E. Dowd Trustee June 23, 1994 James E. Dowd /s/ Lawrence D. Ellis, M.D. Trustee June 23, 1994 Lawrence D. Ellis, M.D. s/ Edward L. Flaherty, Jr. Trustee June 23, 1994 Edward L. Flaherty, Jr. SIGNATURES TITLE DATE /s/ Gregor F. Meyer Trustee June 23, 1994 Gregor F. Meyer /s/ Wesley W. Posvar Trustee June 23, 1994 Wesley W. Posvar /s/ Marjorie P. Smuts Trustee June 23, 1994 Marjorie P. Smuts /s/ Peter E. Madden Trustee June 23, 1994 Peter E. Madden /s/ John T. Conroy, Jr. Trustee June 23, 1994 John T. Conroy, Jr. Sworn to and subscribed before me this _23rd day of __June, 1994. (SEAL) /s/ Elaine T. Polens ____________________________________________ Notary Public Notarial Seal Elaine T. Polens, Notary Public Pittsburgh, Allegheny County My Commission Expires March 28, 1994 Member, Pennsylvania Association of Notaries EX-99.AMENDMENT 5 AMENDMENT #3 TO DECLARATION OF TRUST Exhibit 1 (ii) under Form N-1A Exhibit 3 (a) under Item 601/Reg. S-K FEDERATED INCOME SECURITIES TRUST (Formerly, Federated Floating Rate Trust) Amendment No. 3 to the AMENDED AND RESTATED DECLARATION OF TRUST dated December 31, 1993 THIS Declaration of Trust is amended as follows: A. Strike Section 5 of Article III from the Declaration of Trust and substitute in its place the following: "Section 5. Establishment and Designation of Series or Class. Without limiting the authority of the Trustees set forth in Article XII, Section 8, inter alia, to establish and designate any additional Series or Class, or to modify the rights and preferences of any existing Series or Class, the Series and Class shall be established and designated as: Federated Short-Intermediate Income Fund Institutional Service Shares Institutional Shares Intermediate Income Fund Institutional Service Shares Institutional Shares The undersigned Assistant Secretary of Federated Income Securities Trust hereby certifies that the above-stated amendment is a true and correct Amendment to the Declaration of Trust, as adopted by the Board of Trustees on November 18, 1993. WITNESS the due execution hereof this 23rd day of November, 1993. /s/ Victor R. Siclari Victor R. Siclari Assistant Secretary EX-99.CERTIFICATE 6 STOCK CERTIFICATE Exhibit 4 under Form N-1A Exhibit 3(c) under Item 601/Reg S-K FEDERATED INCOME SECURITIES TRUST INTERMEDIATE INCOME FUND (INSTITUTIONAL SHARES) P O R T F O L I O Number Shares ______ ______ Account No. Alpha Code Organized Under the See Reverse Side For Laws of the Commonwealth Certain Definitions of Massachusetts THIS IS TO CERTIFY THAT is the owner of CUSIP (applied for) Fully Paid and Non-Assessable Shares of Beneficial Interest of the INTERMEDIATE INCOME FUND Portfolio of FEDERATED INCOME SECURITIES TRUST hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this certificate properly endorsed. The shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By- Laws of the Trust and all amendments thereto, all of which the holder by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its seal. Dated: FEDERATED INCOME SECURITIES TRUST Corporate Seal 1994 Massachusetts /s/ Edward C. Gonzales /s/ John F. Donahue Treasurer Chairman Countersigned: Federated Services Company (Pittsburgh) Transfer Agent By: Authorized Signature The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations; TEN COM - as tenants in common UNIF GIFT MIN ACT- .......Custodian........ TEN ENT - as tenants by the entirety (Cust) (Minors) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act............................. in common (State) Additional abbreviations may also be used though not in the above list. For value received __________ hereby sell, assign, and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ________________________________________________________________ _____________ (Please print or typewrite name and address, including zip code, of assignee) ________________________________________________________________ _____________ ________________________________________________________________ _____________ ________________________________________________________________ ______ shares of beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint __________________________________________ ________________________________________________________________ _____________ to transfer the said shares on the books of the within named Trust with full power of substitution in the premises. Dated ______________________ NOTICE:___________________________________ The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. All persons dealing with FEDERATED INCOME SECURITIES TRUST, a Massachusetts business trust, must look solely to the Trust property for the enforcement of any claim against the Trust, as the Trustees, officers, agents or shareholders of the Trust assume no personal liability whatsoever for obligations entered into on behalf of the Trust THIS SPACE MUST NOT BE COVERED IN ANY WAY DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE Page One A. The Certificate is outlined by a one-half inch border. B. The number in the upper left-hand corner and the number of shares in the upper right-hand corner are outlined by octagonal boxes. C. The cusip number in the middle right-hand area of the page is boxed. D. The Massachusetts corporate seal appears in the bottom middle of the page. Page Two The social security or other identifying number of the assignee appears in a box in the top-third upper-left area of the page. Exhibit 4 under Form N-1A Exhibit 3(c) under Item 601/Reg S-K FEDERATED INCOME SECURITIES TRUST INTERMEDIATE INCOME FUND (INSTITUTIONAL SERVICE SHARES) P O R T F O L I O Number Shares ______ ______ Account No. Alpha Code Organized Under the See Reverse Side For Laws of the Commonwealth Certain Definitions of Massachusetts THIS IS TO CERTIFY THAT is the owner of CUSIP (applied for) Fully Paid and Non-Assessable Shares of Beneficial Interest of the INTERMEDIATE INCOME FUND Portfolio of FEDERATED INCOME SECURITIES TRUST hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this certificate properly endorsed. The shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By- Laws of the Trust and all amendments thereto, all of which the holder by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its seal. Dated: FEDERATED INCOME SECURITIES TRUST Corporate Seal 1994 Massachusetts /s/ Edward C. Gonzales /s/ John F. Donahue Treasurer Chairman Countersigned: Federated Services Company (Pittsburgh) Transfer Agent By: Authorized Signature The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations; TEN COM - as tenants in common UNIF GIFT MIN ACT- .......Custodian........ TEN ENT - as tenants by the entirety (Cust) (Minors) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act............................. in common (State) Additional abbreviations may also be used though not in the above list. For value received __________ hereby sell, assign, and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ________________________________________________________________ _____________ (Please print or typewrite name and address, including zip code, of assignee) ________________________________________________________________ _____________ ________________________________________________________________ _____________ ________________________________________________________________ ______ shares of beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint __________________________________________ ________________________________________________________________ _____________ to transfer the said shares on the books of the within named Trust with full power of substitution in the premises. Dated ______________________ NOTICE:___________________________________ The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. All persons dealing with FEDERATED INCOME SECURITIES TRUST, a Massachusetts business trust, must look solely to the Trust property for the enforcement of any claim against the Trust, as the Trustees, officers, agents or shareholders of the Trust assume no personal liability whatsoever for obligations entered into on behalf of the Trust THIS SPACE MUST NOT BE COVERED IN ANY WAY DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE Page One A. The Certificate is outlined by a one-half inch border. B. The number in the upper left-hand corner and the number of shares in the upper right-hand corner are outlined by octagonal boxes. C. The cusip number in the middle right-hand area of the page is boxed. D. The Massachusetts corporate seal appears in the bottom middle of the page. Page Two The social security or other identifying number of the assignee appears in a box in the top-third upper-left area of the page. EX-99.EXHIBITB 7 EXHIBIT B TO INV. ADVISORY CONTRACT Exhibit 5 (ii) under Form N-1A Exhibit 10 under Item 601/ Reg. S-K EXHIBIT B to the Investment Advisory Contract Intermediate Income Fund For all services rendered by the Adviser hereunder, the above-named Fund of the Trust shall pay to the Adviser and the Adviser agrees to accept as full compensation for all services rendered hereunder, an annual investment advisory fee equal to 0.50 of 1% of the average daily net assets of the Fund. The portion of the fees based upon the average daily net assets of the Fund shall be accrued daily at the rate of 1/365th of 0.50 of 1% applied to the daily net assets of the Fund. The advisory fee so accrued shall be paid to the Adviser daily. Witness the due execution hereof this 1st day of December, 1993. Attest: Federated Management /s/ John W. McGonigle By: /s/ William D. Dawson Secretary Vice President Attest: Federated Income Securities Trust /s/ Victor R. Siclari By: /s/ J. Christopher Donahue Assistant Secretary Vice President EX-99.AGREEMENTS 8 TRANSFER AGENCY AND SERVICE AGREEMENT Exhibit 9 under Form N-1A Exhibit 10 under Item 601/Reg. S-K AGREEMENT for FUND ACCOUNTING, SHAREHOLDER RECORDKEEPING, and CUSTODY SERVICES PROCUREMENT AGREEMENT made as of the 1st day of December, 1993, by and between those investment companies listed on Exhibit 1 as may be amended from time to time, having their principal office and place of business at Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Trust"), on behalf of the portfolios (individually referred to herein as a "Fund" and collectively as ("Funds") of the Trust, and FEDERATED SERVICES COMPANY, a Delaware business trust, having its principal office and place of business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222- 3779 (the "Company"). WHEREAS, the Trust is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), with authorized and issued shares of capital stock or beneficial interest ("Shares"); and WHEREAS, the Trust wishes to retain the Company to provide certain pricing, accounting and recordkeeping services for each of the Funds, including any classes of shares issued by any Fund ("Classes"), and the Company is willing to furnish such services; and WHEREAS, the Trust desires to appoint the Company as its transfer agent, dividend disbursing agent, and agent in connection with certain other activities, and the Company desires to accept such appointment; and WHEREAS, the Trust desires to appoint the Company as its agent to select, negotiate and subcontract for custodian services from an approved list of qualified banks and the Company desires to accept such appointment; and WHEREAS, from time to time the Trust may desire and may instruct the Company to subcontract for the performance of certain of its duties and responsibilities hereunder to State Street Bank and Trust Company or another agent (the "Agent"); and WHEREAS, the words Trust and Fund may be used interchangeably for those investment companies consisting of only one portfolio; NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION ONE: Fund Accounting. Article 1. Appointment. The Trust hereby appoints the Company to provide certain pricing and accounting services to the Funds, and/or the Classes, for the period and on the terms set forth in this Agreement. The Company accepts such appointment and agrees to furnish the services herein set forth in return for the compensation as provided in Article 3 of this Section. Article 2. The Company and Duties. Subject to the supervision and control of the Trust's Board of Trustees or Directors ("Board"), the Company will assist the Trust with regard to fund accounting for the Trust, and/or the Funds, and/or the Classes, and in connection therewith undertakes to perform the following specific services; A. Value the assets of the Funds and determine the net asset value per share of each Fund and/or Class, at the time and in the manner from time to time determined by the Board and as set forth in the Prospectus and Statement of Additional Information ("Prospectus") of each Fund; B. Calculate the net income of each of the Funds, if any; C. Calculate capital gains or losses of each of the Funds resulting from sale or disposition of assets, if any; D. Maintain the general ledger and other accounts, books and financial records of the Trust, including for each Fund, and/or Class, as required under Section 31(a) of the 1940 Act and the Rules thereunder in connection with the services provided by the Company; E. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records to be maintained by Rule 31a-1 under the 1940 Act in connection with the services provided by the Company. The Company further agrees that all such records it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust such records upon the Trust's request; F. At the request of the Trust, prepare various reports or other financial documents required by federal, state and other applicable laws and regulations; and G. Such other similar services as may be reasonably requested by the Trust. Article 3. Compensation and Allocation of Expenses. A. The Funds will compensate the Company for its services rendered pursuant to Section One of this Agreement in accordance with the fees set forth on Fee Schedules A ("A1, A2, A3 etc..."), annexed hereto and incorporated herein, as may be added or amended from time to time. Such fees do not include out-of-pocket disbursements of the Company for which the Funds shall reimburse the Company upon receipt of a separate invoice. Out-of-pocket disbursements shall include, but shall not be limited to, the items specified in Schedules B ("B1, B2, B3, etc..."), annexed hereto and incorporated herein, as may be added or amended from time to time. Schedules B may be modified by the Company upon not less than thirty days' prior written notice to the Trust. B. The Fund and/or the Class, and not the Company, shall bear the cost of: custodial expenses; membership dues in the Investment Company Institute or any similar organization; transfer agency expenses; investment advisory expenses; costs of printing and mailing stock certificates, Prospectuses, reports and notices; administrative expenses; interest on borrowed money; brokerage commissions; taxes and fees payable to federal, state and other governmental agencies; fees of Trustees or Directors of the Trust; independent auditors expenses; Federated Administrative Services and/or Federated Administrative Services, Inc. legal and audit department expenses billed to Federated Services Company for work performed related to the Trust, the Funds, or the Classes; law firm expenses; or other expenses not specified in this Article 3 which may be properly payable by the Funds and/or classes. C. The Company will send an invoice to each of the Funds as soon as practicable after the end of each month. Each invoice will provide detailed information about the compensation and out-of-pocket expenses in accordance with Schedules A and Schedules B. The Funds and or the Classes will pay to the Company the amount of such invoice within 30 days of receipt of the invoices. D. Any compensation agreed to hereunder may be adjusted from time to time by attaching to Schedules A revised Schedules dated and signed by a duly authorized officer of the Trust and/or the Funds and a duly authorized officer of the Company. E. The fee for the period from the effective date of this Agreement with respect to a Fund or a Class to the end of the initial month shall be prorated according to the proportion that such period bears to the full month period. Upon any termination of this Agreement before the end of any month, the fee for such period shall be prorated according to the proportion which such period bears to the full month period. For purposes of determining fees payable to the Company, the value of the Fund's net assets shall be computed at the time and in the manner specified in the Fund's Prospectus. F. The Company, in its sole discretion, may from time to time subcontract to, employ or associate with itself such person or persons as the Company may believe to be particularly suited to assist it in performing services under this Section One. Such person or persons may be third-party service providers, or they may be officers and employees who are employed by both the Company and the Funds. The compensation of such person or persons shall be paid by the Company and no obligation shall be incurred on behalf of the Trust, the Funds, or the Classes in such respect. SECTION TWO: Shareholder Recordkeeping. Article 4. Terms of Appointment. Subject to the terms and conditions set forth in this Agreement, the Trust hereby appoints the Company to act as, and the Company agrees to act as, transfer agent and dividend disbursing agent for each Fund's Shares, and agent in connection with any accumulation, open-account or similar plans provided to the shareholders of any Fund ("Shareholder(s)"), including without limitation any periodic investment plan or periodic withdrawal program. As used throughout this Agreement, a "Proper Instruction" means a writing signed or initialed by one or more person or persons as the Board shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved. Oral instructions will be deemed to be Proper Instructions if (a) the Company reasonably believes them to have been given by a person previously authorized in Proper Instructions to give such instructions with respect to the transaction involved, and (b) the Trust, or the Fund, and the Company promptly cause such oral instructions to be confirmed in writing. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Trust, or the Fund, and the Company are satisfied that such procedures afford adequate safeguards for the Fund's assets. Proper Instructions may only be amended in writing. Article 5. Duties of the Company. The Company shall perform the following services in accordance with Proper Instructions as may be provided from time to time by the Trust as to any Fund: A. Purchases (1) The Company shall receive orders and payment for the purchase of shares and promptly deliver payment and appropriate documentation therefore to the custodian of the relevant Fund, (the "Custodian"). The Company shall notify the Fund and the Custodian on a daily basis of the total amount of orders and payments so delivered. (2) Pursuant to purchase orders and in accordance with the Fund's current Prospectus, the Company shall compute and issue the appropriate number of Shares of each Fund and/or Class and hold such Shares in the appropriate Shareholder accounts. (3) For certificated Funds and/or Classes, if a Shareholder or its agent requests a certificate, the Company, as Transfer Agent, shall countersign and mail by first class mail, a certificate to the Shareholder at its address as set forth on the transfer books of the Funds, and/or Classes, subject to any Proper Instructions regarding the delivery of certificates. (4) In the event that any check or other order for the purchase of Shares of the Fund and/or Class is returned unpaid for any reason, the Company shall debit the Share account of the Shareholder by the number of Shares that had been credited to its account upon receipt of the check or other order, promptly mail a debit advice to the Shareholder, and notify the Fund and/or Class of its action. In the event that the amount paid for such Shares exceeds proceeds of the redemption of such Shares plus the amount of any dividends paid with respect to such Shares, the Fund and/the Class or its distributor will reimburse the Company on the amount of such excess. B. Distribution (1) Upon notification by the Funds of the declaration of any distribution to Shareholders, the Company shall act as Dividend Disbursing Agent for the Funds in accordance with the provisions of its governing document and the then-current Prospectus of the Fund. The Company shall prepare and mail or credit income, capital gain, or any other payments to Shareholders. As the Dividend Disbursing Agent, the Company shall, on or before the payment date of any such distribution, notify the Custodian of the estimated amount required to pay any portion of said distribution which is payable in cash and request the Custodian to make available sufficient funds for the cash amount to be paid out. The Company shall reconcile the amounts so requested and the amounts actually received with the Custodian on a daily basis. If a Shareholder is entitled to receive additional Shares by virtue of any such distribution or dividend, appropriate credits shall be made to the Shareholder's account, for certificated Funds and/or Classes, delivered where requested; and (2) The Company shall maintain records of account for each Fund and Class and advise the Trust, each Fund and Class and its Shareholders as to the foregoing. C. Redemptions and Transfers (1) The Company shall receive redemption requests and redemption directions and, if such redemption requests comply with the procedures as may be described in the Fund Prospectus or set forth in Proper Instructions, deliver the appropriate instructions therefor to the Custodian. The Company shall notify the Funds on a daily basis of the total amount of redemption requests processed and monies paid to the Company by the Custodian for redemptions. (2) At the appropriate time upon receiving redemption proceeds from the Custodian with respect to any redemption, the Company shall pay or cause to be paid the redemption proceeds in the manner instructed by the redeeming Shareholders, pursuant to procedures described in the then-current Prospectus of the Fund. (3) If any certificate returned for redemption or other request for redemption does not comply with the procedures for redemption approved by the Fund, the Company shall promptly notify the Shareholder of such fact, together with the reason therefor, and shall effect such redemption at the price applicable to the date and time of receipt of documents complying with said procedures. (4) The Company shall effect transfers of Shares by the registered owners thereof. (5) The Company shall identify and process abandoned accounts and uncashed checks for state escheat requirements on an annual basis and report such actions to the Fund. D. Recordkeeping (1) The Company shall record the issuance of Shares of each Fund, and/or Class, and maintain pursuant to applicable rules of the Securities and Exchange Commission ("SEC") a record of the total number of Shares of the Fund and/or Class which are authorized, based upon data provided to it by the Fund, and issued and outstanding. The Company shall also provide the Fund on a regular basis or upon reasonable request with the total number of Shares which are authorized and issued and outstanding, but shall have no obligation when recording the issuance of Shares, except as otherwise set forth herein, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Funds. (2) The Company shall establish and maintain records pursuant to applicable rules of the SEC relating to the services to be performed hereunder in the form and manner as agreed to by the Trust or the Fund to include a record for each Shareholder's account of the following: (a) Name, address and tax identification number (and whether such number has been certified); (b) Number of Shares held; (c) Historical information regarding the account, including dividends paid and date and price for all transactions; (d) Any stop or restraining order placed against the account; (e) Information with respect to withholding in the case of a foreign account or an account for which withholding is required by the Internal Revenue Code; (f) Any dividend reinvestment order, plan application, dividend address and correspondence relating to the current maintenance of the account; (g) Certificate numbers and denominations for any Shareholder holding certificates; (h) Any information required in order for the Company to perform the calculations contemplated or required by this Agreement. (3) The Company shall preserve any such records required to be maintained pursuant to the rules of the SEC for the periods prescribed in said rules as specifically noted below. Such record retention shall be at the expense of the Company, and such records may be inspected by the Fund at reasonable times. The Company may, at its option at any time, and shall forthwith upon the Fund's demand, turn over to the Fund and cease to retain in the Company's files, records and documents created and maintained by the Company pursuant to this Agreement, which are no longer needed by the Company in performance of its services or for its protection. If not so turned over to the Fund, such records and documents will be retained by the Company for six years from the year of creation, during the first two of which such documents will be in readily accessible form. At the end of the six year period, such records and documents will either be turned over to the Fund or destroyed in accordance with Proper Instructions. E. Confirmations/Reports (1) The Company shall furnish to the Fund periodically the following information: (a) A copy of the transaction register; (b) Dividend and reinvestment blotters; (c) The total number of Shares issued and outstanding in each state for "blue sky" purposes as determined according to Proper Instructions delivered from time to time by the Fund to the Company; (d) Shareholder lists and statistical information; (e) Payments to third parties relating to distribution agreements, allocations of sales loads, redemption fees, or other transaction- or sales-related payments; (f) Such other information as may be agreed upon from time to time. (2) The Company shall prepare in the appropriate form, file with the Internal Revenue Service and appropriate state agencies, and, if required, mail to Shareholders, such notices for reporting dividends and distributions paid as are required to be so filed and mailed and shall withhold such sums as are required to be withheld under applicable federal and state income tax laws, rules and regulations. (3) In addition to and not in lieu of the services set forth above, the Company shall: (a) Perform all of the customary services of a transfer agent, dividend disbursing agent and, as relevant, agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, mailing Shareholder reports and Prospectuses to current Shareholders, withholding taxes on accounts subject to back-up or other withholding (including non-resident alien accounts), preparing and filing reports on U.S. Treasury Department Form 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder account information; and (b) provide a system which will enable the Fund to monitor the total number of Shares of each Fund and/or Class sold in each state ("blue sky reporting"). The Fund shall by Proper Instructions (i) identify to the Company those transactions and assets to be treated as exempt from the blue sky reporting for each state and (ii) verify the classification of transactions for each state on the system prior to activation and thereafter monitor the daily activity for each state. The responsibility of the Company for each Fund's and/or Class's state blue sky registration status is limited solely to the recording of the initial classification of transactions or accounts with regard to blue sky compliance and the reporting of such transactions and accounts to the Fund as provided above. F. Other Duties (1) The Company shall answer correspondence from Shareholders relating to their Share accounts and such other correspondence as may from time to time be addressed to the Company; (2) The Company shall prepare Shareholder meeting lists, mail proxy cards and other material supplied to it by the Fund in connection with Shareholder Meetings of each Fund; receive, examine and tabulate returned proxies, and certify the vote of the Shareholders; (3) The Company shall establish and maintain facilities and procedures for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. Article 6. Duties of the Trust. A. Compliance The Trust or Fund assume full responsibility for the preparation, contents and distribution of their own and/or their classes' Prospectus and for complying with all applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act and any laws, rules and regulations of government authorities having jurisdiction. B. Share Certificates The Trust shall supply the Company with a sufficient supply of blank Share certificates and from time to time shall renew such supply upon request of the Company. Such blank Share certificates shall be properly signed, manually or by facsimile, if authorized by the Trust and shall bear the seal of the Trust or facsimile thereof; and notwithstanding the death, resignation or removal of any officer of the Trust authorized to sign certificates, the Company may continue to countersign certificates which bear the manual or facsimile signature of such officer until otherwise directed by the Trust. C. Distributions The Fund shall promptly inform the Company of the declaration of any dividend or distribution on account of any Fund's shares. Article 7. Compensation and Expenses. A. Annual Fee For performance by the Company pursuant to Section Two of this Agreement, the Trust and/or the Fund agree to pay the Company an annual maintenance fee for each Shareholder account as set out in Schedules C ("C1, C2, C3 etc..."), attached hereto, as may be added or amended from time to time. Such fees may be changed from time to time subject to written agreement between the Trust and the Company. Pursuant to information in the Fund Prospectus or other information or instructions from the Fund, the Company may sub- divide any Fund into Classes or other sub-components for recordkeeping purposes. The Company will charge the Fund the fees set forth on Schedule C for each such Class or sub-component the same as if each were a Fund. B. Reimbursements In addition to the fee paid under Article 7A above, the Trust and/or Fund agree to reimburse the Company for out-of-pocket expenses or advances incurred by the Company for the items set out in Schedules D ("D1, D2, D3 etc..."), attached hereto, as may be added or amended from time to time. In addition, any other expenses incurred by the Company at the request or with the consent of the Trust and/or the Fund, will be reimbursed by the appropriate Fund. C. Payment The Company shall send an invoice with respect to fees and reimbursable expenses to the Trust or each of the Funds as soon as practicable at the end of each month. Each invoice will provide detailed information about the Compensation and out-of-pocket expenses in accordance with Schedules C and Schedules D. The Trust or the Funds will pay to the Company the amount of such invoice within 30 days following the receipt of the invoices. Article 8. Assignment of Shareholder Recordkeeping. Except as provided below, no right or obligation under this Section Two may be assigned by either party without the written consent of the other party. (1) This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. (2) The Company may without further consent on the part of the Trust subcontract for the performance hereof with (A) State Street Bank and its subsidiary, Boston Financial Data Services, Inc., a Massachusetts Trust ("BFDS"), which is duly registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended, or any succeeding statute ("Section 17A(c)(1)"), or (B) a BFDS subsidiary duly registered as a transfer agent pursuant to Section 17A(c)(1), or (C) a BFDS affiliate, or (D) such other provider of services duly registered as a transfer agent under Section 17A(c)(1) as Company shall select; provided, however, that the Company shall be as fully responsible to the Trust for the acts and omissions of any subcontractor as it is for its own acts and omissions; or (3) The Company shall upon instruction from the Trust subcontract for the performance hereof with an Agent selected by the Trust, other than BFDS or a provider of services selected by Company, as described in (2) above; provided, however, that the Company shall in no way be responsible to the Trust for the acts and omissions of the Agent. SECTION THREE: Custody Services Procurement Article 9. Appointment. The Trust hereby appoints Company as its agent to evaluate and obtain custody services from a financial institution that (i) meets the criteria established in Section 17(f) of the 1940 Act and (ii) has been approved by the Board as eligible for selection by the Company as a custodian (the "Eligible Custodian"). The Company accepts such appointment. Article 10. The Company and Its Duties. Subject to the review, supervision and control of the Board, the Company shall: (1) evaluate the nature and the quality of the custodial services provided by the Eligible Custodian; (2) employ the Eligible Custodian to serve on behalf of the Trust as Custodian of the Trust's assets substantially on the terms set forth as the form of agreement in Exhibit 2; (3) negotiate and enter into agreements with the Custodians for the benefit of the Trust, with the Trust as a party to each such agreement. The Company shall not be a party to any agreement with any such Custodian; (4) establish procedures to monitor the nature and the quality of the services provided by the Custodians; (5) continuously monitor the nature and the quality of services provided by the Custodians; and (6) periodically provide to the Trust (i) written reports on the activities and services of the Custodians; (ii) the nature and amount of disbursement made on account of the Trust with respect to each custodial agreement; and (iii) such other information as the Board shall reasonably request to enable it to fulfill its duties and obligations under Sections 17(f) and 36(b) of the 1940 Act and other duties and obligations thereof. Article 11. Fees and Expenses. A. Annual Fee For the performance by the Company pursuant to Section Three of this Agreement, the Trust and/or the Fund agree to pay the Company an annual fee as set forth in Schedule E, attached hereto. B. Payment The Company shall send an invoice with respect to fees and reimbursable expenses to each of the Trust/or Fund as soon as practicable at the end of each month. Each invoice will provide detailed information about the Compensation and out-of-pocket expenses in occurrence with Schedule E. The Trust and/or Fund will pay to the Company the amount of such invoice within 30 days following the receipt of the invoice. Article 12. Representations. The Company represents and warrants that it has obtained all required approvals from all government or regulatory authorities necessary to enter into this arrangement and to provide the services contemplated in Section Three of this Agreement. SECTION FOUR: General Provisions. Article 13. Documents. A. In connection with the appointment of the Company under this Agreement, the Trust shall file with the Company the following documents: (1) A copy of the Charter and By-Laws of the Trust and all amendments thereto; (2) A copy of the resolution of the Board of the Trust authorizing this Agreement; (3) Specimens of all forms of outstanding Share certificates of the Trust or the Funds in the forms approved by the Board of the Trust with a certificate of the Secretary of the Trust as to such approval; (4) All account application forms and other documents relating to Shareholders accounts; and (5) A copy of the current Prospectus for each Fund. B. The Fund will also furnish from time to time the following documents: (1) Each resolution of the Board of the Trust authorizing the original issuance of each Fund's, and/or Class's Shares; (2) Each Registration Statement filed with the SEC and amendments thereof and orders relating thereto in effect with respect to the sale of Shares of any Fund, and/or Class; (3) A certified copy of each amendment to the governing document and the By-Laws of the Trust; (4) Certified copies of each vote of the Board authorizing officers to give Proper Instructions to the Custodian and agents for fund accountant, custody services procurement, and shareholder recordkeeping or transfer agency services; (5) Specimens of all new Share certificates representing Shares of any Fund, accompanied by Board resolutions approving such forms; (6) Such other certificates, documents or opinions which the Company may, in its discretion, deem necessary or appropriate in the proper performance of its duties; and (7) Revisions to the Prospectus of each Fund. Article 14. Representations and Warranties. A. Representations and Warranties of the Company The Company represents and warrants to the Trust that: (1) It is a business trust duly organized and existing and in good standing under the laws of the State of Delaware. (2) It is duly qualified to carry on its business in the State of Delaware. (3) It is empowered under applicable laws and by its charter and by-laws to enter into and perform this Agreement. (4) All requisite corporate proceedings have been taken to authorize it to enter into and perform its obligations under this Agreement. (5) It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. (6) It is in compliance with federal securities law requirements and in good standing as a transfer agent. B. Representations and Warranties of the Trust The Trust represents and warrants to the Company that: (1) It is an investment company duly organized and existing and in good standing under the laws of its state of organization; (2) It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform its obligations under this Agreement; (3) All corporate proceedings required by said Charter and By-Laws have been taken to authorize it to enter into and perform its obligations under this Agreement; (4) The Trust is an open-end investment company registered under the 1940 Act; and (5) A registration statement under the 1933 Act will be effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of each Fund being offered for sale. Article 15. Indemnification. A. Indemnification by Trust The Company shall not be responsible for and the Trust or Fund shall indemnify and hold the Company, including its officers, directors, shareholders and their agents employees and affiliates, harmless against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liabilities arising out of or attributable to: (1) The acts or omissions of any Custodian, (2) The Trust's or Fund's refusal or failure to comply with the terms of this Agreement, or which arise out of the Trust's or The Fund's lack of good faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of the Trust or Fund hereunder or otherwise. (3) The reliance on or use by the Company or its agents or subcontractors of information, records and documents in proper form which (a) are received by the Company or its agents or subcontractors and furnished to it by or on behalf of the Fund, its Shareholders or investors regarding the purchase, redemption or transfer of Shares and Shareholder account information; or (b) have been prepared and/or maintained by the Fund or its affiliates or any other person or firm on behalf of the Trust. (4) The reliance on, or the carrying out by the Company or its agents or subcontractors of Proper Instructions of the Trust or the Fund. (5) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state. Provided, however, that the Company shall not be protected by this Article 15.A. from liability for any act or omission resulting from the Company's willful misfeasance, bad faith, gross negligence or reckless disregard of its duties. B. Indemnification by the Company The Company shall indemnify and hold the Trust or each Fund harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liabilities arising out of or attributable to any action or failure or omission to act by the Company as a result of the Company's willful misfeasance, bad faith, gross negligence or reckless disregard of its duties. C. Reliance At any time the Company may apply to any officer of the Trust or Fund for instructions, and may consult with legal counsel with respect to any matter arising in connection with the services to be performed by the Company under this Agreement, and the Company and its agents or subcontractors shall not be liable and shall be indemnified by the Trust or the appropriate Fund for any action reasonably taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel provided such action is not in violation of applicable federal or state laws or regulations. The Company, its agents and subcontractors shall be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of the officers of the Trust or the Fund, and the proper countersignature of any former transfer agent or registrar, or of a co-transfer agent or co-registrar. D. Notification In order that the indemnification provisions contained in this Article 15 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent. Article 16. Termination of Agreement. This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other. Should the Trust exercise its rights to terminate, all out-of-pocket expenses associated with the movement of records and materials will be borne by the Trust or the appropriate Fund. Additionally, the Company reserves the right to charge for any other reasonable expenses associated with such termination. The provisions of Article 15 shall survive the termination of this Agreement. Article 17. Amendment. This Agreement may be amended or modified by a written agreement executed by both parties. Article 18. Interpretive and Additional Provisions. In connection with the operation of this Agreement, the Company and the Trust may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Charter. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. Article 19. Governing Law. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts Article 20. Notices. Except as otherwise specifically provided herein, Notices and other writings delivered or mailed postage prepaid to the Trust at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such other address as the Trust or the Company may hereafter specify, shall be deemed to have been properly delivered or given hereunder to the respective address. Article 21. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. Article 22. Limitations of Liability of Trustees and Shareholders of the Trust. The execution and delivery of this Agreement have been authorized by the Trustees of the Trust and signed by an authorized officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or Shareholders of the Trust, but bind only the appropriate property of the Fund, or Class, as provided in the Declaration of Trust. Article 23. Limitations of Liability of Trustees and Shareholders of the Company. The execution and delivery of this Agreement have been authorized by the Trustees of the Company and signed by an authorized officer of the Company, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or Shareholders of the Company, but bind only the property of the Company as provided in the Declaration of Trust. Article 24. Assignment. This Agreement and the rights and duties hereunder shall not be assignable with respect to the Trust or the Funds by either of the parties hereto except by the specific written consent of the other party. Article 25. Merger of Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. Article 26. Successor Agent. If a successor agent for the Trust shall be appointed by the Trust, the Company shall upon termination of this Agreement deliver to such successor agent at the office of the Company all properties of the Trust held by it hereunder. If no such successor agent shall be appointed, the Company shall at its office upon receipt of Proper Instructions deliver such properties in accordance with such instructions. In the event that no written order designating a successor agent or Proper Instructions shall have been delivered to the Company on or before the date when such termination shall become effective, then the Company shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $2,000,000, all properties held by the Company under this Agreement. Thereafter, such bank or trust company shall be the successor of the Company under this Agreement. Article 27. Force Majeure. The Company shall have no liability for cessation of services hereunder or any damages resulting therefrom to the Fund as a result of work stoppage, power or other mechanical failure, natural disaster, governmental action, communication disruption or other impossibility of performance. Article 28. Assignment; Successors. This Agreement shall not be assigned by either party without the prior written consent of the other party, except that either party may assign to a successor all of or a substantial portion of its business, or to a party controlling, controlled by, or under common control with such party. Nothing in this Article 28 shall prevent the Company from delegating its responsibilities to another entity to the extent provided herein. Article 29. Severability. In the event any provision of this Agreement is held illegal, void or unenforceable, the balance shall remain in effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written. ATTEST: INVESTMENT COMPANIES (listed on Exhibit 1) /s/ John W. McGonigle_______ By:__/s/ John F. Donahue___ John W. McGonigle John F. Donahue Secretary Chairman ATTEST: FEDERATED SERVICES COMPANY /s/ Jeannette Fisher-Garber By:_/s/ James J. Dolan_____ Jeannette Fisher-Garber James J. Dolan Secretary President EXHIBIT 1 CONTRACT DATE INVESTMENT COMPANY 12/1/93 Federated Income Securities Trust 12/1/93 Federated Short-Term Income Fund 12/1/93 Institutional Service Shares 2/1/93 Institutional Shares 12/1/93 Intermediate Income Fund 12/1/93 Institutional Service Shares 12/1/93 Institutional Shares EX-99.DATA 9 FUND PERFORMANCE DATA Exhibit 16 (ii) under Form N-1A Exhibit 99 under Item 601/Reg. S-K Computation of SEC Yield Yield = 2{( $80,310.15 - $0.00 )+1)^6-1}= As of: April 29, 1994 1,679,092 * $9.53 - 0.00000 ) SEC Yield = 6.10% Dividend and/or Interest Inc for the 30 days ended $80,310.15 Net Expenses for $0.00 the Period Avg Daily Shares Outstanding and entitled to receive dividends 1,679,092 Maxium offering price per share as of 4-30-94 $9.53 Undistributed net income 0.00000
EX-99.DATA 10 FUND PERFORMANCE DATA Exhibit 16 (ii) under Form N-1A Exhibit 99 under Item 601/Reg. S-K Schedule for Computation Initial of Fund Performance Data Invest of: $1,000 Offering Federated Intermediate Income Price/ Fund Share= 10.00 Return Since Inception ending 04/29/94 NAV= 9.53 FYE: April 30 Begin Capital Reinvest Ending Total DECLARED: DAILY Reinvest Period Dividend Gain Price Period Ending Invest PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value 12/31/93 100.000 0.021759123 0.00000 $10.00 100.218 $10.00 $1,002.18 1/31/94 100.218 0.054296045 0.00000 $10.09 100.757 $10.09 $1,016.64 2/28/94 100.757 0.050397990 0.00000 $9.87 101.271 $9.87 $ 999.95 3/31/94 101.271 0.051750514 0.00000 $9.63 101.816 $9.63 $ 980.48 4/30/94 101.816 0.047914449 0.00000 $9.53 102.327 $9.53 $ 975.64 $1,000 (1+T) = End Value T = -2.48%
EX-99.DATA 11 FUND PERFORMANCE DATA Exhibit 16 (ii) under Form N-1A Exhibit 99 under Item 601/Reg. S-K Computation of SEC Yield Yield = 2{( $1,213.79 - $49.86 )+1)^6-1}= As of: April 29, 1994 25,374 * $9.53 - 0.00000 ) SEC Yield = 5.85% Dividend and/or Interest Inc for the 30 days ended $1,213.79 Net Expenses for $49.86 the Period Avg Daily Shares Outstanding and entitled to receive dividends 25,374 Maxium offering price per share as of 4-30-94 $9.53 Undistributed net income 0.00000
EX-99.DATA 12 FUND PERFORMANCE DATA Exhibit 16 (ii) under Form N-1A Exhibit 99 under Item 601 / Reg. S-K Schedule for Computation Initial of Fund Performance Data Invest of: $1,000 Offering Federated Intermediate Income Price/ Fund Share= $10.00 Return Since Inception ending 04/29/94 NAV= $9.53 FYE: April 30 DECLARED: DAILY Begin Capital Reinvest Ending Total PAID: MONTHLY Reinvest Period Dividend Gain Price Period Ending Invest Dates Shares /Share /Share /Share Shares Price Value 12/31/93 100.000 0.020951393 0.00000 $10.00 100.210 $10.00 $1,002.10 1/31/94 100.210 0.052201014 0.00000 $10.09 100.728 $10.09 $1,016.35 2/28/94 100.728 0.048322618 0.00000 $9.87 101.221 $9.87 $999.05 3/31/94 101.221 0.049719937 0.00000 $9.63 101.744 $9.63 $979.79 4/30/94 101.744 0.045930646 0.00000 $9.53 102.234 $9.53 $974.29 $1,000 (1+T) = End Value T = -2.57%
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