PROSPECTUS
Federated Tax-Free Trust
A money market mutual fund seeking to provide dividend income exempt from
federal regular income taxes.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and any representation to the contrary is a criminal offense.
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CONTENTS
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Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 4
What are the Specific Risks of Investing in the Fund? 5
What do Shares Cost? 6
How is the Fund Sold? 6
How to Purchase Shares 6
How to Redeem Shares 7
Account and Share Information 9
Who Manages the Fund? 10
Financial Information 10
Independant Auditors' Report 25
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JANUARY 31, 1999
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund is a money market fund which seeks to maintain a stable net asset value
of $1.00. The Fund's investment objective is to provide for its shareholders
dividend income exempt from federal regular income taxes
while seeking relative stability of principal. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in tax-exempt securities so that the Fund's annual interest
income is exempt from federal
income tax
and from the federal alternative minimum tax.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
Although the Fund seeks to maintain a stable net asset value, it is possible to
lose money investing in the Fund.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.
Risk/Return Bar Chart and Table
The graphic presentation displayed here consists of a bar chart
representing the annual total returns of Federated Tax Free Trust as of the
calendar year-end for each of 10 years. The `y' axis reflects the "% Total
Return" beginning with "0" and increasing in increments of 1.00% up to 7.00%.
The `x' axis represents calculation for the last ten calendar years of the
Fund, beginning 1988. The light gray shaded chart features 10 distinct vertical
bars, each shaded in charcoal, and each visually representing by height the
total return percentages for the calendar year stated directly at its base. The
calculated total return percentage for the Fund for each calendar year is stated
directly at the top of each respective bar, for the calendar years 1988 through
1997. The percentages noted are:
6.03%, 5.69%, 4.32%, 2.75%, 2.14%, 2.57%, 3.57%, 3.14%, 3.33%, and 3.18%.
Historically, the Fund has maintained a constant $1.00 net asset value per
share. The bar chart shows the variability of the Fund's Shares on a
calendar year-end basis.
The Fund's Shares are not sold subject to a sales charge (load). Hence, the
total returns displayed above are based upon the net asset value.
Within the period shown in the Chart, the Fund's highest quarterly return was
1.54% (quarter ended June 30, 1989). Its lowest quarterly return was 0.49%
(quarter ended March 31, 1994).
The Fund's Seven-Day Net Yield as of 12/31/98 was
3.34%.
Average Annual Total Return
The following table represents the Fund's Average Annual Returns through
12/31/98.
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Calendar Period Fund
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1 Year 3.18%
5 Years 3.16%
10 Years 3.66%
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Investors may call the Fund to acquire the current Seven-Day Net Yield by
calling 1-800-341-7400.
Past performance does not necessarily predict future performance
. This information provides you with historical performance information so that
you can analyze whether the Fund's investment risks are balanced by its
potential rewards.
What are the Fund's Fees and Expenses?
FEDERATED TAX-FREE TRUST
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
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Shareholder Fees
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or None
redemption proceeds, as applicable)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) None
(as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
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Management Fee 0.40%
Distribution (12b-1) Fee None
Shareholder Services Fee 0.25%
Other Expenses 0.12%
Total Annual Fund Operating Expenses (Before Waivers)1 0.77%
Waiver of Fund Expenses 0.32%
Total Actual Annual Fund Operating Expenses (after waivers) 0.45%
1 Under the investment advisory contract, the adviser will waive the amount, limited to the amount of the management fee, by which
the Fund's aggregate annual operating expenses, including the management fee but excluding interest, taxes brokerage commissions,
expenses of registering or qualifying the Fund and its shares under federal and state laws and regulations, expenses of
withholding taxes, and extraordinary expenses exceed 0.45% of its average daily net assets. As a result, amounts actually incurred
by the Fund for management fee, shareholder services fees, and/or other expenses may be less than the maximum amounts shown in
this table.
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EXAMPLE
The
Example is intended to help you compare the cost of investing in the Fund with
the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses are before waivers as shown in the table and remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
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1 3 5 10
Year Years Years Years
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$79 $246 $428 $954
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What are the Fund's Investment Strategies?
The Fund invests in a portfolio of high-quality tax-exempt securities maturing
in 13 months or less. The average maturity of the Fund's portfolio will be 90
days or less.
The Fund's Adviser performs a fundamental credit analysis to develop an
approved list of issuers and securities that meet the Adviser's minimum credit
standards. The Adviser targets an average portfolio maturity based upon its
interest rate outlook and the tax exempt securities available. The Adviser
structures the portfolio by combining variable rate demand instruments and
municipal notes. Depending on the supply of tax exempt securities, the Adviser
generally shortens the portfolio's maturity when it expects interest rates to
rise and extends the maturity when it expects interest rates to fall.
Temporary Defensive Investments
During adverse market conditions, the Fund may temporarily depart from its
principal investment strategies by investing in securities subject to federal
regular income tax. Temporary investments will be of comparable quality to other
securities in which the Fund invests. This may cause the Fund to give up greater
after tax investment returns to maintain the safety of principal. This also may
cause the Fund to receive and distribute taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
Tax exempt securities
Tax exempt securities are fixed income securities that pay interest
that is not subject to regular federal income taxes.
Typically, states, counties, cities and other political subdivisions and
authorities
issue tax exempt securities.
The market categorizes tax exempt securities by their source of repayment.
Fixed Income securities
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically.
In addition, the issuer of a fixed income security must
repay the principal amount of the security, normally within a specified time.
The following describes the types of tax exempt securities in which the Fund
invests.
Variable rate demand instruments
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond thirteen months.
Municipal notes
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
Credit Enhancement
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
Investment Ratings
The securities in which the Fund invests must be rated in the highest short-
term rating category by one or more nationally recognized rating services or be
of comparable quality to securities having such ratings.
What are the Specific Risks of Investing in the Fund?
Although there are many factors which may effect an investment in the Fund, the
principal risks of investing in a tax exempt money market fund are described
below.
CREDIT RISK
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money. Money market funds try to minimize this risk by purchasing
higher quality securities.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
MARKET RISK
Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.
Interest rate changes have a greater effect on the price of fixed income
securities with longer maturities. Money market funds try to minimize this risk
by purchasing short-term securities.
SECTOR RISK
A substantial part of the Fund's portfolio may be comprised of tax exempt
securities issued or credit enhanced by companies in similar businesses,
or with other similar characteristics. As a result, the Fund will be more
susceptible to any economic, business, political, or other developments which
generally affect these issuers.
What do Shares Cost?
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is
open. When the Fund receives your transaction request in proper form, it is
processed at the next
calculated net asset value (NAV).
The Fund does not charge a front-end sales charge. NAV is determined at 12:00
noon and 3:00 p.m. (Eastern time) and as of the end of regular trading (normally
4:00 p.m. Eastern time) each day the NYSE is open.
The required minimum initial investment for Fund Shares is $25,000. There is
no required minimum subsequent investment amount.
An account may be opened with a smaller minimum amount as long as the $25,000
minimum is reached within 90 days. An institutional investor's minimum is
calculated by combining all accounts it maintains with the Fund. Accounts
established through investment professionals may be subject to a smaller minimum
investment amount. Keep in mind that investment professionals may charge you
fees for their services in connection with your Share transactions.
How is the Fund Sold?
The Fund's Distributor markets the Shares described in this prospectus to banks
and other institutions that hold assets for individuals, trusts, estates, or
partnerships, or to individuals directly or through investment professionals.
The Fund may not be a suitable investment for retirement plans because it
invests in tax exempt securities. The Distributor and its affiliates may pay out
of their assets other amounts (including items of material value) to investment
professionals for marketing and servicing Shares. The Distributor is a
subsidiary of Federated Investors, Inc. (Federated).
How to Purchase Shares
You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.
THROUGH AN INVESTMENT PROFESSIONAL
. Establish an account with the investment professional; and
. Submit your purchase order to the investment professional before 3:00 p.m.
Eastern time. You will receive that day's dividend if the investment
professional forwards the order to the Fund and the Fund receives payment
by 3:00 p.m. Eastern time. You will become the owner of Shares and receive
dividends when the Fund receives your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
. Establish your account with the Fund by submitting a completed New Account
Form; and
. Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares after the Fund receives your wire or your
check. If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees the Fund or its transfer agent incurs.
An institution may establish an account and place an order by calling the Fund
and will become a shareholder after the Fund receives the order.
By Wire
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
By Check
Make your check payable to The Federated Funds, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third- party checks (checks originally payable to someone other than
you or The Federated Funds). Orders by mail are considered received when payment
by check is converted into federal funds (normally the business day after the
check is received) and Shares begin earning dividends the next day.
BY AUTOMATIC INVESTMENTS
You may establish an account with your financial institution to automatically
purchase Shares on pre- determined dates or when your bank account reaches a
certain level. Under this program, participating financial institutions are
responsible for prompt transmission of orders and may charge you for this
service. You should read this prospectus along with your financial institution's
agreement or materials describing this service.
BY AUTOMATED CLEARINGHOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem Shares
You should redeem Shares:
. through an investment professional if you purchased Shares through an
investment professional; or
. directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption request to your investment professional by the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). Investment
professionals are responsible for promptly submitting redemption requests and
providing proper written redemption instructions as outlined below.
DIRECTLY FROM THE FUND
By Telephone
You may redeem Shares by calling the Fund once you have completed the
appropriate authorization form for telephone transactions.
If you call before 12:00 noon (Eastern time) your redemption will be wired to
you the same day. You will not receive that day's dividend.
If you call after 12:00 noon (Eastern time) your redemption will be wired to you
the following business day. You will receive that day's dividend.
By Mail
You may redeem Shares by mailing a written request to the Fund.
Your redemption request will be processed on the day the Fund receives your
written request in proper form. Dividends are paid up to and including the day
that a redemption request is processed. Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
. Fund Name and Share Class, account number and account registration;
. amount to be redeemed; and
. signatures of all Shareholders exactly as registered.
Call your investment professional or the Fund if you need special instructions.
Signature Guarantees
Signatures must be guaranteed if:
. your redemption will be sent to an address other than the address of record;
. your redemption will be sent to an address of record that was changed within
the last thirty days; or
. a redemption is payable to someone other than the shareholder(s) of record.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union, or broker, dealer, or securities exchange member. A notary public cannot
provide a signature guarantee.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established
when the account was opened:
. an electronic transfer to your account at a financial institution that is an
ACH member; or
. wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
. to allow your purchase to clear;
. during periods of market volatility; or
. when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
ADDITIONAL CONDITIONS
Telephone Transactions
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
Share Certificates
The Fund no longer issues share certificates. If you are redeeming Shares
represented by certificates previously issued by the Fund, you must return the
certificates with your written redemption request. For your protection, send
your certificates by registered or certified mail, but do not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases and redemptions. In addition, you
will receive periodic statements reporting all account activity, including
dividends and capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares any dividends daily and pays them monthly to shareholders. If
you purchase shares by wire, you begin earning dividends on the day your wire is
received. If you purchase shares by check, you begin earning dividends on the
business day after the Fund receives your check. In either case, you earn
dividends through the day your redemption request is received.
The Fund does not expect to realize any capital gains or losses. If capital
gains or losses were to occur, they could result in an increase or decrease in
dividends. The Fund pays any capital gains at least annually. Your dividends and
capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions cause the account balance to fall below the minimum
initial investment amount. Before an account is closed, you will be notified and
allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes. Capital gains and non-exempt
dividends are taxable whether paid in cash or reinvested in the Fund.
Redemptions are taxable sales. Please consult your tax adviser regarding your
federal, state and local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Advisers. The Adviser manages the Fund's assets, including
buying and selling portfolio securities. The Adviser's address is Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. Under the investment advisory contract, which is
subject to annual renewal by the Fund's Board of Trustees, the Adviser will
waive the amount, limited to the amount of the advisory fee, by which the Fund's
aggregate annual operating expenses, including the investment advisory fee but
excluding interest, taxes, brokerage commissions, expenses of registering or
qualifying the Fund and its shares under federal and state laws and regulations,
expenses of withholding taxes, and extraordinary expenses exceed 0.45% of its
average daily net assets.
YEAR 2000 READINESS
The "Year 2000" problem is the potential for computer errors or failures
because certain computer systems may be unable to interpret dates after December
31, 1999. The Year 2000 problem may cause systems to process information
incorrectly and could disrupt businesses that rely on computers, like the Fund.
While it is impossible to determine in advance all of the risks to the Fund,
the Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to
fix any Year 2000 problems. In addition, they are working to gather information
from third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following financial highlights will help you understand the Fund's financial
performance for its past five fiscal years, or since inception, if the life of
the Fund is shorter. Some of the information is presented on a per share basis.
Total returns represent the rate an investor would have earned (or lost) on an
investment in the Fund, assuming reinvestment of all dividends and capital
gains.
This information has been audited by Deloitte & Touche, LLP, whose report,
along with the Fund's audited financial statements, is included in this
Prospectus.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 2
5.
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Year Ended November 30 1998 1997 1996 1995 1994
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Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income 0.03 0.03 0.03 0.04 0.02
Less Distributions:
Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.02)
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return1 3.21% 3.31% 3.18% 3.57% 2.43%
Ratios to Average Net Assets:
Expenses 0.45% 0.45% 0.45% 0.45% 0.45%
Net investment income 3.17% 3.25% 3.12% 3.51% 2.38%
Supplemental Data:
Net assets, end of period (000 omitted) $517,887 $635,519 $747,785 $807,369 $1,215,547
</TABLE>
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1 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
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NOVEMBER 30, 1998
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Principal Value
Amount
SHORT-TERM MUNICIPALS--99.9%1
Alabama--0.5%
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$ 2,500,000 Jefferson County, AL, GO Warrants (Series 1996) Weekly VRDNs (Bayerische Landesbank $ 2,500,000
Girozentrale LOC)
Alaska--1.4%
7,200,000 Alaska State Housing Finance Corp., General Mortgage Revenue Bonds (Series 1997A) 7,200,000
Weekly VRDNs (Bank of America NT and SA, San Francisco LIQ)
Arizona--1.1%
5,000,000 Arizona Agricultural Improvement & Power District, 3.20% CP (Salt River Project, AZ 5,000,000
Agricultural Improvement & Power District), Mandatory Tender 2/18/1999
620,000 Mesa, AZ Municipal Development Corp., (Series 1985), 3.20% CP (Westdeutsche Landesbank 620,000
Girozentrale LOC), Mandatory Tender 12/9/1998
TOTAL 5,620,000
California--3.5%
4,600,000 New Haven, CA Unified School District, 3.90% TRANs, 6/30/1999 4,605,120
5,000,000 San Diego, CA Area Local Governments, Trust Receipts Series A25 Weekly VRDNs (Bank of 5,000,000
New York, New York LIQ)
5,550,000 San Leandro, CA Unified School District, 3.90% TRANs, 6/30/1999 5,556,177
3,000,000 Stanislaus County, CA Office of Education, 4.50% TRANs, 7/30/1999 3,016,208
TOTAL 18,177,505
Colorado--1.0%
2,540,000 Loveland, CO, IDR (Series 1993S), 3.45% TOBs (Safeway, Inc.)/(Bankers Trust Co., New 2,540,000
York LOC), Mandatory Tender 2/1/1999
2,540,000 Loveland, CO, IDR (Series 1993S), 3.80% TOBs (Safeway, Inc.)/(Bankers Trust Co., New 2,540,000
York LOC), Mandatory Tender 12/1/1998
TOTAL 5,080,000
Connecticut--1.0%
5,000,000 2 Connecticut State HFA, Variable Rate Certificates (Series 1998S), 3.50% TOBs (Bank of 5,000,000
America NT and SA, San Francisco LIQ), Optional Tender 8/20/1999
District Of Columbia--1.7%
1,710,000 District of Columbia, (Series B), 7.00% Bonds (FSA INS), 6/1/1999 1,737,389
7,350,000 District of Columbia, Variable Rate Demand/Fixed Rate Revenue Bonds (Series 1997) 7,350,000
Weekly VRDNs (Children's Defense Fund)/(First National Bank of Maryland, Baltimore LOC)
TOTAL 9,087,389
Florida--2.8%
7,325,000 ABN AMRO MuniTOPS Certificates Trust (Florida Non-AMT) Series 1998-9 Weekly VRDNs 7,325,000
(Florida State Board of Education Capital Outlay)/(FSA INS)/(ABN AMRO Bank N.V.,
Amsterdam LIQ)
SHORT-TERM MUNICIPALS--continued1
Florida--continued
$ 3,975,000 Putnam County, FL Development Authority, PCR Bonds (Pooled Series 1984S) $ 3,975,000
Weekly VRDNs (Seminole Electric Cooperative, Inc (FL))/(National Rural Utilities
Cooperative Finance Corp. LOC)
3,000,000 Putnam County, FL Development Authority, PCR Bonds (Series 1984H) 3,000,000
Weekly VRDNs (Seminole Electric Cooperative, Inc (FL))/(National Rural Utilities
Cooperative Finance Corp. LOC)
TOTAL 14,300,000
Georgia--3.9%
4,995,000 2 Bibb County, GA, PT-199, 3.70% TOBs (Georgia State GTD)/(Bayerische Vereinsbank AG, 4,995,000
Munich LIQ), Optional Tender 5/20/1999
12,145,000 Georgia State, (Series 1995C) PA-249 Weekly VRDNs (Merrill Lynch Capital 12,145,000
Services, Inc. LIQ)
3,000,000 Marietta, GA Housing Authority, Multifamily Housing Revenue Refunding Bonds (Series 3,000,000
1996) Weekly VRDNs (Winterset Apartments Project)/(Wachovia Bank of Georgia, NA,
Winston-Salem LOC)
TOTAL 20,140,000
Illinois--4.3%
4,500,000 2 Chicago, IL Public Building Commission, PT-155, 3.75% TOBs (Chicago, IL Board of 4,500,000
Education)/(MBIA Insurance Corporation INS)/(Bayerische Hypotheken-Und Wechsel-Bank Ag
LIQ), Optional Tender 1/14/1999
4,995,000 2 Chicago, IL, Variable Rate Certificates (Series 1998M), 3.70% TOBs (FGIC INS)/ 4,995,000
(Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999
12,900,000 Illinois Health Facilities Authority Weekly VRDNs (OSF Health Care Systems) 12,900,000
TOTAL 22,395,000
Indiana--1.0%
5,000,000 Indiana Bond Bank, Advance Funding Program Notes (Series 1998 A-2), 4.00% TANs 5,002,649
(Lasalle National Bank, Chicago LOC), 1/20/1999
Iowa--1.2%
6,000,000 Iowa School Corporations, (1998-99 Series A), 4.50% TRANs (FSA INS), 6/25/1999 6,027,768
Louisiana--1.8%
2,000,000 Louisiana PFA, East Baton Rouge Parish School Board (Series A), 3.35% TRANs 2,000,000
(Louisiana State), 10/25/1999
1,600,000 Louisiana PFA, Monroe City School Board (Series C), 3.35% TRANs (Louisiana State), 1,600,000
10/25/1999
5,635,000 New Orleans, LA, Class A Certificates (Series 1998-1) Weekly VRDNs 5,635,000
(AMBAC INS)/(Bank of New York, New York LIQ)
TOTAL 9,235,000
Maryland--10.7%
4,300,000 Anne Arundel County, MD, (Series 1988) Weekly VRDNs (Oakland Hills L. P. Facility)/ 4,300,000
(First National Bank of Maryland, Baltimore LOC)
5,580,000 Howard County, MD, (Series 1995) Weekly VRDNs (Bluffs at Clarys Forest Apartments)/ 5,580,000
(First National Bank of Maryland, Baltimore LOC)
SHORT-TERM MUNICIPALS--continued1
Maryland--continued
$ 890,000 Maryland EDC, Variable Rate Demand/Fixed Rate Refunding Revenue Bonds (1997 Issue) $ 890,000
Weekly VRDNs (Jenkins Memorial Nursing Home, Inc. Facility)/(First National Bank of
Maryland, Baltimore LOC)
3,115,000 Maryland Health & Higher Educational Facilities Authority, Facility Authority Revenue 3,115,000
Bonds (Series 1998) Weekly VRDNs (Woodbourne Foundation, Inc.)/(First National Bank of
Maryland, Baltimore LOC)
9,260,000 Maryland Health & Higher Educational Facilities Authority, Series 1997 Weekly VRDNs 9,260,000
(Augsburg Lutheran Home of MD., Inc.)/(First National Bank of Maryland, Baltimore LOC)
7,700,000 Maryland Health & Higher Educational Facilities Authority, Variable Rate Demand/Fixed 7,700,000
Rate Revenue Bonds Weekly VRDNs (Capitol College)/(First National Bank of Maryland,
Baltimore LOC)
10,000,000 Maryland State, (Series 1998) PA-256 Weekly VRDNs (Merrill Lynch Capital Services, Inc. 10,000,000
LIQ)
11,200,000 Montgomery County, MD, EDR Weekly VRDNs (U.S. Pharmacopeial Convention Facility)/ 11,200,000
(Chase Manhattan Bank N.A., New York LOC)
3,595,000 Prince George County, MD, (1997 Issue) Weekly VRDNs (Mona Branch Avenue Ltd. 3,595,000
Partnership)/(First National Bank of Maryland, Baltimore LOC)
TOTAL 55,640,000
Michigan--3.7%
4,000,000 Battle Creek, MI Economic Development Corporation, Limited Obligation Economic 4,000,000
Development Revenue Refunding Bonds (Series 1992) Weekly VRDNs (Michigan Carton &
Paperboard Co.)/(American National Bank, Chicago LOC)
6,000,000 Michigan State Hospital Finance Authority, (Series A) Weekly VRDNs (OSF Health Care 6,000,000
Systems)
3,700,000 Michigan State Housing Development Authority, (Series 1991) Weekly VRDNs (Forest Hills 3,700,000
Apartments)/(National Australia Bank, Ltd., Melbourne LOC)
5,500,000 Michigan Strategic Fund, Limited Obligation PCR Bonds (Series 1993) Weekly VRDNs 5,500,000
(Allied-Signal, Inc.)
TOTAL 19,200,000
Minnesota--2.6%
4,500,000 Minneapolis, MN, (Series 1993) Weekly VRDNs (Market Square Real Estate, Inc.)/ 4,500,000
(Norwest Bank Minnesota, N.A. LOC)
1,000,000 Minneapolis, MN, Housing Development Revenue Refunding Bonds (Series 1988) Weekly VRDNs 1,000,000
(Symphony Place)/(Citibank NA, New York LOC)
2,000,000 Rochester, MN Health Care Facility Authority Weekly VRDNs (Mayo Foundation)/ 2,000,000
(Rabobank Nederland, Utrecht LIQ)
6,000,000 Rochester, MN Health Care Facility Authority Weekly VRDNs (Mayo Foundation)/ 6,000,000
(Rabobank Nederland, Utrecht LIQ)
TOTAL 13,500,000
Missouri--3.4%
5,000,000 Missouri State Environmental Improvement & Energy Authority, Pollution Control Revenue 5,000,000
Bonds Series 1985 B, 3.65% CP (Union Electric Co.)/(Westdeutsche Landesbank
Girozentrale LOC), Mandatory Tender 3/23/1999
SHORT-TERM MUNICIPALS--continued1
Missouri--continued
$ 4,750,000 Missouri State HEFA, (Series K), 4.25% TRANs (St. Louis, MO School District), 9/13/1999 $ 4,771,457
3,130,000 Missouri State HEFA, Health Facilities Revenue Bonds (Series 1996A) Weekly VRDNs 3,130,000
(Deaconess Long Term Care of Missouri)/(Bank One, Texas N.A. LOC)
4,950,000 2 Missouri State HEFA, PT-191, 3.75% TOBs (Health Midwest)/(MBIA Insurance Corporation 4,950,000
INS)/(Banco Santander SA LIQ), Optional Tender 5/13/1999
TOTAL 17,851,457
Multi State--6.8%
9,534,935 ABN AMRO Chicago Corp. 1997-1 LeaseTOPS Trust Weekly VRDNs (Lasalle National Bank, 9,534,935
Chicago LIQ)/(Lasalle National Bank, Chicago LOC)
12,157,000 Clipper Tax Exempt Trust (Non-AMT Multistate), (Series A) Weekly VRDNs (MBIA Insurance 12,157,000
Corporation INS)/(State Street Bank and Trust Co. LIQ)
13,782,040 Equity Trust I, (1996 Series) Weekly VRDNs (Bayerische Hypotheken-Und Wechsel-Bank Ag 13,782,040
LOC)
TOTAL 35,473,975
Nevada--1.0%
5,000,000 Nevada State Highway Improvement Authority, Motor Vehicle Fuel Tax Revenue Bonds, 5,064,979
7.00% Bonds, 4/1/1999
New York--6.5%
8,695,000 Long Island Power Authority, (PA-420) Weekly VRDNs (MBIA Insurance Corporation INS)/ 8,695,000
(Merrill Lynch Capital Services, Inc. LIQ)
10,000,000 New York City Municipal Water Finance Authority, (Series 1994-1), 3.35% CP (Bank of 10,000,000
Nova Scotia, Toronto, Commerzbank AG, Frankfurt and Toronto-Dominion Bank LOCs),
Mandatory Tender 1/21/1999
5,000,000 New York City, NY, UT GO (Series F), 4.10% Bonds, 8/1/1999 5,009,693
10,000,000 Rochester, NY, 3.10% BANs, 10/28/1999 10,017,550
TOTAL 33,722,243
North Carolina--5.9%
20,000,000 Martin County, NC IFA, (Series 1993) Weekly VRDNs (Weyerhaeuser Co.) 20,000,000
10,550,000 NCNB Pooled Tax-Exempt Trust, (Series 1990A) Weekly VRDNs (NCNB Tax Exempt Trust 10,550,000
1990a)/(Nationsbank, N.A., Charlotte LOC)
TOTAL 30,550,000
Oklahoma--1.1%
2,440,000 Muskogee, OK Industrial Trust, (Series 1985) Weekly VRDNs (Muskogee Mall Limited 2,440,000
Partnership)/(Nationsbank, N.A., Charlotte LOC)
3,510,000 Muskogee, OK Industrial Trust, (Series 1985) Weekly VRDNs (Warmack Musskogee Ltd. 3,510,000
Partnership)/(Nationsbank, N.A., Charlotte LOC)
TOTAL 5,950,000
Oregon--1.2%
6,000,000 Oregon State Housing and Community Services Department, Mortgage Revenue Bonds (1998 6,000,000
Series C), 3.75% BANs, 5/13/1999
SHORT-TERM MUNICIPALS--continued1
Pennsylvania--10.1%
$ 15,500,000 Dauphin County, PA General Authority, (Series A of 1997) Weekly VRDNs (Allhealth Pooled $ 15,500,000
Financing Program)/(FSA INS)/(Credit Suisse First Boston LIQ)
7,835,000 Easton Area School District, PA, (Series 1997) Weekly VRDNs (FGIC INS)/(FGIC Securities 7,835,000
Purchase, Inc. LIQ)
24,000,000 Erie County, PA Hospital Authority Weekly VRDNs (St. Vincent Health System)/(Mellon 24,000,000
Bank NA, Pittsburgh LOC)
5,000,000 Philadelphia, PA, 4.25% TRANs, 6/30/1999 5,017,129
TOTAL 52,352,129
Tennessee--2.3%
12,000,000 Chattanooga, TN HEFA Weekly VRDNs (Sisken Hospital)/(Nationsbank, N.A., Charlotte LOC) 12,000,000
Texas--8.8%
3,325,000 Dallas, TX, (Series C), 3.70% TOBs, Optional Tender 6/15/1999 3,325,000
6,820,000 Matagorda County, TX Navigation District Number One, CDC (Series 1997D) Weekly VRDNs 6,820,000
(Houston Light & Power Co.)/(FGIC INS)/(CDC Municipal Products, Inc. LIQ)
5,000,000 San Antonio, TX, Electric & Gas Systems Commercial Paper Notes, (Series A), 3.40% CP 5,000,000
(Chase Bank of Texas, Morgan Guaranty Trust Co., New York, Toronto-Dominion Bank and
UBS AG LIQs), Mandatory Tender 12/17/1998
2,290,000 TX Pooled Tax Exempt Trust, Certificates of Participation (Series 1996) Weekly VRDNs 2,290,000
(Bank One, Texas N.A. LOC)
8,000,000 2 Texas State, Trust Receipts (Series A58), 3.45% TOBs (Commerzbank AG, Frankfurt LIQ), 8,000,000
Optional Tender 12/15/1998
20,000,000 Texas State, Trust Receipts (Series A59) Weekly VRDNs (National Westminster Bank, PLC, 20,000,000
London LIQ)
TOTAL 45,435,000
Virginia--3.8%
7,500,000 ABN AMRO MuniTOPS Certificates Trust (Virginia Non-AMT) Series 1998-21, 7,500,000
(Series 1998-21) Weekly VRDNs (Norfolk, VA Water Revenue)/(FSA INS)/
(ABN AMRO Bank N.V., Amsterdam LIQ)
12,000,000 Fairfax County, VA IDA, 1998 Trust Receipts FR/RI-A35 Weekly VRDNs (Fairfax Hospital 12,000,000
System)/(National Westminster Bank, PLC, London LIQ)/(United States Treasury PRF)
TOTAL 19,500,000
Washington--0.5%
2,775,000 Washington State, Motor Vehicle Fuel Tax (1997-B), 5.00% Bonds, 7/1/1999 2,804,211
West Virginia--1.9%
7,000,000 Cabell County Commission, WV, Life Care Facilities Multi-Option Revenue Bonds (Series 7,000,000
1995) Weekly VRDNs (Foster Foundation)/(Huntington National Bank, Columbus, OH LOC)
2,980,000 Oak Hill, WV, (Series 1991A) Weekly VRDNs (Fayette Plaza)/(ABN AMRO Bank N.V., 2,980,000
Amsterdam LOC)
TOTAL 9,980,000
Wisconsin--4.4%
3,900,000 La Crosse WI, School District, 3.34% TRANs, 8/31/1999 3,902,842
SHORT-TERM MUNICIPALS--continued1
Wisconsin--continued
$ 7,600,000 Wisconsin Health and Educational Facilities Authority, Revenue Bonds (Series 1994) $ 7,600,000
Weekly VRDNs (Felician Health Care, Inc. Project)/(Lasalle National Bank, Chicago LOC)
1,645,000 Wisconsin Health and Educational Facilities Authority, Revenue Bonds (Series 1998), 1,645,000
3.10% Bonds (Marquette University, WI)/(MBIA Insurance Corporation INS), 6/1/1999
5,000,000 Wisconsin State, (Series A), 5.75% Bonds, 5/1/1999 5,041,189
4,500,000 Wisconsin State, Series G, 6.75% Bonds (United States Treasury PRF), 5/1/1999 (@101) 4,599,522
TOTAL 22,788,553
TOTAL INVESTMENTS (AT AMORTIZED COST)3 $ 517,577,858
</TABLE>
1 The Fund may only invest in securities rated in the highest short-term
rating category by nationally recognized rating services or unrated
securities of comparable quality. A rating service's highest rating category
is determined without regard for sub-categories and gradations. For example,
securities rated SP-1+or SP-1 by Standard & Poor's , MIG-1 by Moody's
Investors Service, Inc., or F-1+ and F-1 by Fitch Investors Service, Inc.
are considered rated in the highest short-term rating category.
Securities rated in the highest short-term rating category (and
unrated securities of comparable quality) are identified as First Tier
securities. The Fund follows applicable regulations in determining whether a
security is rated and whether a security rated by multiple rating services in
different rating categories should be identified as a First or Second Tier
security.
At November 30, 1998, the portfolio securities were rated as follows:
Tier Rating Percentage Based on Total Market Value (Unaudited)
<TABLE>
<CAPTION>
First Tier Second Tier
<S> <C>
100.0% 0%
</TABLE>
2 Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At November 30, 1998, these securities
amounted to $32,440,000 which represents 6.3% of net assets.
3 Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($517,886,671) at November 30, 1998.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
BANs --Bond Anticipation Notes
CP --Commercial Paper
EDC --Economic Development Commission
EDR --Economic Development Revenue
FGIC --Financial Guaranty Insurance Company
FSA --Financial Security Assurance
GO --General Obligation
GTD --Guaranty
HEFA --Health and Education Facilities Authority
HFA --Housing Finance Authority
IDA --Industrial Development Authority
IDR --Industrial Development Revenue
IFA --Industrial Finance Authority
INS --Insured
LIQs --Liquidity Agreement(s)
LIQ --Liquidity Agreement
LOCs --Letter(s) of Credit
LOC --Letter of Credit
MBIA --Municipal Bond Investors Assurance
PCR --Pollution Control Revenue
PFA --Public Facility Authority
PLC --Public Limited Company
PRF --Prerefunded
SA --Support Agreement
TANs --Tax Anticipation Notes
TOBs --Tender Option Bonds
TRANs --Tax and Revenue Anticipation Notes
UT --Unlimited Tax
VRDNs --Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
YEAR ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS:
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES, AT AMORTIZED COST AND VALUE $517,577,858
CASH 114,011
INCOME RECEIVABLE 3,938,457
RECEIVABLE FOR SHARES SOLD 2,249
PREPAID EXPENSES 8,855
TOTAL ASSETS 521,641,430
Liabilities:
Payable for investments purchased $2,540,000
Income distribution payable 1,149,225
Accrued expenses 65,534
TOTAL LIABILITIES 3,754,759
Net Assets for 517,905,619 shares outstanding $517,886,671
Net Assets Consist of:
Paid in capital $517,897,759
Accumulated net realized loss on investments (76,421)
Undistributed net investment income 65,333
TOTAL NET ASSETS $517,886,671
Net Asset Value, Offering Price, and Redemption Proceeds Per Share:
$517,886,671 / 517,905,619 shares outstanding $1.00
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C> <C>
Interest $20,500,264
Expenses:
Investment advisory fee $ 2,267,974
Administrative personnel and services fee 427,513
Custodian fees 20,274
Transfer and dividend disbursing agent fees and expenses 33,150
Trustees' fees 15,137
Auditing fees 14,850
Legal fees 12,933
Portfolio accounting fees 102,732
Shareholder services fee 1,417,483
Share registration costs 36,261
Printing and postage 26,245
Insurance premiums 37,101
Taxes 615
Miscellaneous 10,192
TOTAL EXPENSES 4,422,460
Waivers:
Waiver of investment advisory fee $ (700,126)
Waiver of shareholder services fee (1,133,987)
TOTAL WAIVERS (1,834,113)
Net expenses 2,588,347
Net investment income 17,911,917
Net realized gain on investments 11,456
Change in net assets resulting from operations $17,923,373
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended November 30 1998 1997
Increase (Decrease) in Net Assets:
Operations:
<S> <C> <C>
Net investment income $ 17,911,917 $ 23,599,871
Net realized gain (loss) on investments ($53,876)and $(14,032), respectively, 11,456 (14,032)
as computed for federal tax purposes)
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 17,923,373 23,585,839
Distributions to Shareholders:
Distributions from net investment income (17,911,917) (23,599,871)
Share Transactions:
Proceeds from sale of shares 1,890,281,389 2,258,839,187
Net asset value of shares issued to shareholders in payment of distributions 1,421,172 1,764,863
declared
Cost of shares redeemed (2,009,346,623) (2,372,855,710)
Change in net assets resulting from share transactions (117,644,062) (112,251,660)
Change in net assets (117,632,606) (112,265,692)
Net Assets:
Beginning of period 635,519,277 747,784,969
End of period $ 517,886,671 $ 635,519,277
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
ORGANIZATION
Federated Tax-Free Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end management
investment company. The investment objective of the Trust is dividend income
exempt from federal regular income tax while seeking relative stability of
principal.
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.
Investment Valuations
The Trust uses the amortized cost method to value its portfolio securities in
accordance with Rule 2a-7 under the Act.
Investment Income, Expenses and Distributions
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
Federal Taxes
It is the Trust's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At November 30, 1998, the Trust, for federal tax purposes, had a capital loss
carryforward of $76,421, which will reduce the Trust'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 Trust of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire
as follows:
<TABLE>
<CAPTION>
Expiration Year Expiration Amount
<S> <C>
2002 $11,840
2003 $ 1,341
2004 $18,018
2005 $14,032
2006 $31,190
</TABLE>
When-Issued and Delayed Delivery Transactions
The Trust may engage in when-issued or delayed delivery transactions. The Trust
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
Restricted Securities
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from such registration.
Many restricted securities may be resold in the secondary market in transactions
exempt from registration. In some cases, the restricted securities may be
resold without registration upon exercise of a demand feature. Such restricted
securities may be determined to be liquid under criteria established by the
Board of Trustees. The Trust will not incur any registration costs upon such
resales. Restricted securities are valued at amortized cost in accordance with
Rule 2a-7 under the Act of 1940.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
Other
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
November 30, 1998, capital paid-in aggregated $517,897,760. Transactions in
shares were as follows:
<TABLE>
<CAPTION>
Year Ended November 30 1998 1997
<S> <C> <C>
Shares sold 1,890,281,389 2,258,839,187
Shares issued to shareholders in payment of distributions declared 1,421,172 1,764,863
Shares redeemed (2,009,346,623) (2,372,855,710)
NET CHANGE RESULTING FROM SHARE TRANSACTIONS (117,644,062) (112,251,660)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Advisory Fee
Federated Research, the Trust's investment adviser (the "Adviser"), receives for
its services an annual investment advisory fee equal to 0.40% of the Trust's
average daily net assets. The Adviser will waive, to the extent of its advisory
fee, the amount, if any, by which the Trust's aggregate annual operating
expenses exceed 0.45% of average daily net assets of the Trust.
Administrative Fee
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Trust with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors, Inc. for the period.
The administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
Shareholder Services Fee
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services Company ("FSSC"), the Trust will pay FSSC up to 0.25% of average daily
net assets of the Trust for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC
may voluntarily choose to waive any portion of its fee. FSSC can modify or
terminate this voluntary waiver at any time at its sole discretion.
Transfer and Dividend Disbursing Agent Fees and Expenses
FServ, through its subsidiary, FSSC, serves as transfer and dividend disbursing
agent for the Trust. The fee paid to FSSC is based on the size, type, and
number of accounts and transactions made by shareholders.
Portfolio Accounting Fees
FServ maintains the Trust's accounting records for which it receives a fee. The
fee is based on the level of the Trust's average daily net assets for the
period, plus out-of-pocket expenses.
Interfund Transactions
During the period ended November 30, 1998, the Trust engaged in purchase and
sale transactions with funds that have a common investment adviser (or
affiliated investment advisers), common Director/Trustees, and/or common
Officers. These purchase and sale transactions were made at current market value
pursuant to Rule 17a-7 under the Act amounting to $1,144,074,182 and
$1,097,495,089, respectively.
General
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Trust could be adversely affected
if the computer systems used by the Trust's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Trust's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Trust's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Trust.
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FEDERATED TAX-FREE TRUST:
We have audited the accompanying statement of assets and liabilities of
Federated Tax-Free Trust, including the schedule of investments, as of November
30, 1998, and the related statements of operations for the year then ended, the
statment of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the years in the five-year
period ended November 30, 1998. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion of these financial statements and financial highlights
based on our audit.
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 the securities owned as of
November 30, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and signifcant 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 Tax-Free Trust as of November 30, 1998, the results of its operations,
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for the period then ended, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 15, 1999
Federated
Tax-Free
Trust
JANUARY 31, 1999
A Statement of Additional Information (SAI) dated January 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's semi-annual reports to
shareholders as they become available. To obtain the SAI, semi-annual report and
other information without charge, call your investment professional or the Fund
at 1-800-341-7400.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
Investment Company Act File No. 811-2891
Cusip 314282104
8010414A (1/99)
<PAGE>
1
STATEMENT OF ADDITIONAL INFORMATION
FEDERATED TAX-FREE TRUST
This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Tax-Free Trust (Fund)
dated January 31, 1999. Obtain the prospectus without charge by calling
1-800-341-7400.
January 31, 1999
CONTENTS
How is the Fund Organized?
Securities in Which the Fund Invests
Determining Market Value of Securities
How is the Fund Sold?
Redemption in Kind
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Investment Ratings
Addresses
CUSIP 314282104
8010414B (1/99)
HOW IS THE FUND ORGANIZED?
The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on November 20,
1978.
SECURITIES IN WHICH THE FUND INVESTS
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
GENERAL OBLIGATION BONDS are supported by the issuer's power to exact
property or other taxes. The issuer must impose and collect taxes sufficient to
pay principal and interest on the bonds. However, the issuer's authority to
impose additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS are payable solely from specific revenues received by
the issuer such as specific taxes, assessments, tolls, or fees. Bondholders may
not collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds. The Fund will purchase private activity bonds that are not subject to the
federal alternative minimum tax (AMT).
MUNICIPAL LEASES. Municipalities may enter into leases for equipment or
facilities. In order to comply with state public financing laws, these leases
are typically subject to annual appropriation. In other words, a municipality
may end a lease, without penalty, by not providing for the lease payments in its
annual budget. After the lease ends, the lessor (the Fund) can resell the
equipment or facility but the Fund may lose money on the sale.
The Fund may invest in securities supported by pools of municipal leases.
The most common type of lease backed securities are certificates of
participation (COPs). However, the Fund may also invest directly in individual
leases.
CREDIT ENHANCEMENT. Common types of credit enhancement include guarantees,
letters of credit, bond insurance and surety bonds. Credit enhancement also
includes arrangements where securities or other liquid assets secure payment of
a fixed income security. If a default occurs, these assets may be sold and the
proceeds paid to security's holders. Either form of credit enhancement reduces
credit risks by providing another source of payment for a fixed income security.
INVESTMENT RISKS
There are many factors which may effect an investment in the Fund. The
Fund's principal risks are described in the it's prospectus. An additional risk
factor is outlined
below.
TAX RISK
In order to be tax-exempt, municipal securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable. Changes or proposed
changes in federal tax laws may cause the prices of municipal securities to
fall.
FUNDAMENTAL INVESTMENT POLICIES:
The Fund seeks to achieve its investment objective by investing in a
diversified portfolio of short-term tax exempt securities -- obligations issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest from which is, in the opinion of bond counsel
for the issuer, or in the opinion of officers to the Trust and/or the Adviser to
the Fund, exempt from federal regular income tax. Tax exempt securities also
include participation interests in the above obligations. Interest income of the
Fund which is exempt from federal regular income tax will retain its tax-free
status when distributed to shareholders. Such income may be subject to state and
local tax.
All of the Fund's investment assets will consist of tax exempt securities,
temporary investments, as described below, and cash. The securities in which the
Fund invests are rated in the highest short-term rating category by one or more
nationally recognized rating service or be of comparable quality to securities
having such ratings. A rating service's highest rating category is determined
without regard for sub-categories and gradations. For example, securities rated
SP-1+ or SP-1 by Standard & Poor's ("S&P"), MIG-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1+ or F-1 by Fitch Investors Service, Inc. ("Fitch") are
all considered rated in the highest short-term rating category. Longer term
securities that have a remaining maturity of 397 days or less and that have not
received a short-term rating must be rated within the two highest long-term
rating categories by one or more rating services. The Fund will follow
applicable regulations in determining whether a security rated by more than one
rating service can be treated as being in the highest short-term rating
category; currently, such securities must be rated by two rating services in
their highest rating category. See "Regulatory Compliance." Subsequent to its
purchase by the Fund, an issue of tax exempt securities may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event requires the elimination of such obligation from the Fund's
portfolio, but the Adviser will consider such an event in its determination of
whether the Fund should continue to hold such obligation in its portfolio.
From time to time on a temporary basis or for defensive purposes, the Fund
may invest in "temporary investments" which mature in the same manner as the tax
exempt securities in which the Fund can invest, consisting of: other obligations
issued by or on behalf of municipal or corporate issuers; U.S. Treasury Bills,
all other marketable obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities; [instruments of banks savings and loans which
are members of the Federal Deposit Insurance Corporation (FDIC) or Federal
Savings and Loan Insurance Corporation (FSLIC) (such as certificates of deposit,
demand and time deposits, savings shares and bankers' acceptances;) these
instruments are not necessarily guaranteed by the FDIC or the FSLIC)];
repurchase agreements (an instrument where the seller agrees to repurchase the
security at the time of sale at a mutually agreed upon time and price), and
prime commercial paper (as set forth below) including variable amount demand
master note represents a borrowing arrangement under a letter agreement between
a commercial paper issuer and an institutional lender such as the Fund. The Fund
will not invest in instruments issued by banks or savings and loans unless at
the time of investment such banks and savings and loans have capital, surplus
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Commercial paper investments will be
limited to commercial paper rated A-1 by Standard & Poor's Corporation, Prime 1
by Moody's Investors Services, Inc. or F-1 by Fitch Investors Service. The Fund
may invest in these temporary investments, for example, due to market conditions
or pending investment of proceeds of sales of shares or proceeds from the sale
of portfolio securities or in anticipation of redemptions. However, the Fund
generally expects to invest the proceeds received from the sale of Fund shares
in tax exempt securities as soon as reasonably possible. The rating requirements
for the Fund's investments in tax exempt securities will not be applicable to
temporary investments. However, management will limit temporary investments to
the standards set forth above. In addition, no temporary investments in
municipal securities or corporate obligations will be purchased unless they meet
the ratings described in the Fund's investment policies. Interest income from
temporary investments may be taxable to shareholders as ordinary income.
As a fundamental investment policy, at least 80% of the Fund's annual
interest income will be exempt from Federal regular income tax except in
extraordinary circumstances when, for example, management feels that market
conditions dictate a defensive posture in temporary investments.
The Fund may also purchase and sell short-term tax exempt securities on a
when-issued or delayed delivery basis. When-issued and delayed delivery
transactions arise when securities are bought or sold with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transactions. When engaging in when-issued and delayed delivery transactions,
the Fund relies on the buyer or seller, as the case may be, to consummate the
transactions. Failure to do so may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When-issued and
delayed delivery transactions ordinarily occur within a month before delivery is
due, however no payment or delivery will be made by the Fund before it receives
payment or delivery from the other party to the transaction. There are no fees
or other expenses associated with these types of transactions other than normal
transaction costs. Engaging in when-issued or delayed delivery transactions are
normal methods of buying and selling portfolio securities by the Fund in pursuit
of its investment objective of providing dividend income exempt from federal
regular income taxes while seeking relative stability of principal.
The Fund may attempt to increase yield by trading portfolio securities to
take advantage of short-term market variations.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not make short sales of securities or purchase any securities
on margin, except for such credits as are necessary for the clearance of
transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money in amounts up to one-third of the value of its total assets, including the
amounts borrowed.
The Fund will not borrow money, except as a temporary measure for
extraordinary or emergency purposes and then (a) only in amounts not in excess
of 5% of the value of its total assets or (b) in an amount up to one-third of
the value of its total assets including the amount borrowed in order to meet
redemption requests without immediately selling any portfolio securities. (This
borrowing provision is not for investment leverage but solely to facilitate
management of the portfolio by enabling the Fund to meet redemption requests
where the liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous.) While any such borrowings are outstanding, no net purchases of
investment securities will be made by the Fund. If due to market fluctuations or
other reasons the value of the Fund's assets falls below 300% of its borrowing,
the Fund will reduce its borrowing within three business days.
PLEDGING ASSETS
The Fund will not pledge, mortgage, or hypothecate its assets except that,
to secure borrowings permitted, it may pledge securities having a market value
at the time of pledge not exceeding 10% of the value of the Fund's total assets.
LENDING CASH OR SECURITIES
The Fund will not make loans, except that the Fund may, in accordance with
its investment objective, policies, and limitations, acquire publicly or
non-publicly issued Municipal Securities or temporary investments or enter into
repurchase agreements.
INVESTING IN COMMODITIES AND MINERALS
The Fund will not purchase or sell commodities or commodity contracts or
oil, gas or other mineral exploration or development programs.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, but this shall not prevent
the Fund from investing in Municipal Securities secured by real estate or
interests therein.
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 securities in accordance with its investment objective, policies,
and limitations.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
The Fund will not purchase or retain the securities of any issuer other
than the securities of the Fund, if, to the Fund's knowledge, those Officers and
Trustees of the Fund or the Adviser, who individually own beneficially more than
0.5% of the outstanding securities of such issuer, together own beneficially
more than 5.0% of such outstanding securities.
If any percentage limitation is adhered to at the time of an 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not invest in securities issued by any other investment
company or investment trust.
INVESTING FOR CONTROL
The Fund will not acquire voting securities except as part of a merger,
consolidation, reorganization, or acquisition of assets.
CONCENTRATION OF INVESTMENTS
The Fund does not generally intend to purchase securities if, as a result
of such purchase, more than 25 percent of the value of its assets would be
invested in the securities of governmental subdivisions located in any one
state, territory, or possession of the United States. The Fund may invest more
than 25 percent of the value of its assets in Short-Term Tax-Exempt Project
Notes which are guaranteed by the U.S. Government regardless of the location of
the issuing municipality. Weakness in a state's ability to raise taxes resulting
from a contraction of its tax based on a rise in delinquencies could influence
the state's ability to support housing programs. In addition, an adverse
economic climate, changes in political sentiment within a state legislature, or
on the part of a state electorate, could also impact such housing programs, and
in turn, the availability of new issues of project notes. At the Federal level,
the decision to curtail Federal budget deficit or both could similarly reduce
the volume of project notes available in auction markets. One effect of the
reduction of the supply of project notes, given continuing growth in demand for
these notes, might be to reduce yields on them to a point that such notes are
relatively noncompetitive with other similar tax-free securities. Further, were
the Congress of the United States to revoke the right of the Department of
Housing and Urban Development to back project notes with the full faith and
credit of the Federal government or alter the law in some other way, suitability
of project notes as investments for the Fund would have to be re-examined and
purchases or holdings of project notes could fall below 25%.
With respect to temporary investments, the Fund will not purchase
securities (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities), if as a result of such purchase, more than
25% of the value of the Fund's assets would be invested in any one industry.
However, the Fund may, at times, invest more than 25 percent of the value of its
assets in cash or cash items (including bank time and demand deposits such as
certificates of deposit), U.S. Treasury bills or securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or instruments secured
by these money market instruments, such as repurchase agreements, for defensive
purposes. If, because of changing values, the value of the Fund's assets
invested in a particular industry or in the securities of governmental
subdivisions located in any one state, territory or possession of the United
States exceeds 25 percent of the value of its assets, the Fund will not be
required to make any reduction of its holdings in that particular industry or in
the securities of the governmental body.
The above limitations cannot be changed unless authorized by the "vote of a
majority of its outstanding voting securities," as defined by the Investment
Company Act. The following limitations, however, may be changed by the Board
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may invest pursuant to its investment objective and
policies but which are subject to restrictions on resale under federal
securities law. Under criteria established by the Trustees, certain restricted
securities are determined to be liquid. To the extent that restricted securities
are not determined to be liquid, the Fund will limit their purchase, together
with other illiquid securities, to 10% of its net assets.
For purposes of the above limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." 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 limitation.
The Fund did not borrow money or pledge securities in excess of 5% of the
value of its net assets during the last fiscal year and has no present intent to
do so during the coming fiscal year.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in the
prospectus and this Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940. In particular, the Fund will comply
with the various requirements of Rule 2a-7, which regulates money market mutual
funds. The Fund will determine the effective maturity of its investments, as
well as its ability to consider a security as having received the requisite
short-term ratings by rating services, according to Rule 2a-7. The Fund may
change these operational policies to reflect changes in the laws and regulations
without the approval of its shareholders.
DETERMINING MARKET VALUE OF SECURITIES
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
Accordingly, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio. In
periods of declining interest rates, the indicated daily yield on shares of the
Fund computed by dividing the annualized daily income on the Fund's portfolio by
the net asset value computed as above may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates. In periods of rising interest rates, the opposite may be true.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-7 (the
"Rule") promulgated by the Securities and Exchange Commission under the
Investment Company Act of 1940. Under the Rule, the Trustees must establish
procedures reasonably designed to stabilize the net asset value per share, as
computed for purposes of distribution and redemption, at $1.00 per share, taking
into account current market conditions and the Fund's investment objective. The
procedures include monitoring the relationship between the amortized cost value
per share and the net asset value per share based upon available indications of
market value. The Trustees will decide what, if any, steps should be taken if
there is a difference of more than 0.5 of 1% between the two values. The
Trustees will take any steps they consider appropriate (such as redemption in
kind or shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the two
methods of determining net asset value.
HOW IS THE FUND SOLD?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the
Distributor and/or Federated Shareholder Services Company (but not out of Fund
assets). The Distributor and/or Federated Shareholder Services Company may be
reimbursed by the Adviser or its affiliates.
Investment professionals receive such fees for providing
distribution-related or shareholder services such as sponsoring sales, providing
sales literature, conducting training seminars for employees, and engineering
sales-related computer software programs and systems. Also, investment
professionals may be paid cash or promotional incentives, such as reimbursement
of certain expenses relating to attendance at informational meetings about the
Fund or other special events at recreational-type facilities, or items of
material value. These payments will be based upon the amount of Shares the
investment professional sells or may sell and/or upon the type and nature of
sales or marketing support furnished by the investment professional.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940, the Fund is obligated to pay Share redemptions
to any one shareholder in cash only up to the lesser of $250,000 or 1% of the
net assets represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, 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 the portfolio securities and selling them
before their maturity could receive less than the redemption value of the
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Fund. To protect its
shareholders, the Fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Fund.
In the unlikely event a shareholder is held personally liable for the
Fund's obligations, the Fund is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Fund will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Fund. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Fund itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
ACCOUNT AND SHARE INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All Shares of the Fund
have equal voting
rights.
Trustees may be removed by the Board or by shareholders at a special
meeting. A special meeting of shareholders will be called by the Board upon the
written request of shareholders who own at least 10% of the Fund's outstanding
shares of all series.
As of January 6, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Shares:
Fiduciary Trust Company International, New York, NY, owned 27.92%; Bova &
Company, Charlotte, NC, owned 6.40%; Chase Manhattan Bank, New York, NY, owned
5.53%.
Shareholders owning 25% or more of outstanding Shares may be in control and
be able to affect the outcome of certain matters presented for a vote of
shareholders.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies. If these requirements
are not met, it will not receive special tax treatment and will pay federal
income tax.
WHO MANAGES AND PROVIDES SERVICES TO THE FUND?
BOARD OF TRUSTEES
The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birthdate, present position(s) held with the Fund,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Fund for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Federated Fund Complex is
comprised of 56 investment companies, whose investment advisers are affiliated
with the Fund's Adviser.
As of January 6, 1999, the Fund's Board and Officers as a group owned less
than 1% of the Fund's outstanding Shares.
An asterisk (*) denotes a Trustee who is deemed to be an interested person
as defined in the Investment Company Act of 1940. The following symbol (#)
denotes a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.
<TABLE>
<CAPTION>
NAME
BIRTHDATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITION WITH PRINCIPAL OCCUPATIONS FROM TRUST FROM TRUST
- ------------------------ FOR PAST 5 YEARS AND FUND COMPLEX
TRUST
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer and Director or $0 $0 for the
Birthdate: July 28, 1924 Trustee of the Federated Fund Complex; Trust and
Federated Investors Chairman and Director, Federated Investors, 54 other
Tower Inc.; Chairman and Trustee, Federated investment
1001 Liberty Avenue Advisers, Federated Management, and companies
Pittsburgh, PA Federated Research; Chairman and Director, in the Fund
CHAIRMAN/TRUSTEE Federated Research Corp., and Federated Complex
Global Research Corp.; Chairman, Passport
Research, Ltd.
- -------------------------
THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,398.10 $113,860.22 for
Birthdate: February 3, Complex; Director, Member of Executive the
1934 Committee, Children's Hospital of Trust and
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst 54 other
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, investment
TRUSTEE Inc.; Director, Member of Executive companies
Committee, University of Pittsburgh. in the Fund
Complex
- -------------------------
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,538.14 $125,264.48 for
Birthdate: June 23, 1937 Complex; President, Investment Properties the
Wood/IPC Commercial Corporation; Senior Vice President, Trust and
Dept. John R. Wood and Associates, Inc., 54 other
John R. Wood Realtors; Partner or Trustee in private investment
Associates, Inc. real estate ventures in Southwest Florida; companies
Realtors formerly: President, Naples Property in the Fund
3255 Tamiami Trial Management, Inc. and Northgate Village Complex
North Naples, FL Development Corporation.
TRUSTEE
- -------------------------
NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund $881.26 $47,958.02 for
Birthdate: September 3, Complex; formerly: Partner, Andersen the
1939 Worldwide SC. Trust and
175 Woodshire Drive 29 other
Pittsburgh, PA investment
TRUSTEE companies
in the Fund
Complex
- -------------------------
WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,538.14 $125,264.48 for
Birthdate: July 4, 1918 Complex; Director and Member of the the
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; Trust and
Pittsburgh, PA formerly: Vice Chairman and Director, PNC 54 other
TRUSTEE Bank, N.A., and PNC Bank Corp.; Director, investment
Ryan Homes, Inc. companies
in the Fund
Previous Positions: Director, United Complex
Refinery; Director, Forbes Fund; Chairman,
Pittsburgh Foundation; Chairman, Pittsburgh
Civic Light Opera.
- -------------------------
JOHN F. CUNNINGHAM Director or Trustee of some of the $0 $0 for the
Birthdate: March 5, 1943 Federated Funds; Chairman, President and Trust and
353 El Brillo Way Chief Executive Officer, Cunningham & Co., 26 other
Palm Beach, FL Inc. ; Trustee Associate, Boston College; investment
TRUSTEE Director, EMC Corporation; formerly: companies
Director, Redgate Communications. in the Fund
Complex
Previous Positions: Chairman of the Board
and Chief Executive Officer, Computer
Consoles, Inc.; President and Chief
Operating Officer, Wang Laboratories;
Director, First National Bank of Boston;
Director, Apollo Computer, Inc.
- -------------------------
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,398.10 $113,860.22 for
Birthdate: October 11, Complex; Professor of Medicine, University the
1932 of Pittsburgh; Medical Director, University Trust and
3471 Fifth Avenue of Pittsburgh Medical Center - Downtown; 54 other
Suite 1111 Hematologist, Oncologist, and Internist, investment
Pittsburgh, PA University of Pittsburgh Medical Center; companies
TRUSTEE Member, National Board of Trustees, in the Fund
Leukemia Society of America. Complex
- -------------------------
PETER E. MADDEN Director or Trustee of the Federated Fund $1,398.10 $113,860.22 for
Birthdate: March 16, Complex; formerly: Representative, the
1942 Commonwealth of Massachusetts General Trust and
One Royal Palm Way Court; President, State Street Bank and 54 other
100 Royal Palm Way Trust Company and State Street Corporation. investment
Palm Beach, FL companies
TRUSTEE Previous Positions: Director, VISA USA and in the Fund
VISA International; Chairman and Director, Complex
Massachusetts Bankers Association;
Director, Depository Trust Corporation.
- -------------------------
CHARLES F. MANSFIELD, Director or Trustee of some of the $0 $0 for the
JR. Federated Funds; Management Consultant. Trust and
Birthdate: April 10, 25 other
1945 Previous Positions: Chief Executive investment
80 South Road Officer, PBTC International Bank; Chief companies
Westhampton Beach, NY Financial Officer of Retail Banking Sector, in the Fund
TRUSTEE Chase Manhattan Bank; Senior Vice Complex
President, Marine Midland Bank; Vice
President, Citibank; Assistant Professor of
Banking and Finance, Frank G. Zarb School
of Business, Hofstra University.
- -------------------------
JOHN E. MURRAY, JR., Director or Trustee of the Federated Fund $1,398.10 $113,860.22 for
J.D., S.J.D. Complex; President, Law Professor, Duquesne the
Birthdate: December 20, University; Consulting Partner, Mollica & Trust and
1932 Murray. 54 other
President, Duquesne investment
University Previous Positions: Dean and Professor of companies
Pittsburgh, PA Law, University of Pittsburgh School of in the Fund
TRUSTEE Law; Dean and Professor of Law, Villanova Complex
University School of Law.
- -------------------------
MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,398.10 $113,860.22 for
Birthdate: June 21, 1935 Complex; Public the
4905 Bayard Street Relations/Marketing/Conference Planning. Trust and
Pittsburgh, PA 54 other
TRUSTEE Previous Positions: National Spokesperson, investment
Aluminum Company of America; business owner. companies
in the Fund
Complex
- -------------------------
JOHN S. WALSH Director or Trustee of some of the $0 $0 for the
Birthdate: November 28, Federated Funds; President and Director, Trust and
1957 Heat Wagon, Inc.; President and Director, 22 other
2007 Sherwood Drive Manufacturers Products, Inc.; President, investment
Valparaiso, IN Portable Heater Parts, a division of companies
TRUSTEE Manufacturers Products, Inc.; Director, in the Fund
Walsh & Kelly, Inc.; formerly: Vice Complex
President, Walsh & Kelly, Inc.
- -------------------------
GLEN R. JOHNSON Trustee, Federated Investors, Inc.; staff $0 $0 for the
Birthdate: May 2, 1929 member, Federated Securities Corp. Trust and
Federated Investors 8 other
Tower investment
1001 Liberty Avenue companies
Pittsburgh, PA in the Fund
PRESIDENT Complex
- -------------------------
J. CHRISTOPHER DONAHUE+ President or Executive Vice President of $0 $0 for the
Birthdate: April 11, the Federated Fund Complex; Director or Trust and
1949 Trustee of some of the Funds in the 16 other
Federated Investors Federated Fund Complex; President and investment
Tower Director, Federated Investors, Inc.; companies
1001 Liberty Avenue President and Trustee, Federated Advisers, in the Fund
Pittsburgh, PA Federated Management, and Federated Complex
EXECUTIVE VICE PRESIDENT Research; President and Director, Federated
Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.
- -------------------------
<PAGE>
EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birthdate: October 22, the Federated Fund Complex; President, Trust and
1930 Executive Vice President and Treasurer of 1 other
Federated Investors some of the Funds in the Federated Fund investment
Tower Complex; Vice Chairman, Federated company
1001 Liberty Avenue Investors, Inc.; Vice President, Federated in the Fund
Pittsburgh, PA Advisers, Federated Management, Federated Complex
EXECUTIVE VICE PRESIDENT Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
- -------------------------
JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birthdate: October 26, the Federated Fund Complex; Executive Vice Trust and
1938 President, Secretary, and Director, 54 other
Federated Investors Federated Investors, Inc.; Trustee, investment
Tower Federated Advisers, Federated Management, companies
1001 Liberty Avenue and Federated Research; Director, Federated in the Fund
Pittsburgh, PA Research Corp. and Federated Global Complex
EXECUTIVE VICE Research Corp.; Director, Federated
PRESIDENT, Services Company; Director, Federated
SECRETARY Securities Corp.
- -------------------------
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; $0 $0 for the
Birthdate: June 17, Vice President - Funds Financial Services Trust and
1954 Division, Federated Investors, Inc.; 54 other
Federated Investors Formerly: various management positions investment
Tower within Funds Financial Services Division of companies
1001 Liberty Avenue Federated Investors, Inc. in the Fund
Pittsburgh, PA Complex
TREASURER
- -------------------------
RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birthdate: May 17, 1923 Funds in the Federated Fund Complex; Corporation and
Federated Investors Director or Trustee of some of the Funds in 6 other
Tower the Federated Fund Complex; Executive Vice investment
1001 Liberty Avenue President, Federated Investors, Inc.; companies
Pittsburgh, PA Chairman and Director, Federated Securities in the Fund
VICE PRESIDENT Corp. Complex
- -------------------------
MARY JO OCHSON Mary Jo Ochson is Vice President of the $0 $0 for the
Birthdate: September Trust. Ms. Ochson joined Federated Trust and
12, 1953 Investors in 1982 and has been a Senior 7 other
Federated Investors Portfolio Manager and a Senior Vice investment
Tower President of the Fund's investment adviser companies
1001 Liberty Avenue since 1996. From 1988 through 1995, Ms. in the Fund
Pittsburgh, PA Ochson served as a Portfolio Manager and a Complex
-
VICE PRESIDENT Vice President of the Fund's investment
adviser. Ms. Ochson is a Chartered
Financial Analyst and received her M.B.A.
in Finance from the University of
Pittsburgh.
- -------------------------
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: March 3, 1949 various other Funds in the Federated Fund Trust and
Federated Investors Complex; Executive Vice President, 41 other
Tower Federated Investment Counseling, Federated investment
1001 Liberty Avenue Global Research Corp., Federated Advisers, companies
Pittsburgh, PA Federated Management, Federated Research, in the Fund
CHIEF INVESTMENT OFFICER and Passport Research, Ltd.; Registered Complex
Representative, Federated Securities Corp.;
Portfolio Manager, Federated Administrative
Services; Vice President, Federated
Investors, Inc.; Formerly: Executive Vice
President and Senior Vice President,
Federated Investment Counseling
Institutional Portfolio Management Services
Division; Senior Vice President, Federated
Research Corp., Federated Advisers,
Federated Management, Federated Research,
and Passport Research, Ltd.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust.
++ MESSRS. CUNNINGHAM, MANSFIELD AND WALSH BECAME MEMBERS OF THE BOARD OF
TRUSTEES ON JANUARY 1, 1999. THEY DID NOT EARN ANY FEES FOR SERVING THE FUND
COMPLEX SINCE THESE FEES ARE REPORTED AS OF THE END OF THE LAST CALENDAR YEAR.
THEY DID NOT RECEIVE ANY FEES AS OF THE FISCAL YEAR END OF THE FUND.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for
the Fund.
The Adviser is a wholly-owned subsidiary of Federated.
The Adviser shall not be liable to the Trust, the Fund, or any Fund
shareholder 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 Fund.
<PAGE>
The Adviser must waive the portion of its advisory fee that increases the
Fund's aggregate annual operating expenses above .45% of its average daily net
assets. The Fund's operating expenses include the advisory fee but exclude
interest, taxes, brokerage commissions, expenses of registering the Fund and its
shares under federal and state laws, expenses of withholding taxes, and
extraordinary expenses.
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 Fund Shares offered by the Distributor.
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. The Adviser will generally use those who are recognized dealers
in specific portfolio instruments, except when a better price and execution of
the order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
RESEARCH SERVICES
Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those 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.
Investment decisions for the Fund are made independently from those of
other accounts managed by the Adviser. When the Fund and one or more of those
accounts invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
<PAGE>
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at the following annual rate of the average aggregate daily net
assets of all Federated Funds as specified below:
MAXIMUM ADMINISTRATIVE AVERAGE AGGREGATE DAILY NET ASSETS OF THE
FEE FEDERATED FUNDS
0.150 of 1% on the first $250 million
- -------------------------
0.125 of 1% on the next $250 million
- -------------------------
0.100 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 Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio investments for a
fee based on Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian
for the securities and cash of the Fund. Foreign instruments purchased by the
Fund are held by
foreign banks participating in a network coordinated by State Street Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent
subsidiary, Federated Shareholder Services Company, maintains all necessary
shareholder records. The Fund pays the transfer agent a fee based on the size,
type, and number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
Deloitte & Touche LLP is the independent auditor for the Fund.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOVEMBER 30,
1998 1998 1997 1996
<S> <C> <C> <C>
- --------------------------------
Advisory Fee Earned $2,267,974 $2,902,993 $3,255,470
- ---------------------------------
Advisory Fee Reduction $700,126 $823,445 $960,485
- ---------------------------------
Brokerage Commissions $0 $0 $0
- ---------------------------------
Administrative Fee $427,513 $547,940 $615,257
- ---------------------------------
Shareholder Services Fee 283,496 _ _
- ---------------------------------
</TABLE>
If the Fund's expenses are capped at a particular level, the cap does not
include reimbursement to the Fund of any expenses incurred by shareholders who
use the transfer agent's subaccounting facilities.
HOW DOES THE FUND MEASURE PERFORMANCE?
The Fund may advertise Share performance by using the Securities and
Exchange Commission's (SEC) standard method for calculating performance
applicable to all mutual funds. The SEC also permits this standard performance
information to be accompanied by non-standard performance information.
Unless otherwise stated, any quoted Share performance reflects the effect
of non-recurring charges, such as maximum sales charges, which, if excluded,
would increase the total return and yield. The performance of Shares depends
upon such variables as: portfolio quality; average portfolio maturity; type and
value of portfolio securities; changes in interest rates; changes or differences
in the Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns given for the one-, five- and ten-year periods ended November
30, 1998.
Yield, Effective Yield and Tax-Equivalent Yield given for the seven-day
period ended November 30, 1998.
Share Class 7-day 1 Year 5 Years 10 Years
CLASS NAME period
Total Return NA 3.21% 3.14% 3.69%
Yield 3.03% NA NA NA
Effective Yield 3.08% NA NA NA
Tax-Equivalent Yield 5.02% NA NA NA
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value
of Shares over a specific period of time, and includes the investment of income
and capital gains distributions.
The average annual total return for Shares is the average compounded rate
of return for a given period that would equate a $1,000 initial investment to
the ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.
YIELD
The yield of Shares is based upon the seven days ending on the day of the
calculation, called the "base period." This yield is calculated by: determining
the net change in the value of a hypothetical account with a balance of one
Share at the beginning of the base period, with the net change excluding capital
changes but including the value of any additional Shares purchased with
dividends earned from the original one Share and all dividends declared on the
original and any purchased Shares; dividing the net change in the account's
value by the value of the account at the beginning of the base period to
determine the base period return; and multiplying the base period return by
365/7. The effective yield is calculated by compounding the unannualized base
period return by: adding 1 to the base period return, raising the sum to the
365/7th power; and subtracting 1 from the result. The tax-equivalent yield of
Shares is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that Shares would have had to earn to equal the actual yield,
assuming a specific tax rate.
To the extent investment professional and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
<TABLE>
<CAPTION>
TAX EQUIVALENCY TABLE
TAXABLE YIELD EQUIVALENT FOR 1999 MULTISTATE MUNICIPAL FUND
FEDERAL INCOME TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60%
Joint Return $1-43,050 $43,051-104,05$104,051-158,550$158,551-283,150 Over
283,150
Single Return $1-25,750 $25,751-62,450$62,451-130,250 $130,251-283,150 Over
283,150
TAX EXEMPT YIELD: TAXABLE YIELD EQUIVALENT:
<S> <C> <C> <C> <C> <C>
- --------------------------------
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
- --------------------------------
</TABLE>
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN
CALCULATING THE TAXABLE YIELD EQUIVALENT.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Funds; and
o information about the mutual fund industry from sources such as the
Investment Company Institute.
The Fund may compare its performance, or performance for the types of
securities in which it invests, to a variety of other investments, including
federally insured bank products such as bank savings accounts, certificates of
deposit, and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete
view of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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 specified period of time.
IBC/DONOGHUE'S MONEY FUND REPORT
Publishes annualized yields of money market funds weekly. Donoghue's MONEY
MARKET INSIGHT publication reports monthly and 12-month-to-date investment
results for the same
money funds.
MONEY
A monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day effective yield.
<PAGE>
WHO IS FEDERATED INVESTORS, INC.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state-of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9
money market funds and 15 bond funds with assets approximating $22.8 billion and
$7.1 billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset-backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated manages 9
mortgage-backed, 5 government/ agency and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion and $41.6 billion,
respectively. Federated trades approximately $425 million in U.S. government and
mortgage-backed securities daily and places approximately $25 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $43.2 billion in government funds within
these maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -William D. Dawson, III; and global equities and fixed
income - Henry A. Frantzen. The Chief Investment Officers are Executive Vice
Presidents of the Federated
advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $5 trillion to the more than 7,300 funds
available, according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety
of investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of purposes, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisers. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Sales Division, Federated Securities Corp.
INVESTMENT RATINGS
APPENDIX
STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A Standard & Poor's (S&P) note rating reflects the liquidity concerns and
market access risks unique to notes.
SP-1Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus sign (+) designation.
SP-2Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
S&P assigns dual ratings to all long-term debt issues that have as part of
their provisions a variable rate demand feature. The first rating (long-term
rating) addresses the likelihood of repayment of principal and interest when
due, and the second rating (short-term rating) describes the demand
characteristics. Several examples are AAA/A-l+, AA/A-I+, A/A-1. (The definitions
for the long-term and the short-term ratings are provided below.)
COMMERCIAL PAPER (CP) RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
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.
LONG-TERM DEBT RATINGS
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest 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., SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's Investor Service, Inc. (Moody's) short-term ratings are designated
Moody's Investment Grade (MIG or VMIG) (see below). The purpose of the MIG or
VMIG ratings is to provide investors with a simple system by which the relative
investment qualities of short-term obligations may be evaluated.
MIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Short-term ratings on issues with demand features are differentiated by the
use of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. In this case, two ratings are usually assigned, (for example,
Aaa/VMIG-1); the first representing an evaluation of the degree of risk
associated with scheduled principal and interest payments, and the second
representing an evaluation of the degree of risk associated with the demand
feature. The VMIG rating can be assigned a 1 or 2 designation using the same
definitions described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1 Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
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.
P-2 Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
LONG-TERM DEBT RATINGS
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.
NR Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to securities
rated A-1 or P-1.
NR(1) The underlying issuer/obligor/guarantor has other outstanding debt
rated AAA by S&P or Aaa by Moody's.
NR(2) The underlying issuer/obligor/guarantor has other outstanding debt
rated AA by S&P or Aa by Moody's.
NR(3) The underlying issuer/obligor/guarantor has other outstanding debt
rated A by S&P or Moody's.
FITCH INVESTORS SERVICE, L.P. SHORT-TERM DEBT RATING DEFINITIONS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment, only slightly less in degree than issues rated
F-1+.
F-2 Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
ADDRESSES
FEDERATED TAX-FREE TRUST
Federated Investors Fund
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Research
Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110-1617
