PROSPECTUS
Federated Short-Term Municipal Trust
INSTITUTIONAL SHARES
A mutual fund seeking dividend income which is exempt from federal regular
income tax by investing in a portfolio of tax exempt securities with a dollar
weighted average maturity of less than three years.
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. Any representation to the contrary is a criminal offense.
AUGUST 31, 1999
CONTENTS
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? 5
What are the Specific Risks of Investing in the Fund? 6
What Do Shares Cost? 7
How is the Fund Sold? 7
How to Purchase Shares 7
How to Redeem Shares 9
Account and Share Information 11
Who Manages the Fund? 12
Financial Information 13
Report of Independent Public Accountants 30
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide dividend income which is exempt
from federal regular income tax. 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 pursues its objective by investing at least 80% of its net assets in a
diversified portfolio of municipal securities or by investing its assets so that
at least 80% of its income will be tax exempt. The Fund's dollar-weighted
average portfolio maturity will be less than three years. Interest from the
Fund's investments may be subject to the federal alternative minimum tax for
individuals and corporations (AMT).
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
* a change in prevailing interest rates,
* defaults or an increase in the risk of defaults on portfolio securities.
Other risk factors associated with an investment in the Fund include sector
risk, liquidity risk and call risk.
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 the Fund's Institutional Shares as of the calendar
year-end for each of ten years. The `y' axis reflects the "% Total Return"
beginning with "0.00" and increasing in increments of 2.00% up to 10.00%. The
`x' axis represents calculation periods for the last ten calendar years of the
Fund, beginning with 1989. The light gray shaded chart features ten 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 Class for each calendar year is
stated directly at the top of each respective bar, for the calendar years 1989
through 1998.
The percentages noted are: 6.51%; 6.27%; 7.32%; 5.12%; 4.05%; 0.12%;
8.09%; 4.01%; 4.49%; and 4.84%.]
The bar chart shows the variability of the Fund's Institutional Shares total
returns on a calendar year-end basis.
The Fund's Institutional Shares are not sold subject to a sales charge (load).
The total returns displayed above are based upon net asset value.
The Fund's Institutional Shares total return for the six-month period from
January 1, 1999 to June 30, 1999 was 0.55%.
Within the period shown in the Chart, the Fund's Institutional Shares highest
quarterly return was 3.08% (quarter ended March 31, 1995). Its lowest quarterly
return was (0.59%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Institutional Shares Average Annual
Total Returns for the calendar periods ended December 31, 1998. The table shows
the Fund's Institutional Shares total returns averaged over a period of years
relative to the Lehman Brothers 1 Year General Obligation Index ("LB1YRGOI"),
the Lehman Brothers 3 Year Government Obligation Index ("LB3YRGOI"), the Lehman
Brothers 1 Year Municipal Index ("LB1YRMI"), and the Lehman Brothers 3 Year
Municipal Index ("LB3YRMI"), broad-based market indexes. The Fund's Adviser has
elected to change the benchmark indexes from LB1YRGOI and LB3YRGOI to LB1YRMI
and LB3YRMI because they are more representative of the securities in which the
Fund invests. Total returns for the indexes shown do not reflect sales charges,
expenses or other fees that the SEC requires to be reflected in the Fund's
performance. Indexes are unmanaged, and it is not possible to invest directly in
an index.
<TABLE>
<CAPTION>
CALENDAR PERIOD FUND LB1YRGOI LB3YRGOI LB1YRMI LB3YRMI
<S> <C> <C> <C> <C> <C>
1 Year 4.84% 4.77% 5.17% 4.74% 5.20%
5 Years 4.28% 4.48% 4.93% 4.47% 4.90%
10 Years 5.06% 4.52% 6.21% NA 1 NA 1
</TABLE>
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.
1 The LB1YRMI and LB3YRMI began performance on July 1, 1993 and January 1, 1990,
respectively.
What are the Fund's Fees and Expenses?
FEDERATED SHORT-TERM MUNICIPAL TRUST
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund's Institutional Shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
<S> <C>
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
redemption proceeds,
as applicable) None
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions) (as a
percentage of offering
price) None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES (Before Waivers) Expenses That are Deducted From
Fund Assets (as a percentage of average net assets)
Management Fee 1 0.40%
Distribution (12b-1) Fee None
Shareholder Services Fee 2 0.25%
Other Expenses 0.19%
Total Annual Fund
Operating Expenses 0.84%
Total Waivers of Fund
Expenses 0.37%
Total Actual Annual Fund
Operating Expenses (after
waivers) 0.47%
1 Pursuant to the investment advisory contract, the Adviser waived a portion of the
management fee. The management fee paid by the Fund (after the contractual waiver)
was 0.28% for the fiscal year ended June 30, 1999. Shareholders must approve any
change to the contractual waiver.
2 The shareholder services fee has been reduced. The shareholder services fee paid
by the Fund's Institutional Shares (after the reduction) was 0.00% for the fiscal
year ended June 30, 1999.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Institutional Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Institutional Shares
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 Institutional Shares operating expenses (after
waivers) as shown in the table remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
<S> <C>
1 Year $ 48
3 Years $ 151
5 Years $ 263
10 Years $ 591
</TABLE>
What are the Fund's Investment Strategies?
The Fund invests at least 80% of its net assets in a diversified portfolio of
municipal securities or invests so that at least 80% of its income will be tax
exempt. The tax exempt securities in which the Fund invests are investment grade
at the time of purchase. The Fund's dollar-weighted average portfolio maturity
is less than three years. Interest from the Fund's investments may be subject to
AMT. The Fund's investment adviser (Adviser) actively manages the Fund's
portfolio, emphasizing credit quality while seeking to manage the Fund's
interest rate risk and provide enhanced levels of income.
The Adviser performs a fundamental credit analysis on tax exempt securities
before the Fund purchases such securities. The Adviser considers various
factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor;
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all securities on an ongoing basis by
reviewing periodic financial data and ratings of nationally recognized ratings
services.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser attempts to provide enhanced levels of income, subject to the Fund's
maturity, quality and duration constraints, through the following management
techniques. The Adviser will engage in a relative value analysis; that is, the
Adviser will assess the cost of a tax exempt security compared with other tax
exempt securities and taxable securities such as U.S. Treasury obligations. The
Adviser may also allocate investments in sectors of the tax exempt market that
offer the highest return. Finally, the Adviser will invest a portion of the
portfolio in tax exempt securities subject to the alternative minimum tax, which
may offer higher returns.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal income tax. It may do this
to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This 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 federal income taxes. Fixed income securities pay interest, dividends
or distributions at a specified rate. The rate may be fixed or adjusted
periodically. The issuer must also repay the principal amount of the security,
normally within a specified time.
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.
The following describes the types of tax exempt securities in which the fund
invests.
GENERAL OBLIGATION BONDS
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
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 could result in a default on the
bonds.
PRIVATE ACTIVITY 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 interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
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 FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when
due on each security. 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 that the security is comparable to investment grade.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates. The Fund attempts to manage
interest rate risk by limiting its portfolio maturity and duration.
CREDIT RISKS
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.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. 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 on the Adviser's credit assessment.
The Fund attempts to manage credit risk by purchasing investment grade
securities.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities credit
enhanced by insurance companies, banks or companies with similar
characteristics. As a result, the Fund will be more susceptible to any economic,
business, political or other developments which generally affect these entities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
received any credit ratings or are not widely held.
These features may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower price
to sell a security, sell other securities to raise cash or give up an investment
opportunity, any of which could have a negative effect on the Fund's
performance. Infrequent trading of securities may also lead to an increase in
their price volatility.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price. If a fixed income
security is called, the Fund may have to reinvest the proceeds in other fixed
income securities with lower interest rates, higher credit risks, or other less
favorable characteristics.
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, (as
described in the prospectus), 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 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 amount as long as the $25,000 minimum is
reached within 90 days. An institutional investor's minimum investment 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 offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Shares. Each share class has
different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to accounts for which financial institutions act in a
fiduciary or agency capacity or individuals, directly or through investment
professionals. The Fund may not be a suitable investment for retirement plans.
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 the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within one business day. 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 and your Shares will be priced at the next
calculated NAV 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 the Shares will be priced at the next calculated NAV 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).
BY AUTOMATED CLEARING HOUSE (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). The redemption
amount you will receive is based upon the next calculated NAV after the Fund
receives the order from your investment professional.
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
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you
will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the
Fund receives your written request in proper form.
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 30 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.
In addition, 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.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
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 Investment Management Company. 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 totaled 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.
THE FUND'S PORTFOLIO MANAGERS ARE:
JEFF A. KOZEMCHAK
Jeff A. Kozemchak has been the Fund's portfolio manager since June 1996. He
is Vice President of the Fund. Mr. Kozemchak joined Federated in 1987 and
has been a Senior Portfolio Manager since 1996 and a Senior Vice President
of the Fund's Adviser since 1999. He was a Portfolio Manager until 1996 and
a Vice President of the Fund's Adviser from 1993 to 1998. Mr. Kozemchak is
a Chartered Financial Analyst and received his M.S. in Industrial
Administration from Carnegie Mellon University in 1987.
MARY JO OCHSON
Mary Jo Ochson has been the Fund's portfolio manager since January 1997.
Ms. Ochson joined Federated in 1982 and has been a Senior Portfolio
Manager and a Senior Vice President of the Fund's Adviser since 1996. From
1988 through 1995, Ms. Ochson served as a Portfolio Manager and a Vice
President of the Fund's Adviser. Ms. Ochson is a Chartered Financial
Analyst and received her M.B.A. in Finance from the University of
Pittsburgh.
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 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
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 any dividends and capital
gains.
This information has been audited by Arthur Andersen 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 Report of Independent Public Accountants on page 30.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.29 $10.26 $10.24 $10.28 $10.15
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.44 0.44 0.44 0.43 0.42
Net realized and unrealized gain (loss)
on investments (0.09) 0.03 0.02 (0.04) 0.13
TOTAL FROM INVESTMENT OPERATIONS 0.35 0.47 0.46 0.39 0.55
LESS DISTRIBUTIONS:
Distributions from net investment income (0.44) (0.44) (0.44) (0.43) (0.42)
NET ASSET VALUE, END OF PERIOD $10.20 $10.29 $10.26 $10.24 $10.28
TOTAL RETURN 1 3.39% 4.68% 4.59% 3.82% 5.52%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.84% 0.47% 0.46% 0.47% 0.46%
Net investment income 3.84% 4.28% 4.30% 4.14% 4.09%
Expenses (after waivers) 2 0.47% 0.47% 0.46% 0.47% 0.46%
Net investment income (after waivers) 2 4.21% 4.28% 4.30% 4.14% 4.09%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $202,226 $184,903 $210,169 $189,467 $217,713
Portfolio turnover 19% 33% 50% 20% 33%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived. If such voluntary
waivers had not occurred, the ratios would have been as indicated.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
JUNE 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-95.3% 2
ALABAMA-0.9%
$ 1,000,000 Alabama State Docks
Department, Docks
Facilities Refunding
Revenue Bonds, 5.25% (MBIA
INS), 10/1/2000 AAA $ 1,019,350
1,000,000 Alabama State Docks
Department, Docks
Facilities Refunding
Revenue Bonds, 5.25% (MBIA
INS), 10/1/2001 AAA 1,023,900
TOTAL 2,043,250
ALASKA-0.9%
2,000,000 Anchorage, AK, Hospital
Refunding Revenue Bonds,
6.50% (Sisters of
Providence)/(Original
Issue Yield: 6.75%),
10/1/1999 AA- 2,015,400
ARKANSAS-0.8%
1,645,000 Arkansas Development
Finance Authority, Single
Family Mortgage Revenue
Bonds (Series 1997A-R),
6.50% (MBIA INS), 2/1/2011 AAA 1,717,841
CALIFORNIA-9.3%
1,000,000 ABAG Finance Authority for
Non-Profit Corporations,
Refunding Revenue
Certificates of
Participation, 4.625%
(Episcopal Homes
Foundation)/(Original
Issue Yield: 4.70%),
7/1/2004 A- 1,000,000
2,620,000 ABAG Finance Authority for
Non-Profit Corporations,
Refunding Revenue
Certificates of
Participation, 4.50%
(Episcopal Homes
Foundation)/(Original
Issue Yield: 4.60%),
7/1/2003 A- 2,611,930
12,500,000 Los Angeles, CA Wastewater
System, Revenue Bonds
(Series D), 6.70% (MBIA
INS)/(United States
Treasury PRF)/(Original
Issue Yield: 6.768%),
12/1/2000 (@102) AAA 13,275,250
4,000,000 San Bernardino County, CA,
SFM Revenue Bonds
Mortgage-Backed Securities
Program, 4.875%, 5/1/2015 AAA 4,007,080
TOTAL 20,894,260
COLORADO-3.8%
4,375,000 Arvada, CO Urban Renewal
Authority, Revenue
Refunding Bonds
(Series 1997A), 5.25%
(MBIA INS), 9/1/2002 AAA 4,488,181
1,130,000 Colorado HFA, SFM Revenue
Bond, Series C-1, 7.65%,
12/1/2025 Aa2 1,238,887
1,995,000 Colorado HFA, SFM Revenue
Bonds (Series 1997C-3),
4.80%, 11/1/2016 Aa2 2,026,102
500,000 Colorado HFA, Single
Family Program Senior
Bonds (Series 1998C-2),
4.50%, 11/1/2005 Aa2 494,275
250,000 Colorado HFA, Single
Family Program Subordinate
Bonds (Series 1998B),
4.625%, 11/1/2005 A1 247,485
TOTAL 8,494,930
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
DISTRICT OF COLUMBIA-1.1%
$ 2,335,000 District of Columbia HFA,
SFM Revenue Bonds
(Series 1998A), 6.25%
(GNMA Home Mortgage
Program COL), 12/1/2028 AAA $ 2,477,692
FLORIDA-1.6%
2,000,000 Dade County, FL, Public Improvement Refunding UT GO Bonds,
7.20% (FSA INS),
6/1/2001 AAA 2,113,080
1,375,000 Florida Housing Finance
Corp., Homeowner Mortgage
Revenue Bonds, Series 2,
4.75% (MBIA INS), 7/1/2019 AAA 1,381,765
TOTAL 3,494,845
HAWAII-4.5%
4,660,000 Hawaii State, Highway
Revenue Bonds, Series
1998, 5.00% (MBIA INS),
7/1/2003 AAA 4,747,049
5,000,000 Hawaii State, UT GO Bonds,
Series CN, 6.25% (FGIC
LOC), 3/1/2002 AAA 5,238,950
TOTAL 9,985,999
ILLINOIS-6.4%
1,585,000 Broadview, IL, Tax
Increment Financing
Revenue Bonds, 4.40%,
7/1/2002 NR 1,574,444
1,000,000 Chicago, IL SFM Revenue
Bonds, Series A-1, 4.85%
(GNMA COL), 3/1/2015 Aaa 1,015,390
1,500,000 Illinois Health Facilities
Authority, Adjustable Rate
Revenue Bonds,
Series 1991B, 5.00%
(Highland Park
Hospital)/(FGIC INS),
10/1/2000 AAA 1,522,635
1,030,000 Illinois Health Facilities
Authority, Revenue Bonds
(Series 1998), 5.25%
(Centegra Health System),
9/1/2003 A- 1,044,997
1,000,000 Illinois Health Facilities
Authority, Revenue
Refunding Bonds (Series
A), 4.80% (Advocate Health
Care Network)/(Original
Issue Yield: 4.90%),
8/15/2002 AA 1,008,460
2,000,000 Illinois Health Facilities
Authority, Revenue
Refunding Bonds (Series
A), 5.00% (Advocate Health
Care Network), 8/15/2003 AA 2,026,120
3,000,000 Illinois State, UT GO
Bonds, 5.10% (FGIC INS),
9/1/2000 AAA 3,050,790
3,000,000 Illinois State, UT GO
Bonds, 5.50%, 8/1/1999 AA 3,005,220
TOTAL 14,248,056
INDIANA-2.3%
3,900,000 Indiana Health Facility
Financing Authority,
Hospital Revenue Bonds
(Series 1996A), 4.75%
(Clarian Health Partners,
Inc.)/(Original Issue
Yield: 4.85%), 2/15/2002 AA 3,934,749
1,250,000 Indiana State HFA, SFM
Revenue Bonds, (Series C-
3), 4.75%, 1/1/2029 Aaa 1,257,137
TOTAL 5,191,886
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
KANSAS-1.7%
$ 1,000,000 Sedgwick & Shawnee
Counties, KS, SFM Revenue
Bonds, (Series 1998 A-1),
4.70% (GNMA Home Mortgage
Program COL), 12/1/2008 Aaa $ 987,760
2,000,000 Sedgwick & Shawnee
Counties, KS, SFM Revenue
Bonds, (Series 1998 A-1),
5.00% (GNMA Home Mortgage
Program COL), 6/1/2013 Aaa 1,994,360
880,000 Sedgwick & Shawnee
Counties, KS, SFM Revenue
Bonds (Series 1997A-2),
4.90% (GNMA Home Mortgage
Program COL), 6/1/2016 Aaa 889,882
TOTAL 3,872,002
KENTUCKY-0.5%
1,155,000 Jefferson County, KY, UT GO
Trust Certificates, 5.25%,
3/1/2000 A+ 1,168,375
LOUISIANA-7.0%
2,200,000 Lake Charles, LA Harbor &
Terminal District, Port
Facilities Revenue
Refunding Bond, Trunkline
Lining Co Project, 7.75%
(Panhandle Eastern Corp.),
8/15/2022 A3 2,465,672
4,000,000 Louisiana PFA, Health &
Education Capital
Facilities Revenue Bonds
(Series A), 5.00% TOBs
(AMBAC INS), Mandatory
Tender 6/1/2002 AAA 4,050,720
7,000,000 Louisiana State, Refunding
GO Bonds (Series 1996A),
6.00% (FGIC INS), 8/1/2000 AAA 7,179,830
2,000,000 St. Charles Parish, LA, PCR
Refunding Revenue Bonds
(Series 1999A), 4.85% TOBs
(Entergy Louisiana, Inc.),
Mandatory Tender 6/1/2030 BBB- 2,000,000
TOTAL 15,696,222
MASSACHUSETTS-1.1%
2,495,000 Massachusetts HEFA,
Revenue Bonds (Series
1999A), 5.25% (Caritas
Christi Obligated Group),
7/1/2004 BBB 2,513,962
MICHIGAN-3.0%
1,000,000 Michigan State Building
Authority, Revenue Bonds
(Series II), 6.25% (AMBAC
INS)/(Original Issue
Yield: 6.35%), 10/1/2000 AAA 1,032,100
925,000 Michigan State Hospital
Finance Authority,
Hospital Revenue &
Refunding Bonds (Series
1998A), 4.60% (Hackley
Hospital Obligated Group),
5/1/2003 A3 917,544
1,005,000 Michigan State Hospital
Finance Authority,
Hospital Revenue &
Refunding Bonds (Series
1998A), 4.70% (Hackley
Hospital Obligated Group),
5/1/2004 A3 994,287
820,000 Michigan State Hospital
Finance Authority, Revenue
& Refunding Bonds (Series
1998A), 4.40% (McLaren
Health Care
Corp.)/(Original Issue
Yield: 4.45%), 6/1/2004 A1 806,913
3,000,000 Michigan Underground
Storage Tank Financial
Assurance Authority,
Revenue Refunding Bonds
(Series I), 5.00%,
5/1/2001 AAA 3,049,350
TOTAL 6,800,194
MINNESOTA-1.3%
3,000,000 Minneapolis, MN, Temporary
Parking Ramp Revenue
Bonds, Series 1997A,
4.75%, 6/1/2000 NR 3,000,120
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
MISSISSIPPI-0.9%
$ 930,000 Mississippi Home Corp.,
SFM Revenue Bonds (Series
1998A-4), 5.125% (GNMA
Home Mortgage Program
COL), 12/1/2017 Aaa $ 940,741
1,000,000 Mississippi Home Corp.,
SFM Revenue Bonds (Series
1998A), 5.25% (GNMA Home
Mortgage Program COL),
12/1/2018 Aaa 1,012,060
TOTAL 1,952,801
MISSOURI-0.9%
2,000,000 Springfield, MO State
Highway Improvement Corp.,
Transportation Revenue
Bonds (Series 1997), 5.25%
(AMBAC INS), 8/1/2001 AAA 2,044,860
NEBRASKA-0.7%
1,500,000 American Public Energy
Agency, NE, Gas Supply
Revenue Bonds
(Series 1999A), 4.50%
(Nebraska Public Gas
Agency), 6/1/2003 AAA 1,499,685
NEW HAMPSHIRE-1.3%
3,000,000 New Hampshire Business
Finance Authority, PCR
Refunding Bonds, 4.55%
TOBs (United Illuminating
Co.), Mandatory Tender
2/1/2004 BBB- 2,973,720
NEW JERSEY-3.2%
7,000,000 New Jersey State, UT GO
Refunding Bonds (Series
C), 6.50%, 1/15/2002 AA+ 7,068,950
NEW MEXICO-0.8%
1,820,000 Santa Fe Solid Waste
Management Agency, NM,
Facility Revenue Bonds
(Series 1996), 5.00%,
6/1/2003 NR 1,840,238
NEW YORK-2.2%
3,000,000 New York State Mortgage
Agency, Homeowner Mortgage
Revenue Bonds, Series 71,
4.75%, 10/1/2021 Aa2 3,006,630
2,000,000 New York State Urban
Development Corp.,
Community Enhancement
Facilities Revenue Bonds,
Series 1999A, 5.00%,
4/1/2003 BBB+ 2,026,120
TOTAL 5,032,750
NORTH CAROLINA-1.3%
2,900,000 North Carolina HFA, SFM
Revenue Bonds (Series
1997TT), 4.90%, 9/1/2024 AA 2,900,725
OHIO-6.3%
1,000,000 Cincinnati City School
District, OH, Tax
Anticipation Notes (Series
A), 5.50% (AMBAC INS),
12/1/2000 AAA 1,023,990
3,000,000 Hamilton County, OH, Local
Cooling Facilities Revenue
Bonds (Series 1998), 4.90%
TOBs (Trigen-Cinergy
Solutions of Cincinnati
LLC)/(Cinergy Corp. GTD),
Mandatory Tender 6/1/2023 BBB+ 3,000,000
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
OHIO-CONTINUED
$ 1,610,000 Knox County, OH, Hospital
Facilities Revenue
Refunding Bonds
(Series 1998), 4.20% (Knox
Community Hospital)/(Asset
Guaranty INS)/(Original
Issue Yield: 4.30%),
6/1/2003 AA $ 1,585,109
1,750,000 Knox County, OH, Hospital
Facilities Revenue
Refunding Bonds
(Series 1998), 4.30% (Knox
Community Hospital)/(Asset
Guaranty INS)/(Original
Issue Yield: 4.40%),
6/1/2004 AA 1,714,930
3,630,000 Lucas County, OH HDA,
Hospital Revenue Refunding
Bonds (Series 1996), 5.00%
(ProMedica Healthcare
Obligated Group)/(MBIA
INS), 11/15/1999 AAA 3,651,816
1,140,000 Ohio HFA, Residential
Mortgage Revenue Bonds
(Series 1997D-1), 4.85%
(GNMA Home Mortgage
Program COL), 3/1/2015 AAA 1,145,871
1,985,000 Ohio HFA, Residential
Mortgage Revenue Bonds
(Series 1998A-1), 4.60%
(GNMA Home Mortgage
Program COL), 9/1/2026 AAA 1,984,266
TOTAL 14,105,982
OKLAHOMA-2.4%
4,000,000 Oklahoma HFA, SFM Revenue
Bonds (Series 1998D-2),
6.25% (GNMA Home Mortgage
Program COL), 9/1/2029 Aaa 4,301,760
1,055,000 Washington County, OK
Medical Authority, Hospital Revenue Bonds (Series 1996A),
4.75% (Jane Phillips Medical Center)/(AMBAC INS)/ (Original
Issue Yield:
4.90%), 11/1/2001 AAA 1,066,911
TOTAL 5,368,671
OREGON-0.9%
2,000,000 Oregon State Department of
Transportation, Regional
Light Rail Revenue Bond,
Westside Project, 5.50%
(MBIA INS), 6/1/2000 AAA 2,037,980
PENNSYLVANIA-5.7%
4,000,000 3 Allegheny County, PA, UT GO
Bonds (Series C-49),
5.00%, 4/1/2004 AAA 4,022,120
3,000,000 Philadelphia, PA IDA,
Airport Revenue Bonds,
(Series 1998A), 4.50%
(Philadelphia Airport
System)/(FGIC INS),
7/1/2003 AAA 2,991,840
4,099,750 Philadelphia, PA Municipal
Authority, Equipment
Revenue Bonds
(Series 1997A), 5.297%
(Philadelphia, PA Gas
Works)/
(AMBAC INS), 10/1/2004 AAA 4,201,670
1,500,000 Southeastern, PA
Transportation Authority,
Special Revenue Bonds,
5.25% (FGIC INS), 3/1/2001 AAA 1,528,155
TOTAL 12,743,785
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
RHODE ISLAND-2.9%
$ 950,000 Central Falls Detention
Facility Corporation, RI,
Detention Facility Revenue
Refunding Bonds (Series
1998A), 4.10% (Donald W.
Wyatt Detention
Facility)/(Asset Guaranty
INS), 1/15/2003 AA $ 934,164
990,000 Central Falls Detention
Facility Corporation, RI,
Detention Facility Revenue
Refunding Bonds (Series
1998A), 4.20% (Donald W.
Wyatt Detention
Facility)/(Asset Guaranty
INS), 1/15/2004 AA 968,171
1,035,000 Central Falls Detention
Facility Corporation, RI,
Detention Facility Revenue
Refunding Bonds (Series
1998A), 4.30% (Donald W.
Wyatt Detention
Facility)/(Asset Guaranty
INS), 1/15/2005 AA 1,007,945
2,230,000 Johnston, RI, GO Bonds,
Series A, 4.25% (Asset
Guaranty INS), 6/15/2002 AA 2,212,539
1,280,000 Johnston, RI, GO Bonds,
Series A, 4.35% (Asset
Guaranty INS), 6/15/2003 AA 1,264,371
TOTAL 6,387,190
TEXAS-7.4%
5,000,000 Alliance Airport Authority
Inc., TX, Special
Facilities Revenue Bonds,
7.50% (American
Airlines)/(Original Issue
Yield: 8.00%), 12/1/2029 BBB- 5,291,250
2,000,000 Fort Worth, TX, Refunding
LT GO Bonds (Series A),
5.10% (Original Issue
Yield: 5.20%), 3/1/2000 AA 2,023,920
2,500,000 Harris County, TX HFDC,
Hospital Revenue Bonds
(Series 1997A), 5.25%
(Memorial Hospital
System)/(MBIA INS LOC),
6/1/2002 AAA 2,556,500
2,070,000 Lewisville, TX,
Combination Contract
Revenue & Special
Assessment Bonds (Series
1997), 4.95% TOBs (Wells
Fargo Bank, N.A. LOC),
Mandatory Tender 11/1/2001 AAA 2,119,059
4,440,000 Texas State, UT GO Public
Finance Authority (Series
B), 8.00%, 10/1/1999 AA 4,490,705
TOTAL 16,481,434
UTAH-3.1%
6,500,000 Davis County, Utah Solid
Waste Management & Energy
Recovery Special Service
Dist., Refunding Revenue
Bonds, 6.125% (United
States Treasury
GTD)/(Original Issue
Yield: 6.25%), 6/15/2009 A 7,026,110
WASHINGTON-3.5%
1,680,000 Tacoma, WA, Solid Waste
Utility Revenue Refunding
Bonds (Series 1997B),
5.50% (AMBAC INS),
12/1/2002 AAA 1,740,430
3,000,000 Washington State Public
Power Supply System,
Nuclear Project No. 2
Revenue Refunding Bond,
(Series 1997B), 5.50%,
7/1/2003 AA- 3,103,770
3,000,000 Washington State Public
Power Supply System,
Refunding Revenue Bonds
(Nuclear Project No. 2)
(Series 1997A), 5.00%,
7/1/2001 AA- 3,044,190
TOTAL 7,888,390
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
WEST VIRGINIA-1.1%
$ 1,500,000 Cabell County, WV Board of
Education, Refunding UT GO
Bonds, 6.00%, 5/1/2001 A+ $ 1,545,585
1,000,000 West Virginia State, GO
State Road Bonds, Series
1998, 4.40% (FGIC INS),
6/1/2004 AAA 996,690
TOTAL 2,542,275
WISCONSIN-4.5%
6,500,000 Wisconsin HEFA, Revenue
Bonds (Series 1996), 5.50%
(Gundersen Lutheran)/(FSA
INS), 12/1/2000 AAA 6,644,950
3,335,000 Wisconsin HEFA, Revenue
Bonds (Series 1997), 4.70%
(Marshfield Clinic,
WI)/(MBIA INS)/(Original
Issue Yield: 4.85%),
2/15/2002 AAA 3,356,911
TOTAL 10,001,861
TOTAL SHORT-INTERMEDIATE
MUNICIPAL SECURITIES
(IDENTIFIED COST
$212,726,295) 213,512,441
SHORT-TERM MUNICIPALS-5.8%
GEORGIA-2.2%
5,000,000 Burke County, GA
Development Authority, PCR
Bonds (Fourth Series 1994)
Daily VRDNs (Georgia Power
Co.) A+ 5,000,000
NEW YORK-0.4%
800,000 New York City Municipal
Water Finance Authority
Revenue Bonds
(Series 1995A) Daily VRDNs
(FGIC INS)/(FGIC
Securities Purchase,
Inc. LIQ) AAA 800,000
PENNSYLVANIA-1.0%
1,800,000 Erie County, PA Hospital
Authority Weekly VRDNs
(St. Vincent Health
System)/(Mellon Bank N.A.,
Pittsburgh LOC) A 1,800,000
400,000 Erie County, PA Hospital
Authority, (Series 1998B)
Daily VRDNs (Hamot Health
Foundation)/(AMBAC
INS)/(PNC Bank, N.A. LIQ) AAA 400,000
TOTAL 2,200,000
TEXAS-2.2%
4,900,000 Harris County, TX HFDC,
(Series 1994) Daily VRDNs
(Methodist Hospital,
Harris County, TX) AA 4,900,000
TOTAL SHORT-TERM
MUNICIPALS (AT AMORTIZED
COST) 12,900,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$225,626,295) 4 $ 226,412,441
</TABLE>
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 Securities that are subject to Alternative Minimum Tax represent 19.0% of the
portfolio as calculated based upon total portfolio market value.
3 This security was purchased on a when-issued basis.
4 The cost of investments for federal tax purposes amounts to $225,626,295. The
net unrealized appreciation of investments on a federal tax basis amounts to
$786,146 which is comprised of $1,481,622 appreciation and $695,476 depreciation
at June 30, 1999.
Note: The categories of investments are shown as a percentage of net assets
($223,993,022) at June 30, 1999.
The following acronyms are used throughout this portfolio:
AMBAC -American Municipal Bond Assurance Corporation COL -Collateralized FGIC
- -Financial Guaranty Insurance Company FSA -Financial Security Assurance GNMA
- -Government National Mortgage Association GO -General Obligation GTD -Guaranty
HDA -Hospital Development Authority HEFA -Health and Education Facilities
Authority HFA -Housing Finance Authority HFDC -Health Facility Development
Corporation IDA -Industrial Development Authority INS -Insured LIQ -Liquidity
Agreement LOC -Letter of Credit LT -Limited Tax MBIA -Municipal Bond Investors
Assurance PCR -Pollution Control Revenue PFA -Public Facility Authority PRF
- -Prerefunded SFM -Single Family Mortgage TOBs -Tender Option Bonds UT -Unlimited
Tax VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$225,626,295) $ 226,412,441
Income receivable 2,837,570
Receivable for investments
sold 130,000
Receivable for shares sold 133,632
TOTAL ASSETS 229,513,643
LIABILITIES:
Payable for investments
purchased $ 4,109,236
Payable for shares
redeemed 623,184
Income distribution
payable 430,608
Payable to Bank 345,273
Accrued expenses 12,320
TOTAL LIABILITIES 5,520,621
Net assets for 21,969,169
shares outstanding $ 223,993,022
NET ASSETS CONSIST OF:
Paid in capital $ 227,432,352
Net unrealized
appreciation of
investments 786,146
Accumulated net realized
loss on investments (4,225,476)
TOTAL NET ASSETS $ 223,993,022
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE
INSTITUTIONAL SHARES:
$202,225,564 / 19,834,188
shares outstanding $10.20
INSTITUTIONAL SERVICE
SHARES:
$21,767,458 / 2,134,981
shares outstanding $10.20
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 9,891,224
EXPENSES:
Investment advisory fee $ 844,421
Administrative personnel
and services fee 160,041
Custodian fees 13,236
Transfer and dividend
disbursing agent fees and
expenses 52,390
Directors'/Trustees' fees 11,527
Auditing fees 13,635
Legal fees 3,102
Portfolio accounting fees 75,507
Distribution services fee-
Institutional Service
Shares 38,803
Shareholder services fee-
Institutional Shares 488,960
Shareholder services fee-
Institutional Service
Shares 38,803
Share registration costs 40,491
Printing and postage 24,266
Insurance premiums 1,948
Miscellaneous 6,941
TOTAL EXPENSES 1,814,071
WAIVERS:
Waiver of investment
advisory fee $ (260,701)
Waiver of distribution
services fee-Institutional
Service Shares (37,251)
Waiver of shareholder
services fee-Institutional
Shares (488,960)
Waiver of shareholder
services fee-Institutional
Service Shares (1,552)
TOTAL WAIVERS (788,464)
Net expenses 1,025,607
Net investment income 8,865,617
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on
investments (200,513)
Net change in unrealized
appreciation of
investments (2,021,010)
Net realized and
unrealized loss on
investments (2,221,523)
Change in net assets
resulting from operations $ 6,644,094
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 8,865,617 $ 8,539,971
Net realized gain (loss) on
investments ($48,774 and
$8,804, respectively, as
computed for federal tax
purposes) (200,513) 202,730
Net change in unrealized
appreciation (2,021,010) 561,167
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 6,644,094 9,303,868
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income
Institutional Shares (8,248,977) (8,174,344)
Institutional Service
Shares (616,640) (360,458)
CHANGE IN NET ASSETS
RESULTING FROM
DISTRIBUTIONS
TO SHAREHOLDERS (8,865,617) (8,534,802)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 113,101,471 83,677,957
Net asset value of shares
issued to shareholders in
payment of
distributions declared 3,922,616 3,608,608
Cost of shares redeemed (87,078,787) (108,712,902)
CHANGE IN NET ASSETS
RESULTING FROM SHARE
TRANSACTIONS 29,945,300 (21,426,337)
Change in net assets 27,723,777 (20,657,271)
NET ASSETS:
Beginning of period 196,269,245 216,926,516
End of period (including
accumulated undistributed
net investment income of
$2,917 for the year ended
June 30, 1998) $ 223,993,022 $ 196,269,245
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
JUNE 30, 1999
ORGANIZATION
Federated Short-Term Municipal Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Trust offers two classes of shares:
Institutional Shares and Institutional Service Shares. The investment objective
of the Trust is to provide dividend income which is exempt from federal regular
income tax. The Trust pursues this investment objective by investing in a
portfolio of municipal securities with a dollar-weighted average maturity of
less than three years.
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
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
Short-term securities are valued according to the mean between bid and asked
prices provided by an independent pricing service. However, short-term
securities with remaining maturities of 60 days or less at the time of purchase
may be valued at amortized cost, which approximates fair market value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principals.
The following reclassification has been made to the financial statements.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
ACCUMULATED UNDISTRIBUTED
NET REALIZED NET INVESTMENT
PAID-IN CAPITAL LOSS INCOME
<S> <C> <C>
$(3,236) $6,153 $(2,917)
</TABLE>
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 June 30, 1999, the Trust, for federal tax purposes, had a capital loss
carryforward of $3,982,020 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. Pusuant to the Code, such capital loss carryforward will expire as
follows:
<TABLE>
<CAPTION>
EXPIRATION
EXPIRATION YEAR AMOUNT
<S> <C>
2001 $ 25,213
2003 $ 1,189,491
2004 $ 2,597,123
2005 $ 170,193
</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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998
INSTITUTIONAL SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 8,901,686 $ 91,940,247 7,381,068 $ 75,983,944
Shares issued to
shareholders in payment of
distributions declared 342,196 3,533,322 328,092 3,376,837
Shares redeemed (7,376,339) (76,161,673) (10,235,034) (105,370,170)
NET CHANGE RESULTING FROM
INSTITUTIONAL
SHARE TRANSACTIONS 1,867,543 $ 19,311,896 (2,525,874) (26,009,389)
<CAPTION>
YEAR ENDED JUNE 30 1999 1998
INSTITUTIONAL SERVICE
SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 2,051,296 $ 21,161,224 747,794 $ 7,694,013
Shares issued to
shareholders in payment of
distributions declared 37,712 389,294 22,517 231,771
Shares redeemed (1,058,494) (10,917,114) (324,766) (3,342,732)
NET CHANGE RESULTING FROM
INSTITUTIONAL
SERVICE SHARE TRANSACTIONS 1,030,514 10,633,404 445,545 $ 4,583,052
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 2,898,057 $ 29,945,300 (2,080,329) (21,426,337)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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 (excluding interest, taxes, brokerage commissions,
expenses of registering and qualifying the Trust and its shares under federal
and state laws and regulations, expenses of withholding taxes, and extraordinary
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 year ended June 30, 1999, the Fund engaged in purchase and sale
transactions with funds that have a common investment adviser (or affiliated
investment advisers), common Directors/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 $114,131,466 and $149,919,873,
respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended June 30, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $ 73,827,246
Sales $ 38,936,294
</TABLE>
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.
CHANGE OF INDEPENDENT AUDITORS
On May 19, 1999, the Trust's Board of Trustees, upon the recommendation of the
Audit Committee of the Board of Trustees, requesting and subsequently accepted
the resignation of Arthur Anderson LLP ("AA") as the Trust's independent
auditors. AA's reports on the Trust's financial statements for the fiscal years
ended June 30, 1998 and June 30, 1999, contained no adverse opinion or
disclaimer of opinion nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. During the Trust's fiscal years ended June
30, 1998 and June 30, 1999, (i) there were no disagreements with AA on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of AA, would have caused it to make reference to the subject matter
of the disagreements in connection with its reports on the financial statements
for such years; and (ii) there were no reportable events of the kind described
in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of 1934, as
amended.
The Trust, by action of its Board of Trustees, upon the recommendation of the
Audit Committee of the Board, has engaged Ernst & Young LLP ("E&Y") as the
independent auditors to audit the Trust's financial statements for the fiscal
year ended June 30, 2000. During the Trust's fiscal years ended June 30, 1998
and June 30, 1999, neither the Trust nor anyone on its behalf has consulted E&Y
on items which (i) concerned the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Trust's financial statements of (ii)
concerned the subject of a disagreement (as defined in paragraph (a)(1)(iv) of
Item 304 of Regulation S-K) of reportable events (as described in paragraph
(a)(1)(v) of said Item 304).
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FEDERATED SHORT-TERM MUNICIPAL TRUST:
We have audited the accompanying statement of assets and liabilities of
Federated Short-Term Muncipal Trust (a Massachusetts business trust), including
the schedule of portfolio of investments, as of June 30, 1999, the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term Municipal Trust as of June 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
August 27, 1999
[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS
Federated Short-Term Municipal Trust
INSTITUTIONAL SHARES
AUGUST 31, 1999
A Statement of Additional Information (SAI) dated August 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund and its investments is contained in the Fund's SAI and Annual and
Semi-Annual reports to shareholders as they become available. The Annual Report
discusses market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year. To obtain the SAI,
the Annual Report, Semi-Annual Report and other information without charge, and
make inquiries, 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.
[Graphic]
Federated
Federated Short-Term Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-3181
Cusip 313907107
8072507A-IS (8/99)
[Graphic]
PROSPECTUS
Federated Short-Term Municipal Trust
INSTITUTIONAL SERVICE SHARES
A mutual fund seeking dividend income which is exempt from federal regular
income tax by investing in a portfolio of tax exempt securities with a dollar
weighted average maturity of less than three years.
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. Any representation to the contrary is a criminal offense.
AUGUST 31, 1999
CONTENTS
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? 5
What are the Specific Risks of Investing in the Fund? 7
What Do Shares Cost? 8
How is the Fund Sold? 9
How to Purchase Shares 10
How to Redeem Shares 12
Account and Share Information 14
Who Manages the Fund? 15
Financial Information 16
Report of Independent Public Accountants 34
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide dividend income which is exempt
from federal regular income tax. 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 pursues its objective by investing at least 80% of its net assets in a
diversified portfolio of municipal securities or by investing its assets so that
at least 80% of its income will be tax exempt. The Fund's dollar-weighted
average portfolio maturity will be less than three years. Interest from the
Fund's investments may be subject to the federal alternative minimum tax for
individuals and corporations (AMT).
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
* a change in prevailing interest rates,
* defaults or an increase in the risk of defaults on portfolio securities.
Other risk factors associated with an investment in the Fund include sector
risk, liquidity risk and call risk.
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 the Fund's Institutional Service Shares as of the
calendar year-end for each of five years.
The `y' axis reflects the "% Total Return" beginning with "-2.00%" and
increasing in increments of 2% up to 8.00%.
The `x' axis represents calculation periods from the earliest first full
calendar year end of the Fund's start of business through the calendar year
ended December 31, 1998. The light gray shaded chart features five 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 Class for each calendar year is
stated directly at the top of each respective bar, for the calendar years 1994
through 1998. The percentages noted are: -0.13%; 7.82%; 3.75%; 4.23%; and
4.58%.]
The bar chart shows the variability of the Fund's Institutional Service Shares
total returns on a calendar year-end basis.
The Fund's Institutional Service Shares are not sold subject to a sales charge
(load). The total returns displayed above are based upon net asset value.
The Fund's Institutional Service Shares total return for the six-month period
from January 1, 1999 to June 30, 1999 was 0.42%.
Within the period shown in the Chart, the Fund's highest quarterly return was
3.02% (quarter ended March 31, 1995). Its lowest quarterly return was (0.65%)
(quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Institutional Service Shares Average
Annual Total Returns for the calendar periods ended December 31, 1998. The table
shows the Fund's total returns averaged over a period of years relative to the
Lehman Brothers 1 Year General Obligation Index ("LB1YRGOI"), the Lehman
Brothers 3 Year Government Obligation Index ("LB3YRGOI"), the Lehman Brothers 1
Year Municipal Index ("LB1YRMI") and the Lehman Brothers 3 Year Municipal Index
("LB3YRMI"), broad-based market indexes. The Fund's Adviser has elected to
change the benchmark indexes from LB1YRGOI and LB3YRGOI to LB1YRMI and LB3YRMI
because they are more representative of the securities in which the Fund
invests. Total returns for the indexes shown do not reflect sales charges,
expenses or other fees that the SEC requires to be reflected in the Fund's
performance. Indexes are unmanaged, and it is not possible to invest directly in
an index.
<TABLE>
<CAPTION>
CALENDAR PERIOD FUND LB1YRGOI LB3YRGOI LB1YRMI LB3YRMI
<S> <C> <C> <C> <C> <C>
1 Year 4.58% 4.77% 5.17% 4.74% 5.20%
5 Years 4.02% 4.48% 4.93% 4.47% 4.90%
Start of Performance 1 4.00% 4.52% 5.01% 4.43% 4.90%
</TABLE>
1 The Fund's Institutional Service Shares start of performance date was
September 1, 1993.
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 SHORT-TERM MUNICIPAL TRUST
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund's Institutional Service Shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
<S> <C>
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 redemption proceeds, as applicable) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and
other Distributions) (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL FUND OPERATING
EXPENSES (Before Waivers)1
Expenses That are Deducted From Fund Assets (as a
percentage of average net assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee 3 0.25%
Shareholder Services Fee 4 0.25%
Other Expenses 0.19%
Total Annual Fund
Operating Expenses 1.09%
1 As a result of contractual obligations and voluntary waivers, the Adviser,
Distributor, and Shareholder Services Provider waived certain amounts. These are
shown below along with the net expenses the Fund's Institutional Service Shares
actually paid for the fiscal year ended June 30, 1999.
Total Waivers of Fund Expenses (contractual and voluntary) 0.37%
Total Actual Annual Fund Operating Expenses (after waivers) 0.72%
2 Pursuant to the investment advisory contract, the Adviser waived a portion of
the management fee. The management fee paid by the Fund's Institutional Service
Shares (after the contractual waiver) was 0.28% for the fiscal year ended June
30, 1999. Shareholders must approve any change to the contractual waiver. 3 The
distribution (12b-1) fee has been voluntarily reduced. This voluntary reduction
can be terminated at any time. The distribution (12b-1) fee paid by the Fund's
Institutional Service Shares (after the voluntary reduction) was 0.01% for the
fiscal year ended June 30, 1999. 4 The shareholder services fee has been
voluntarily reduced. This voluntary reduction can be terminated at any time. The
shareholder services fee paid by the Fund's Institutional Service Shares (after
the voluntary reduction) was 0.24% for the fiscal year ended June 30, 1999.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Institutional Service Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Institutional Service
Shares 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 Institutional Service Shares operating
expenses (after waivers) as shown in the table remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year $ 74
3 Years $ 230
5 Years $ 401
10 Years $ 894
What are the Fund's Investment Strategies?
The Fund invests at least 80% of its net assets in a diversified portfolio of
municipal securities or invests so that at least 80% of its income will be tax
exempt. The tax exempt securities in which the fund invests are investment grade
at the time of purchase. The Fund's dollar-weighted average portfolio maturity
is less than three years. Interest from the Fund's investments may be subject to
AMT. The Fund's investment adviser (Adviser) actively manages the Fund's
portfolio, emphasizing credit quality while seeking to manage the Fund's
interest rate risk and provide enhanced levels of income.
The Adviser performs a fundamental credit analysis on tax exempt securities
before the Fund purchases such securities. The Adviser considers various
factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor;
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all securities on an ongoing basis by
reviewing periodic financial data and ratings of nationally recognized ratings
services.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser attempts to provide enhanced levels of income, subject to the Fund's
maturity, quality and duration constraints, through the following management
techniques. The Adviser will engage in a relative value analysis; that is, the
Adviser will assess the cost of a tax exempt security compared with other tax
exempt securities and taxable securities such as U.S. Treasury obligations. The
Adviser may also allocate investments in sectors of the tax exempt market that
offer the highest return. Finally, the Adviser will invest a portion of the
portfolio in tax exempt securities subject to the alternative minimum tax, which
may offer higher returns.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal income tax. It may do this
to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This 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 federal income taxes. Fixed income securities pay interest, dividends
or distributions at a specified rate. The rate may be fixed or adjusted
periodically. The issuer must also repay the principal amount of the security,
normally within a specified time.
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.
The following describes the types of tax exempt securities in which the fund
invests.
GENERAL OBLIGATION BONDS
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
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 could result in a default on the
bonds.
PRIVATE ACTIVITY 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 interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
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 FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when
due on each security. 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 that the security is comparable to investment grade.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates. The Fund attempts to manage
interest rate risk by limiting its portfolio maturity and duration.
CREDIT RISKS
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.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. 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 on the Adviser's credit assessment.
The Fund attempts to manage credit risk by purchasing investment grade
securities.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities credit
enhanced by insurance companies, banks or companies with similar
characteristics. As a result, the Fund will be more susceptible to any economic,
business, political or other developments which generally affect these entities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
received any credit ratings or are not widely held.
These features may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower price
to sell a security, sell other securities to raise cash or give up an investment
opportunity, any of which could have a negative effect on the Fund's
performance. Infrequent trading of securities may also lead to an increase in
their price volatility.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price. If a fixed income
security is called, the Fund may have to reinvest the proceeds in other fixed
income securities with lower interest rates, higher credit risks, or other less
favorable characteristics.
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 (as
described in the prospectus), 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 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 amount as long as the $25,000 minimum is
reached within 90 days. An institutional investor's minimum investment 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 offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Service Shares. Each share class
has different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to retail and private banking customers of financial
institutions or individuals, directly or through investment professionals. The
Fund may not be a suitable investment for retirement plans.
When the Distributor receives marketing fees, it may pay some or all of them to
investment professionals. 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).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Institutional Service Shares. Because these
Shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.
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 the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within one business day. 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 and your Shares will be priced at the next
calculated NAV 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 the Shares will be priced at the next calculated NAV 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).
BY AUTOMATED CLEARING HOUSE (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). The redemption
amount you will receive is based upon the next calculated NAV after the Fund
receives the order from your investment professional.
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
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you
will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the
Fund receives your written request in proper form.
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 30 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.
In addition, 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.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
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 Investment Management Company. 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 totaled 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.
THE FUND'S PORTFOLIO MANAGERS ARE:
JEFF A. KOZEMCHAK
Jeff A. Kozemchak has been the Fund's portfolio manager since June 1996. He
is Vice President of the Fund. Mr. Kozemchak joined Federated in 1987 and
has been a Senior Portfolio Manager since 1996 and a Senior Vice President
of the Fund's Adviser since 1999. He was a Portfolio Manager until 1996 and
a Vice President of the Fund's Adviser from 1993 to 1998. Mr. Kozemchak is
a Chartered Financial Analyst and received his M.S. in Industrial
Administration from Carnegie Mellon University in 1987.
MARY JO OCHSON
Mary Jo Ochson has been the Fund's portfolio manager since January 1997.
Ms. Ochson joined Federated in 1982 and has been a Senior Portfolio Manager
and a Senior Vice President of the Fund's Adviser since 1996. From 1988
through 1995, Ms. Ochson served as a Portfolio Manager and a Vice President
of the Fund's Adviser. Ms. Ochson is a Chartered Financial Analyst and
received her M.B.A. in Finance from the University of Pittsburgh.
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, distribution and shareholder services fees, 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 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
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 any dividends and capital
gains.
This information has been audited by Arthur Andersen 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 Report of Independent Public Accountants on page 34.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $10.29 $10.26 $10.24 $10.28 $10.15
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.41 0.42 0.42 0.40 0.39
Net realized and
unrealized gain (loss) on
investments (0.09) 0.03 0.02 (0.04) 0.13
TOTAL FROM INVESTMENT
OPERATIONS 0.32 0.45 0.44 0.36 0.52
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.41) (0.42) (0.42) (0.40) (0.39)
NET ASSET VALUE, END OF
PERIOD $10.20 $10.29 $10.26 $10.24 $10.28
TOTAL RETURN 1 3.13% 4.41% 4.33% 3.56% 5.26%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.09% 0.72% 0.71% 0.72% 0.71%
Net investment income 3.60% 4.05% 4.05% 3.90% 3.69%
Expenses (after waivers) 2 0.72% 0.72% 0.71% 0.72% 0.71%
Net investment income
(after waivers) 2 3.97% 4.05% 4.05% 3.90% 3.69%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $21,767 $11,367 $6,758 $6,209 $5,223
Portfolio turnover 19% 33% 50% 20% 33%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived. If such voluntary
waivers had not occurred, the ratios would have been as indicated.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
JUNE 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-95.3% 2
ALABAMA-0.9%
$ 1,000,000 Alabama State Docks
Department, Docks
Facilities Refunding
Revenue Bonds, 5.25% (MBIA
INS), 10/1/2000 AAA $ 1,019,350
1,000,000 Alabama State Docks
Department, Docks
Facilities Refunding
Revenue Bonds, 5.25% (MBIA
INS), 10/1/2001 AAA 1,023,900
TOTAL 2,043,250
ALASKA-0.9%
2,000,000 Anchorage, AK, Hospital
Refunding Revenue Bonds,
6.50% (Sisters of
Providence)/(Original
Issue Yield: 6.75%),
10/1/1999 AA- 2,015,400
ARKANSAS-0.8%
1,645,000 Arkansas Development
Finance Authority, Single
Family Mortgage Revenue
Bonds (Series 1997A-R),
6.50% (MBIA INS), 2/1/2011 AAA 1,717,841
CALIFORNIA-9.3%
1,000,000 ABAG Finance Authority for
Non-Profit Corporations,
Refunding Revenue
Certificates of
Participation, 4.625%
(Episcopal Homes
Foundation)/(Original
Issue Yield: 4.70%),
7/1/2004 A- 1,000,000
2,620,000 ABAG Finance Authority for
Non-Profit Corporations,
Refunding Revenue
Certificates of
Participation, 4.50%
(Episcopal Homes
Foundation)/(Original
Issue Yield: 4.60%),
7/1/2003 A- 2,611,930
12,500,000 Los Angeles, CA Wastewater
System, Revenue Bonds
(Series D), 6.70% (MBIA
INS)/(United States
Treasury PRF)/(Original
Issue Yield: 6.768%),
12/1/2000 (@102) AAA 13,275,250
4,000,000 San Bernardino County, CA,
SFM Revenue Bonds
Mortgage-Backed Securities
Program, 4.875%, 5/1/2015 AAA 4,007,080
TOTAL 20,894,260
COLORADO-3.8%
4,375,000 Arvada, CO Urban Renewal
Authority, Revenue
Refunding Bonds
(Series 1997A), 5.25%
(MBIA INS), 9/1/2002 AAA 4,488,181
1,130,000 Colorado HFA, SFM Revenue
Bond, Series C-1, 7.65%,
12/1/2025 Aa2 1,238,887
1,995,000 Colorado HFA, SFM Revenue
Bonds (Series 1997C-3),
4.80%, 11/1/2016 Aa2 2,026,102
500,000 Colorado HFA, Single
Family Program Senior
Bonds (Series 1998C-2),
4.50%, 11/1/2005 Aa2 494,275
250,000 Colorado HFA, Single
Family Program Subordinate
Bonds (Series 1998B),
4.625%, 11/1/2005 A1 247,485
TOTAL 8,494,930
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
DISTRICT OF COLUMBIA-1.1%
$ 2,335,000 District of Columbia HFA,
SFM Revenue Bonds (Series
1998A), 6.25% (GNMA Home
Mortgage Program COL),
12/1/2028 AAA $ 2,477,692
FLORIDA-1.6%
2,000,000 Dade County, FL, Public Improvement Refunding UT GO Bonds,
7.20% (FSA INS),
6/1/2001 AAA 2,113,080
1,375,000 Florida Housing Finance
Corp., Homeowner Mortgage
Revenue Bonds, Series 2,
4.75% (MBIA INS), 7/1/2019 AAA 1,381,765
TOTAL 3,494,845
HAWAII-4.5%
4,660,000 Hawaii State, Highway
Revenue Bonds, Series
1998, 5.00% (MBIA INS),
7/1/2003 AAA 4,747,049
5,000,000 Hawaii State, UT GO Bonds,
Series CN, 6.25% (FGIC
LOC), 3/1/2002 AAA 5,238,950
TOTAL 9,985,999
ILLINOIS-6.4%
1,585,000 Broadview, IL, Tax
Increment Financing
Revenue Bonds, 4.40%,
7/1/2002 NR 1,574,444
1,000,000 Chicago, IL SFM Revenue
Bonds, Series A-1, 4.85%
(GNMA COL), 3/1/2015 Aaa 1,015,390
1,500,000 Illinois Health Facilities
Authority, Adjustable Rate
Revenue Bonds,
Series 1991B, 5.00%
(Highland Park
Hospital)/(FGIC INS),
10/1/2000 AAA 1,522,635
1,030,000 Illinois Health Facilities
Authority, Revenue Bonds
(Series 1998), 5.25%
(Centegra Health System),
9/1/2003 A- 1,044,997
1,000,000 Illinois Health Facilities
Authority, Revenue
Refunding Bonds (Series
A), 4.80% (Advocate Health
Care Network)/(Original
Issue Yield: 4.90%),
8/15/2002 AA 1,008,460
2,000,000 Illinois Health Facilities
Authority, Revenue
Refunding Bonds (Series
A), 5.00% (Advocate Health
Care Network), 8/15/2003 AA 2,026,120
3,000,000 Illinois State, UT GO
Bonds, 5.10% (FGIC INS),
9/1/2000 AAA 3,050,790
3,000,000 Illinois State, UT GO
Bonds, 5.50%, 8/1/1999 AA 3,005,220
TOTAL 14,248,056
INDIANA-2.3%
3,900,000 Indiana Health Facility
Financing Authority,
Hospital Revenue Bonds
(Series 1996A), 4.75%
(Clarian Health Partners,
Inc.)/(Original Issue
Yield: 4.85%), 2/15/2002 AA 3,934,749
1,250,000 Indiana State HFA, SFM
Revenue Bonds (Series C-
3), 4.75%, 1/1/2029 Aaa 1,257,137
TOTAL 5,191,886
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
KANSAS-1.7%
$ 1,000,000 Sedgwick & Shawnee
Counties, KS, SFM Revenue
Bonds, (Series 1998 A-1),
4.70% (GNMA Home Mortgage
Program COL), 12/1/2008 Aaa $ 987,760
2,000,000 Sedgwick & Shawnee
Counties, KS, SFM Revenue
Bonds, (Series 1998 A-1),
5.00% (GNMA Home Mortgage
Program COL), 6/1/2013 Aaa 1,994,360
880,000 Sedgwick & Shawnee
Counties, KS, SFM Revenue
Bonds (Series 1997A-2),
4.90% (GNMA Home Mortgage
Program COL), 6/1/2016 Aaa 889,882
TOTAL 3,872,002
KENTUCKY-0.5%
1,155,000 Jefferson County, KY, UT GO
Trust Certificates, 5.25%,
3/1/2000 A+ 1,168,375
LOUISIANA-7.0%
2,200,000 Lake Charles, LA Harbor &
Terminal District, Port
Facilities Revenue
Refunding Bond, Trunkline
Lining Co Project, 7.75%
(Panhandle Eastern Corp.),
8/15/2022 A3 2,465,672
4,000,000 Louisiana PFA, Health &
Education Capital
Facilities Revenue Bonds
(Series A), 5.00% TOBs
(AMBAC INS), Mandatory
Tender 6/1/2002 AAA 4,050,720
7,000,000 Louisiana State, Refunding
GO Bonds (Series 1996A),
6.00% (FGIC INS), 8/1/2000 AAA 7,179,830
2,000,000 St. Charles Parish, LA, PCR
Refunding Revenue Bonds
(Series 1999A), 4.85% TOBs
(Entergy Louisiana, Inc.),
Mandatory Tender 6/1/2030 BBB- 2,000,000
TOTAL 15,696,222
MASSACHUSETTS-1.1%
2,495,000 Massachusetts HEFA,
Revenue Bonds (Series
1999A), 5.25% (Caritas
Christi Obligated Group),
7/1/2004 BBB 2,513,962
MICHIGAN-3.0%
1,000,000 Michigan State Building
Authority, Revenue Bonds
(Series II), 6.25% (AMBAC
INS)/(Original Issue
Yield: 6.35%), 10/1/2000 AAA 1,032,100
925,000 Michigan State Hospital
Finance Authority,
Hospital Revenue &
Refunding Bonds (Series
1998A), 4.60% (Hackley
Hospital Obligated Group),
5/1/2003 A3 917,544
1,005,000 Michigan State Hospital
Finance Authority,
Hospital Revenue &
Refunding Bonds (Series
1998A), 4.70% (Hackley
Hospital Obligated Group),
5/1/2004 A3 994,287
820,000 Michigan State Hospital
Finance Authority, Revenue
& Refunding Bonds (Series
1998A), 4.40% (McLaren
Health Care
Corp.)/(Original Issue
Yield: 4.45%), 6/1/2004 A1 806,913
3,000,000 Michigan Underground
Storage Tank Financial
Assurance Authority,
Revenue Refunding Bonds
(Series I), 5.00%,
5/1/2001 AAA 3,049,350
TOTAL 6,800,194
MINNESOTA-1.3%
3,000,000 Minneapolis, MN, Temporary
Parking Ramp Revenue
Bonds, Series 1997A,
4.75%, 6/1/2000 NR 3,000,120
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
MISSISSIPPI-0.9%
$ 930,000 Mississippi Home Corp.,
SFM Revenue Bonds (Series
1998A-4), 5.125% (GNMA
Home Mortgage Program
COL), 12/1/2017 Aaa $ 940,741
1,000,000 Mississippi Home Corp.,
SFM Revenue Bonds (Series
1998A), 5.25% (GNMA Home
Mortgage Program COL),
12/1/2018 Aaa 1,012,060
TOTAL 1,952,801
MISSOURI-0.9%
2,000,000 Springfield, MO State
Highway Improvement Corp.,
Transportation Revenue
Bonds (Series 1997), 5.25%
(AMBAC INS), 8/1/2001 AAA 2,044,860
NEBRASKA-0.7%
1,500,000 American Public Energy
Agency, NE, Gas Supply
Revenue Bonds
(Series 1999A), 4.50%
(Nebraska Public Gas
Agency), 6/1/2003 AAA 1,499,685
NEW HAMPSHIRE-1.3%
3,000,000 New Hampshire Business
Finance Authority, PCR
Refunding Bonds, 4.55%
TOBs (United Illuminating
Co.), Mandatory Tender
2/1/2004 BBB- 2,973,720
NEW JERSEY-3.2%
7,000,000 New Jersey State, UT GO
Refunding Bonds (Series
C), 6.50%, 1/15/2002 AA+ 7,068,950
NEW MEXICO-0.8%
1,820,000 Santa Fe Solid Waste
Management Agency, NM,
Facility Revenue Bonds
(Series 1996), 5.00%,
6/1/2003 NR 1,840,238
NEW YORK-2.2%
3,000,000 New York State Mortgage
Agency, Homeowner Mortgage
Revenue Bonds, Series 71,
4.75%, 10/1/2021 Aa2 3,006,630
2,000,000 New York State Urban
Development Corp.,
Community Enhancement
Facilities Revenue Bonds,
Series 1999A, 5.00%,
4/1/2003 BBB+ 2,026,120
TOTAL 5,032,750
NORTH CAROLINA-1.3%
2,900,000 North Carolina HFA, SFM
Revenue Bonds (Series
1997TT), 4.90%, 9/1/2024 AA 2,900,725
OHIO-6.3%
1,000,000 Cincinnati City School
District, OH, Tax
Anticipation Notes (Series
A), 5.50% (AMBAC INS),
12/1/2000 AAA 1,023,990
3,000,000 Hamilton County, OH, Local
Cooling Facilities Revenue
Bonds (Series 1998), 4.90%
TOBs (Trigen-Cinergy
Solutions of Cincinnati
LLC)/(Cinergy Corp. GTD),
Mandatory Tender 6/1/2023 BBB+ 3,000,000
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
OHIO-CONTINUED
$ 1,610,000 Knox County, OH, Hospital
Facilities Revenue
Refunding Bonds
(Series 1998), 4.20% (Knox
Community Hospital)/(Asset
Guaranty INS)/(Original
Issue Yield: 4.30%),
6/1/2003 AA $ 1,585,109
1,750,000 Knox County, OH, Hospital
Facilities Revenue
Refunding Bonds
(Series 1998), 4.30% (Knox
Community Hospital)/(Asset
Guaranty INS)/(Original
Issue Yield: 4.40%),
6/1/2004 AA 1,714,930
3,630,000 Lucas County, OH HDA,
Hospital Revenue Refunding
Bonds (Series 1996), 5.00%
(ProMedica Healthcare
Obligated Group)/(MBIA
INS), 11/15/1999 AAA 3,651,816
1,140,000 Ohio HFA, Residential
Mortgage Revenue Bonds
(Series 1997D-1), 4.85%
(GNMA Home Mortgage
Program COL), 3/1/2015 AAA 1,145,871
1,985,000 Ohio HFA, Residential
Mortgage Revenue Bonds
(Series 1998A-1), 4.60%
(GNMA Home Mortgage
Program COL), 9/1/2026 AAA 1,984,266
TOTAL 14,105,982
OKLAHOMA-2.4%
4,000,000 Oklahoma HFA, SFM Revenue
Bonds (Series 1998D-2),
6.25% (GNMA Home Mortgage
Program COL), 9/1/2029 Aaa 4,301,760
1,055,000 Washington County, OK
Medical Authority,
Hospital Revenue Bonds
(Series 1996A), 4.75%
(Jane Phillips Medical
Center)/(AMBAC
INS)/(Original Issue
Yield: 4.90%), 11/1/2001 AAA 1,066,911
TOTAL 5,368,671
OREGON-0.9%
2,000,000 Oregon State Department of
Transportation, Regional
Light Rail Revenue Bond,
Westside Project, 5.50%
(MBIA INS), 6/1/2000 AAA 2,037,980
PENNSYLVANIA-5.7%
4,000,000 3 Allegheny County, PA, UT GO
Bonds (Series C-49),
5.00%, 4/1/2004 AAA 4,022,120
3,000,000 Philadelphia, PA IDA,
Airport Revenue Bonds,
(Series 1998A), 4.50%
(Philadelphia Airport
System)/(FGIC INS),
7/1/2003 AAA 2,991,840
4,099,750 Philadelphia, PA Municipal
Authority, Equipment
Revenue Bonds
(Series 1997A), 5.297%
(Philadelphia, PA Gas
Works)/
(AMBAC INS), 10/1/2004 AAA 4,201,670
1,500,000 Southeastern, PA
Transportation Authority,
Special Revenue Bonds,
5.25% (FGIC INS), 3/1/2001 AAA 1,528,155
TOTAL 12,743,785
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
RHODE ISLAND-2.9%
$ 950,000 Central Falls Detention
Facility Corporation, RI,
Detention Facility Revenue
Refunding Bonds (Series
1998A), 4.10% (Donald W.
Wyatt Detention
Facility)/(Asset Guaranty
INS), 1/15/2003 AA $ 934,164
990,000 Central Falls Detention
Facility Corporation, RI,
Detention Facility Revenue
Refunding Bonds (Series
1998A), 4.20% (Donald W.
Wyatt Detention
Facility)/(Asset Guaranty
INS), 1/15/2004 AA 968,171
1,035,000 Central Falls Detention
Facility Corporation, RI,
Detention Facility Revenue
Refunding Bonds (Series
1998A), 4.30% (Donald W.
Wyatt Detention
Facility)/(Asset Guaranty
INS), 1/15/2005 AA 1,007,945
2,230,000 Johnston, RI, GO Bonds,
Series A, 4.25% (Asset
Guaranty INS), 6/15/2002 AA 2,212,539
1,280,000 Johnston, RI, GO Bonds,
Series A, 4.35% (Asset
Guaranty INS), 6/15/2003 AA 1,264,371
TOTAL 6,387,190
TEXAS-7.4%
5,000,000 Alliance Airport Authority
Inc., TX, Special
Facilities Revenue Bonds,
7.50% (American
Airlines)/(Original Issue
Yield: 8.00%), 12/1/2029 BBB- 5,291,250
2,000,000 Fort Worth, TX, Refunding
LT GO Bonds (Series A),
5.10% (Original Issue
Yield: 5.20%), 3/1/2000 AA 2,023,920
2,500,000 Harris County, TX HFDC,
Hospital Revenue Bonds
(Series 1997A), 5.25%
(Memorial Hospital
System)/(MBIA INS LOC),
6/1/2002 AAA 2,556,500
2,070,000 Lewisville, TX,
Combination Contract
Revenue & Special
Assessment Bonds (Series
1997), 4.95% TOBs (Wells
Fargo Bank, N.A. LOC),
Mandatory Tender 11/1/2001 AAA 2,119,059
4,440,000 Texas State, UT GO Public
Finance Authority (Series
B), 8.00%, 10/1/1999 AA 4,490,705
TOTAL 16,481,434
UTAH-3.1%
6,500,000 Davis County, Utah Solid
Waste Management & Energy
Recovery Special Service
Dist., Refunding Revenue
Bonds, 6.125% (United
States Treasury
GTD)/(Original Issue
Yield: 6.25%), 6/15/2009 A 7,026,110
WASHINGTON-3.5%
1,680,000 Tacoma, WA, Solid Waste
Utility Revenue Refunding
Bonds (Series 1997B),
5.50% (AMBAC INS),
12/1/2002 AAA 1,740,430
3,000,000 Washington State Public
Power Supply System,
Nuclear Project No. 2
Revenue Refunding Bond,
(Series 1997B), 5.50%,
7/1/2003 AA- 3,103,770
3,000,000 Washington State Public
Power Supply System,
Refunding Revenue Bonds
(Nuclear Project No. 2)
(Series 1997A), 5.00%,
7/1/2001 AA- 3,044,190
TOTAL 7,888,390
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
SHORT-INTERMEDIATE
MUNICIPAL SECURITIES-
continued 2
WEST VIRGINIA-1.1%
$ 1,500,000 Cabell County, WV Board of
Education, Refunding UT GO
Bonds, 6.00%, 5/1/2001 A+ $ 1,545,585
1,000,000 West Virginia State, GO
State Road Bonds, Series
1998, 4.40% (FGIC INS),
6/1/2004 AAA 996,690
TOTAL 2,542,275
WISCONSIN-4.5%
6,500,000 Wisconsin HEFA, Revenue
Bonds (Series 1996), 5.50%
(Gundersen Lutheran)/(FSA
INS), 12/1/2000 AAA 6,644,950
3,335,000 Wisconsin HEFA, Revenue
Bonds (Series 1997), 4.70%
(Marshfield Clinic,
WI)/(MBIA INS)/(Original
Issue Yield: 4.85%),
2/15/2002 AAA 3,356,911
TOTAL 10,001,861
TOTAL SHORT-INTERMEDIATE
MUNICIPAL SECURITIES
(IDENTIFIED COST
$212,726,295) $ 213,512,441
SHORT-TERM MUNICIPALS-5.8%
GEORGIA-2.2%
5,000,000 Burke County, GA
Development Authority, PCR
Bonds (Fourth Series 1994)
Daily VRDNs (Georgia Power
Co.) A+ 5,000,000
NEW YORK-0.4%
800,000 New York City Municipal
Water Finance Authority
Revenue Bonds
(Series 1995A) Daily VRDNs
(FGIC INS)/(FGIC
Securities Purchase,
Inc. LIQ) AAA 800,000
PENNSYLVANIA-1.0%
1,800,000 Erie County, PA Hospital
Authority Weekly VRDNs
(St. Vincent Health
System)/(Mellon Bank N.A.,
Pittsburgh LOC) A 1,800,000
400,000 Erie County, PA Hospital
Authority, (Series 1998B)
Daily VRDNs (Hamot Health
Foundation)/(AMBAC
INS)/(PNC Bank, N.A. LIQ) AAA 400,000
TOTAL 2,200,000
TEXAS-2.2%
4,900,000 Harris County, TX HFDC,
(Series 1994) Daily VRDNs
(Methodist Hospital,
Harris County, TX) AA 4,900,000
TOTAL SHORT-TERM
MUNICIPALS (AT AMORTIZED
COST ) $ 12,900,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$225,626,295) 4 $ 226,412,441
</TABLE>
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 Securities that are subject to Alternative Minimum Tax represent 19.0% of the
portfolio as calculated based upon total portfolio market value.
3 This security was purchased on a when-issued basis.
4 The cost of investments for federal tax purposes amounts to $225,626,295. The
net unrealized appreciation of investments on a federal tax basis amounts to
$786,146 which is comprised of $1,481,622 appreciation and $695,476 depreciation
at June 30, 1999.
Note: The categories of investments are shown as a percentage of net assets
($223,993,022) at June 30, 1999.
The following acronyms are used throughout this portfolio:
AMBAC -American Municipal Bond Assurance Corporation COL -Collateralized FGIC
- -Financial Guaranty Insurance Company FSA -Financial Security Assurance GNMA
- -Government National Mortgage Association GO -General Obligation GTD -Guaranty
HDA -Hospital Development Authority HEFA -Health and Education Facilities
Authority HFA -Housing Finance Authority HFDC -Health Facility Development
Corporation IDA -Industrial Development Authority INS -Insured LIQ -Liquidity
Agreement LOC -Letter of Credit LT -Limited Tax MBIA -Municipal Bond Investors
Assurance PCR -Pollution Control Revenue PFA -Public Facility Authority PRF
- -Prerefunded SFM -Single Family Mortgage TOBs -Tender Option Bonds UT -Unlimited
Tax VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
JUNE 30, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$225,626,295) $ 226,412,441
Income receivable 2,837,570
Receivable for investments
sold 130,000
Receivable for shares sold 133,632
TOTAL ASSETS 229,513,643
LIABILITIES:
Payable for investments
purchased $ 4,109,236
Payable for shares
redeemed 623,184
Income distribution
payable 430,608
Payable to Bank 345,273
Accrued expenses 12,320
TOTAL LIABILITIES 5,520,621
Net assets for 21,969,169
shares outstanding $ 223,993,022
NET ASSETS CONSIST OF:
Paid in capital $ 227,432,352
Net unrealized
appreciation of
investments 786,146
Accumulated net realized
loss on investments (4,225,476)
TOTAL NET ASSETS $ 223,993,022
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE
INSTITUTIONAL SHARES:
$202,225,564 / 19,834,188
shares outstanding $10.20
INSTITUTIONAL SERVICE
SHARES:
$21,767,458 / 2,134,981
shares outstanding $10.20
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED JUNE 30, 1999
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 9,891,224
EXPENSES:
Investment advisory fee $ 844,421
Administrative personnel
and services fee 160,041
Custodian fees 13,236
Transfer and dividend
disbursing agent fees and
expenses 52,390
Directors'/Trustees' fees 11,527
Auditing fees 13,635
Legal fees 3,102
Portfolio accounting fees 75,507
Distribution services fee-
Institutional Service
Shares 38,803
Shareholder services fee-
Institutional Shares 488,960
Shareholder services fee-
Institutional Service
Shares 38,803
Share registration costs 40,491
Printing and postage 24,266
Insurance premiums 1,948
Miscellaneous 6,941
TOTAL EXPENSES 1,814,071
WAIVERS:
Waiver of investment
advisory fee $ (260,701)
Waiver of distribution
services fee-Institutional
Service Shares (37,251)
Waiver of shareholder
services fee-Institutional
Shares (488,960)
Waiver of shareholder
services fee-Institutional
Service Shares (1,552)
TOTAL WAIVERS (788,464)
Net expenses 1,025,607
Net investment income 8,865,617
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on
investments (200,513)
Net change in unrealized
appreciation of
investments (2,021,010)
Net realized and
unrealized loss on
investments (2,221,523)
Change in net assets
resulting from operations $ 6,644,094
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 8,865,617 $ 8,539,971
Net realized gain (loss) on
investments ($48,774 and
$8,804, respectively, as
computed for federal tax
purposes) (200,513) 202,730
Net change in unrealized
appreciation (2,021,010) 561,167
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 6,644,094 9,303,868
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income
Institutional Shares (8,248,977) (8,174,344)
Institutional Service
Shares (616,640) (360,458)
CHANGE IN NET ASSETS
RESULTING FROM
DISTRIBUTIONS
TO SHAREHOLDERS (8,865,617) (8,534,802)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 113,101,471 83,677,957
Net asset value of shares
issued to shareholders in
payment of
distributions declared 3,922,616 3,608,608
Cost of shares redeemed (87,078,787) (108,712,902)
CHANGE IN NET ASSETS
RESULTING FROM SHARE
TRANSACTIONS 29,945,300 (21,426,337)
Change in net assets 27,723,777 (20,657,271)
NET ASSETS:
Beginning of period 196,269,245 216,926,516
End of period (including
accumulated undistributed
net investment income of
$2,917 for the year ended
June 30, 1998) $ 223,993,022 $ 196,269,245
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
JUNE 30, 1999
ORGANIZATION
Federated Short-Term Municipal Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Trust offers two classes of shares:
Institutional Shares and Institutional Service Shares. The investment objective
of the Trust is to provide dividend income which is exempt from federal regular
income tax. The Trust pursues this investment objective by investing in a
portfolio of municipal securities with a dollar-weighted average maturity of
less than three years.
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
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
Short-term securities are valued according to the mean between bid and asked
prices provided by an independent pricing service. However, short-term
securities with remaining maturities of 60 days or less at the time of purchase
may be valued at amortized cost, which approximates fair market value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principals.
The following reclassification has been made to the financial statements.
INCREASE (DECREASE)
ACCUMULATED UNDISTRIBUTED
NET REALIZED NET INVESTMENT
PAID-IN CAPITAL LOSS INCOME
$(3,236) $6,153 $(2,917)
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 June 30, 1999, the Trust, for federal tax purposes, had a capital loss
carryforward of $3,982,020 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. Pusuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION
EXPIRATION YEAR AMOUNT
2001 $ 25,213
2003 $ 1,189,491
2004 $ 2,597,123
2005 $ 170,193
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998
INSTITUTIONAL SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 8,901,686 $ 91,940,247 7,381,068 $ 75,983,944
Shares issued to
shareholders in payment of
distributions declared 342,196 3,533,322 328,092 3,376,837
Shares redeemed (7,376,339) (76,161,673) (10,235,034) (105,370,170)
NET CHANGE RESULTING FROM
INSTITUTIONAL
SHARE TRANSACTIONS 1,867,543 $ 19,311,896 (2,525,874) (26,009,389)
<CAPTION>
YEAR ENDED JUNE 30 1999 1998
INSTITUTIONAL SERVICE
SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 2,051,296 $ 21,161,224 747,794 $ 7,694,013
Shares issued to
shareholders in payment of
distributions declared 37,712 389,294 22,517 231,771
Shares redeemed (1,058,494) (10,917,114) (324,766) (3,342,732)
NET CHANGE RESULTING FROM
INSTITUTIONAL
SERVICE SHARE TRANSACTIONS 1,030,514 10,633,404 445,545 $ 4,583,052
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 2,898,057 $ 29,945,300 (2,080,329) (21,426,337)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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 (excluding interest, taxes, brokerage commissions,
expenses of registering and qualifying the Trust and its shares under federal
and state laws and regulations, expenses of withholding taxes, distribution and
shareholder services fees, and extraordinary 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.
DISTRIBUTION SERVICES FEE
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Trust will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Trust to finance activities intended to result in the sale of the Trust's
Institutional Service Shares. The Plan provides that the Trust may incur
distribution expenses of up to 0.25% of the average daily net assets of the
Institutional Service Shares, annually, to compensate FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services 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 year ended June 30, 1999, the Fund engaged in purchase and sale
transactions with funds that have a common investment adviser (or affiliated
investment advisers), common Directors/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 $114,131,466 and $149,919,873,
respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 1999, were as follows:
Purchases $ 73,827,246
Sales $ 38,936,294
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.
CHANGE OF INDEPENDENT AUDITORS
On May 19, 1999, the Trust's Board of Trustees, upon the recommendation of the
Audit Committee of the Board of Trustees, requested and subsequently accepted
the resignation of Arthur Anderson LLP ("AA") as the Trust's independent
auditors. AA's reports on the Trust's financial statements for the fiscal years
ended June 30, 1998 and June 30, 1999, contained no adverse opinion or
disclaimer of opinion nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. During the Trust's fiscal years ended June
30, 1998 and June 30, 1999, (i) there were no disagreements with AA on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of AA, would have caused it to make reference to the subject matter
of the disagreements in connection with its reports on the financial statements
for such years; and (ii) there were no reportable events of the kind described
in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of 1934, as
amended.
The Trust, by action of its Board of Trustees, upon the recommendation of the
Audit Committee of the Board, has engaged Ernst & Young LLP ("E&Y") as the
independent auditors to audit the Trust's financial statements for the fiscal
year ending June 30, 2000. During the Trust's fiscal years ended June 30, 1998
and June 30, 1999, neither the Trust nor anyone on its behalf has consulted E&Y
on items which (i) concerned the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Trust's financial statements of (ii)
concerned the subject of a disagreement (as defined in paragraph (a)(1)(iv) of
Item 304 of Regulation S-K) of reportable events (as described in paragraph
(a)(1)(v) of said Item 304).
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FEDERATED SHORT-TERM MUNICIPAL TRUST:
We have audited the accompanying statement of assets and liabilities of
Federated Short-Term Muncipal Trust (a Massachusetts business trust), including
the schedule of portfolio of investments, as of June 30, 1999, the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term Municipal Trust as of June 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
August 27, 1999
[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS
Federated Short-Term Municipal Trust
INSTITUTIONAL SERVICE SHARES
AUGUST 31, 1999
A Statement of Additional Information (SAI) dated August 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund and its investments is contained in the Fund's SAI and Annual and
Semi-Annual Reports to shareholders as they become available. The Annual Report
discusses market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year. To obtain the SAI,
the Annual Report, Semi-Annual Report and other information without charge, and
make inquiries, 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.
[Graphic]
Federated
Federated Short-Term Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-3181
Cusip 313907206
8072507A-SS (8/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
FEDERATED SHORT-TERM MUNICIPAL TRUST
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Institutional Shares and
Institutional Service Shares of Federated Short-Term Municipal Trust (Fund),
dated August 31, 1999.
Obtain the prospectuses without charge by calling 1-800-341-7400.
August 31, 1999
CONTENTS
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Subaccounting Services
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 313907107
CUSIP 313907206
8072507B (8/99)
<PAGE>
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 May 8, 1981.
On December 15, 1994, the Fund changed its name from Short-Term Municipal Trust
to Federated Short-Term Municipal Trust. The Fund's investment adviser is
Federated Investment Management Company (Adviser). Effective March 31, 1999,
Federated Management, former Adviser to the Fund, became Federated Investment
Management Company (formerly, Federated Advisers).
The Board of Trustees (Board) has established two classes of Shares of the Fund,
known as Institutional Shares and Institutional Service Shares. This SAI relates
to both classes of the above-mentioned Shares.
SECURITIES IN WHICH THE FUND INVESTS
The Fund's principal securities are described in its prospectus. Additional
securities, and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in such
securities for any purpose that is consistent with its investment objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
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. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities. A security's yield measures the
annual income earned on a security as a percentage of its price. A security's
yield will increase or decrease depending upon whether it costs less (a
discount) or more (a premium) than the principal amount. If the issuer may
redeem the security before its scheduled maturity, the price and yield on a
discount or premium security may change based upon the probability of an early
redemption. Securities with higher risks generally have higher yields. The
following describes the types of fixed income 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.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves
in the opposite direction of market interest rates. When market interest
rates go up, the interest rate paid on the inverse floater goes down;
when market interest rates go down, the interest rate paid on the
inverse floater goes up. Inverse floaters generally respond more rapidly
to market interest rate changes than fixed rate tax exempt securities.
Inverse floaters are subject to interest rate risks and leverage risks.
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.
TAX INCREMENT FINANCING BONDS Tax increment financing
(TIF) bonds are payable from increases in taxes or other revenues
attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF
bonds would be payable solely from any increase in sales taxes collected
from merchants in the area. The bonds could default if merchants' sales,
and related tax collections, failed to increase as anticipated.
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
can resell the equipment or facility but 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.
ZERO COUPON SECURITIES Zero coupon securities do not
pay interest or principal until final maturity unlike debt securities
that provide periodic payments of interest (referred to as a coupon
payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price
and the amount paid at maturity represents interest on the zero coupon
security. Investors must wait until maturity to receive interest and
principal, which increases the market and credit risks of a zero coupon
security.
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.
<PAGE>
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the
lowest credit risks. AGENCY SECURITIES Agency securities are issued or
guaranteed by a federal agency or other government sponsored entity acting
under federal authority (a GSE). The United States supports some GSEs with
its full faith and credit. Other GSEs receive support through federal
subsidies, loans or other benefits. A few GSEs have no explicit financial
support, but are regarded as having implied support because the federal
government sponsors their activities. Agency securities are generally
regarded as having low credit risks, but not as low as treasury securities.
The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does
not reduce the market and prepayment risks of these mortgage backed
securities. BANK INSTRUMENTS Bank instruments are unsecured interest bearing
deposits with banks. Bank instruments include bank accounts, time deposits,
certificates of deposit and banker's acceptances. Yankee instruments are
denominated in U.S. dollars and issued by U.S. branches of foreign banks.
Eurodollar instruments are denominated in U.S. dollars and issued by
non-U.S. branches of U.S. or foreign banks. CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types
of corporate debt securities. The Fund may also purchase interests in bank
loans to companies. The credit risks of corporate debt securities vary
widely among issuers.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for
current expenditures. Most issuers constantly reissue their commercial
paper and use the proceeds (or bank loans) to repay maturing paper. If
the issuer cannot continue to obtain liquidity in this fashion, its
commercial paper may default. The short maturity of commercial paper
reduces both the market and credit risks as compared to other debt
securities of the same issuer.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually
agreed upon time and price. The repurchase price exceeds the sale price,
reflecting the Fund's return on the transaction. This return is unrelated to
the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the
Adviser. The Fund's custodian or subcustodian will take possession of the
securities subject to repurchase agreements. The Adviser or subcustodian
will monitor the value of the underlying security each day to ensure that
the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified price,
date, and time. Entering into a contract to buy an underlying asset is commonly
referred to as buying a contract or holding a long position in the asset.
Entering into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures contracts
are considered to be commodity contracts. Futures contracts traded OTC are
frequently referred to as forward contracts. The Fund may buy and sell interest
rate and index financial futures contracts. Depending upon how the Fund uses
futures contracts and the relationships between the market value of a futures
contract and the underlying asset, futures contracts may increase or decrease
the Fund's exposure to interest rate risks, and may also expose the Fund to
liquidity and leverage risks. SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment
and delivery of the securities scheduled for a future time. During the
period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. The Fund records the
transaction when it agrees to buy the securities and reflects their value in
determining the price of its shares. Settlement dates may be a month or more
after entering into these transactions so that the market values of the
securities bought may vary from the purchase prices. Therefore, delayed
delivery transactions create interest rate risks for the Fund. Delayed
delivery transactions also involve credit risks in the event of a
counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated investment companies, as an efficient
means of carrying out its investment policies and managing its uninvested cash.
<PAGE>
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
The Fund may invest up to 100% of its assets in fixed income securities rated
BBB or in unrated but comparable securities. Fixed income securities generally
compensate for greater credit risk by paying interest at a higher rate. The
difference between the yield of a security and the yield of a "AAA"-rated
general obligation security or index with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy. TAX RISKS 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. LIQUIDITY RISKS
Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security or close out a futures contract when it wants to. If this
happens, the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses. LEVERAGE RISKS Leverage risk is
created when an investment exposes the Fund to a level of risk that exceeds the
amount invested. Changes in the value of such an investment magnify the Fund's
risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security, or other benchmark.
<PAGE>
FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide dividend income which is exempt
from federal regular income tax. The investment objective may not be changed by
the Fund's Trustees without shareholder approval.
The Fund attempts to achieve its investment objective by investing at least 80%
of its net assets in a diversified portfolio of municipal securities or by
investing its assets so that at least 80% of its income will be tax exempt.
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase the securities of any one issuer
(other than cash, cash items, securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such U.S. government securities,
and securities of other investment companies) if as a result more than
5% of the value of its total assets would be invested in the securities
of that issuer, or it would own more than 10% of the outstanding voting
securities of that issuer.
BORROWING MONEY
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. (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
borrowings, the Fund will reduce its borrowings within three business
days. To do this, the Fund may have to sell a portion of its investments
at a time when it may be disadvantageous to do so.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of the total assets at the time of the borrowing.
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 REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in
municipal securities secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities or commodity contracts.
MAKING LOANS
The Fund will not make loans, but may acquire publicly or nonpublicly
issued municipal securities as permitted by its investment objective,
policies and limitations.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES
The Fund will not issue senior securities, except as permitted by its
investment objective and policies.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
TRUSTEES (BOARD) AND 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 ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice and certain restricted
securities.
For purposes of the diversification limitation, the Fund considers cash and cash
items to be instruments 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 the investment. The Fund does not intend to purchase
securities if, as a result of such purchase, more than 25% 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. Except with
respect to borrowing money, if a percentage limitation is adhered to at the time
of the investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in violation of such restriction.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;
o futures contracts and options are valued at market values established by the
exchanges on which they are traded at the close of trading on such exchanges.
Options traded in the over-the-counter market are valued according to the
mean between the last bid and the last asked price for the option as provided
by an investment dealer or other financial institution that deals in the
option. The Board may determine in good faith that another method of valuing
such investments is necessary to appraise their fair market value;
for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as
determined in good faith by the Board; and
for all other securities at fair value as determined in good faith by the
Board.
<PAGE>
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
WHAT DO SHARES COST?
The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund.
The NAV for each class of Shares may differ due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.
HOW IS THE FUND SOLD?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
RULE 12B-1 PLAN (INSTITUTIONAL SERVICE SHARES ONLY)
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing-related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses.
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.
SUBACCOUNTING SERVICES
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
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, except that in matters
affecting only a particular class, only Shares of that class are entitled to
vote.
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.
As of August 6, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Shares: Charles Schwab & Co.
Inc., San Francisco, California owned approximately 3,772,989 shares (19.25%).
As of August 6, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Service Shares: First American
Bank Kane City, Dundee, Illinois owned approximately 288,240 shares (13.54%);
SEI Trust Company, Oaks, Pennsylvania owned approximately 152,670 shares
(7.17%); and CPB Trust Division, Honolulu, Hawaii owned approximately 128,510
shares (6.04%).
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.
The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.
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, birth date, 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 54 investment companies, whose investment advisers are affiliated
with the Fund's Adviser.
As of August 6, 1999, the Fund's Board and Officers as a group owned
approximately 392,780 (2.00%) 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. A pound sign (#) denotes a Member
of the Board's Executive Committee, which handles the Board's responsibilities
between its meetings.
<TABLE>
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM FUND
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND AND FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer and Director or $0 $0 for the
Birth Date: July 28, Trustee of the Federated Fund Complex; Fund and
1924 Chairman and Director, Federated Investors, 54 other investment
Federated Investors Inc.; Chairman and Trustee, Federated companies
Tower Investment Management Company; Chairman and in the Fund Complex
1001 Liberty Avenue Director, Federated Investment Counseling,
Pittsburgh, PA and Federated Global Investment Management
CHAIRMAN AND TRUSTEE Corp.; Chairman, Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,123.65 $113,860.22 for the
Birth Date: February 3, Complex; Director, Member of Executive Fund and
1934 Committee, Children's Hospital of Pittsburgh; 54 other investment
15 Old Timber Trail Director, Robroy Industries, Inc. (coated companies
Pittsburgh, PA steel conduits/computer storage equipment); in the Fund Complex
TRUSTEE formerly: Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc. (physician
practice management); Director, Member of
Executive Committee, University of Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,236.20 $125,264.48 for the
Birth Date: June 23, Complex; President, Investment Properties Fund and
1937 Corporation; Senior Vice President, 54 other investment
Wood/Commercial Dept. John R. Wood and Associates, Inc., Realtors; companies
John R. Wood Partner or Trustee in private real estate in the Fund Complex
Associates, Inc. ventures in Southwest Florida; formerly:
Realtors President, Naples Property Management, Inc.
3255 Tamiami Trail and Northgate Village Development Corporation.
North
Naples, FL
TRUSTEE
JOHN F. CUNNINGHAM Director or Trustee of some of the Federated $280.15 $0 for the
Birth Date: March 5, Fund Complex; Chairman, President and Chief Fund and
1943 Executive Officer, Cunningham & Co., Inc. 40 other investment
353 El Brillo Way (strategic business consulting) ; Trustee companies
Palm Beach, FL Associate, Boston College; Director, EMC in the Fund Complex
TRUSTEE Corporation (computer storage systems);
formerly: Director, Redgate Communications.
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 $1,123.65 $113,860.22 for the
Birth Date: October 11, Complex; Professor of Medicine, University of Fund and
1932 Pittsburgh; Medical Director, University of 54 other investment
3471 Fifth Avenue Pittsburgh Medical Center - Downtown; companies
Suite 1111 Hematologist, Oncologist, and Internist, in the Fund Complex
Pittsburgh, PA University of Pittsburgh Medical Center;
TRUSTEE Member, National Board of Trustees, Leukemia
Society of America.
PETER E. MADDEN Director or Trustee of the Federated Fund $995.02 $113,860.22 for the
Birth Date: March 16, Complex; formerly: Representative, Fund and
1942 Commonwealth of Massachusetts General Court; 54 other investment
One Royal Palm Way President, State Street Bank and Trust companies
100 Royal Palm Way Company and State Street Corporation. in the Fund Complex
Palm Beach, FL
TRUSTEE Previous Positions: Director, VISA USA and
VISA International; Chairman and Director,
Massachusetts Bankers Association; Director,
Depository Trust Corporation; Director, The
Boston Stock Exchange.
CHARLES F. MANSFIELD, Director or Trustee of some of the Federated $280.15 $0 for the
JR. Fund Complex; Management Consultant. Fund and
Birth Date: April 10, 43 other investment
1945 Previous Positions: Chief Executive Officer, companies
80 South Road PBTC International Bank; Partner, Arthur in the Fund Complex
Westhampton Beach, NY Young & Company (now Ernst & Young LLP);
Chief Financial Officer of Retail Banking
TRUSTEE Sector, Chase Manhattan Bank; Senior Vice
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 $1,179.94 $113,860.22 for the
J.D., S.J.D.# Complex; President, Law Professor, Duquesne Fund and
Birth Date: December University; Consulting Partner, Mollica & 54 other investment
20, 1932 Murray; Director, Michael Baker Corp. companies
President, Duquesne (engineering, construction, operations, and in the Fund Complex
University technical services).
Pittsburgh, PA
TRUSTEE Previous Positions: Dean and Professor of
Law, University of Pittsburgh School of Law;
Dean and Professor of Law, Villanova
University School of Law.
MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,123.65 $113,860.22 for the
Birth Date: June 21, Complex; Public Fund and
1935 Relations/Marketing/Conference Planning. 54 other investment
4905 Bayard Street companies
Pittsburgh, PA Previous Positions: National Spokesperson, in the Fund Complex
TRUSTEE Aluminum Company of America; television
producer; business owner.
JOHN S. WALSH Director or Trustee of some of the Federated $280.15 $0 for the
Birth Date: November Fund Complex; President and Director, Heat Fund and
28, 1957 Wagon, Inc. (manufacturer of construction 41 other investment
2007 Sherwood Drive temporary heaters); President and Director, companies
Valparaiso, IN Manufacturers Products, Inc. (distributor of in the Fund Complex
TRUSTEE portable construction heaters); President,
Portable Heater Parts, a division of
Manufacturers Products, Inc.; Director, Walsh
& Kelly, Inc. (heavy highway contractor);
formerly: Vice President, Walsh & Kelly, Inc.
GLEN R. JOHNSON Trustee, Federated Investors, Inc.; staff $0 $0 for the
Birth Date: May 2, 1929 member, Federated Securities Corp. Fund and
Federated Investors 8 other investment
Tower companies
1001 Liberty Avenue in the Fund Complex
Pittsburgh, PA
PRESIDENT
J. CHRISTOPHER DONAHUE+ President or Executive Vice President of the $0 $0 for the
Birth Date: April 11, Federated Fund Complex; Director or Trustee Fund and
1949 of some of the Funds in the Federated Fund 16 other investment
Federated Investors Complex; President and Director, Federated companies
Tower Investors, Inc.; President and Trustee, in the Fund Complex
1001 Liberty Avenue Federated Investment Management Company;
Pittsburgh, PA President and Director, Federated Investment
EXECUTIVE VICE PRESIDENT Counseling and Federated Global Investment
Management 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
Birth Date: October 22, the Federated Fund Complex; President, Fund and
1930 Executive Vice President and Treasurer of 1 other investment
Federated Investors some of the Funds in the Federated Fund company
Tower Complex; Vice Chairman, Federated Investors, in the Fund Complex
1001 Liberty Avenue Inc.; Vice President, Federated Investment
Pittsburgh, PA Management Company and Federated Investment
EXECUTIVE VICE PRESIDENT Counseling, Federated Global Investment
Management 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 the $0 $0 for the
Birth Date: October 26, Federated Fund Complex; Executive Vice Fund and
1938 President, Secretary, and Director, Federated 54 other investment
Federated Investors Investors, Inc.; Trustee, Federated companies
Tower Investment Management Company; Director, in the Fund Complex
1001 Liberty Avenue Federated Investment Counseling and Federated
Pittsburgh, PA Global Investment Management Corp.; Director,
EXECUTIVE VICE Federated Services Company; Director,
PRESIDENT AND SECRETARY Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; Vice $0 $0 for the
Birth Date: June 17, President - Funds Financial Services Fund and
1954 Division, Federated Investors, Inc.; 54 other investment
Federated Investors formerly: various management positions within companies
Tower Funds Financial Services Division of in the Fund Complex
1001 Liberty Avenue Federated Investors, Inc.
Pittsburgh, PA
TREASURER
RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birth Date: May 17, 1923 Funds in the Federated Fund Complex; Director Fund and
Federated Investors or Trustee of some of the Funds in the 6 other investment
Tower Federated Fund Complex; Executive Vice companies
1001 Liberty Avenue President, Federated Investors, Inc.; in the Fund Complex
Pittsburgh, PA Chairman and Director, Federated Securities
VICE PRESIDENT Corp.
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birth Date: March 3, various other Funds in the Federated Fund Fund and
1949 Complex; Executive Vice President, Federated 41 other investment
Federated Investors Investment Counseling, Federated Global companies
Tower Investment Management Corp., Federated in the Fund Complex
1001 Liberty Avenue Investment Management Company and Passport
Pittsburgh, PA Research, Ltd.; Registered Representative,
CHIEF INVESTMENT OFFICER 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 Investment Management Company
and Passport Research, Ltd.
JEFF A. KOZEMCHAK Jeff A. Kozemchak has been the Fund's $0 $0 for the
Birth Date: January 15, portfolio manager since June 1996. He is Fund and
1960 Vice President of the Fund.] Mr. Kozemchak 3 other investment
Federated Investors joined Federated in 1987 and has been a companies
Tower Senior Portfolio Manager since 1996 and a in the Fund Complex
1001 Liberty Avenue Senior Vice President of the Fund's Adviser
Pittsburgh, PA since 1999. He was a Portfolio Manager from
VICE PRESIDENT 1993 to 1996 and a Vice President of the
Fund's Adviser from 1993 to 1998. Mr.
Kozemchak is a Chartered Financial Analyst
and received his M.S. in Industrial
Administration from Carnegie Mellon
University in 1987.
</TABLE>
+ MR. DONAHUE IS THE FATHER OF J. CHRISTOPHER DONAHUE, EXECUTIVE VICE
PRESIDENT OF THE FUND.
++MESSRS. CUNNINGHAM, MANSFIELD AND WALSH BECAME MEMBERS OF THE BOARD OF
TRUSTEES/DIRECTORS ON MARCH 23, 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.
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 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.
The Adviser must waive the portion of its advisory fee that increases the Fund's
aggregate annual operating expenses above 0.45% 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. 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.
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.
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 FEDERATED
FEE 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 PUBLIC ACCOUNTANTS
The independent public accountant for the Fund, Arthur Andersen LLP, plans and
performs its audit so that it may provide an opinion as to whether the Fund's
financial statements and financial highlights are free of material misstatement.
<TABLE>
<CAPTION>
FEES PAID BY THE FUND FOR SERVICES
<S> <C> <C> <C>
FOR THE YEAR ENDED JUNE 30, 1999 1998 1997
Advisory Fee Earned $844,421 $799,123 $866,632
Advisory Fee Reduction $260,701 $256,084 $293,339
Brokerage Commissions $0 $0 $0
Administrative Fee $160,041 $155,000 $163,655
12b-1 Fee
Institutional Service Shares $1,552 -- --
Shareholder Services Fee
Institutional Shares $0 -- --
Institutional Service Shares $37,251 -- --
</TABLE>
Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.
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.
<PAGE>
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.
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-year, five-year and ten-year or Start of
Performance periods ended June 30, 1999.
Yield and Tax-Equivalent Yield given for the 30-day period ended June 30, 1999.
<TABLE>
<CAPTION>
30-DAY PERIOD 1 Year 5 Years 10 Years
INSTITUTIONAL SHARES
Total Return NA 3.39% 4.40% 4.82%
Yield 3.92% NA NA NA
Tax-Equivalent Yield 6.49% NA NA NA
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30-DAY PERIOD 1 Year 5 Years Start of Performance
on September 1, 1993
INSTITUTIONAL
SERVICE SHARES
Total Return NA 3.13% 4.14% 3.73%
Yield 3.67% NA NA NA
Tax-Equivalent Yield 6.08% NA NA NA
- -------------------------------------------------------------------------------------------
</TABLE>
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 calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield and tax-equivalent yield do
not necessarily reflect income actually earned by Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent investment professionals 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>
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. assumes the reinvestment of all capital
gains distributions and income dividends and ranks funds in various fund
categories by making comparative calculations using total return. Total
return takes into account any change in offering price over a specific
period of time. From time to time, the Fund will quote its Lipper ranking
in the "intermediate municipal bond funds" category in advertising and
sales literature.
THE LEHMAN BROTHERS MUNICIPAL INDEX/1-YEAR is an unmanaged index of
municipal bonds issued after January 1, 1991, with a minimum credit rating
of at least Baa, which have been issued as part of a deal of at least $50
million, have a maturity value of at least $3 million and mature in at
least 1, but not more than 2, years. As of January 1996, the index also
includes zero coupon bonds and bonds subject to the Alternative Minimum
Tax.
THE LEHMAN BROTHERS MUNICIPAL INDEX/3 YEAR is an unmanaged index of
municipal bonds issued after January 1, 1991, with a minimum credit rating
of at least Baa, which have been issued as part of a deal of at least $50
million, have a maturity value of at least $3 million, and a maturity range
of 1-5 years. As of January 1996, the index also includes zero coupon bonds
and bonds subject to the Alternative Minimum Tax.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
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 managed 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.
<PAGE>
INVESTMENT RATINGS
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B rating.
CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as gilt
edged. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated BAA are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
<PAGE>
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
PRIME-2--Issuers rated Prime-1 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
<PAGE>
ADDRESSES
FEDERATED SHORT-TERM MUNICIPAL TRUST
Institutional Shares
Institutional Service Shares
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Investment Management Company
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 PUBLIC ACCOUNTANTS
Arthur Andersen LLP
225 Franklin Street
Boston, MA 02110-2812
MANAGEMENT DISCUSSION AND ANALYSIS
Federated Short-Term Municipal Trust
ANNUAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 1999
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
For the 12 months ended June 30, 1999, Federated Short-Term Municipal Trust
produced a total return of 3.39% for the Institutional Shares (IS) and 3.13% for
the Institutional Service Shares (SS). 1 Against the Lipper Short-Term Municipal
Debt Category, the fund's total returns ranked 10th out of 31 funds (IS), and 22
out of 31 funds (SS) for the one-year period ended June 30, 1999.2 Nevertheless,
the fund is managed predominately for tax-exempt income, with the goal of
minimal fluctuation of principal value.3 Over the past 12 months-a period of
rising interest rates-the fund's net asset value per share decreased slightly
from $10.29 to $10.20. The fund produced income dividends exempt from all
federal regular income taxes of approximately $0.4355 per share (IS) and $0.4097
per share (SS). These dividends are equivalent to annualized tax-free
distribution rates of 4.27% (IS) and 4.02% (SS). For investors at the highest
federal tax bracket, these distributions are comparable to taxable rates of
7.07% (IS) and 6.66% (SS).
The fund's 30-day net distribution yields were 4.24% (IS) and 3.99% (SS) while
the 30-day net yields were 3.92% (IS) and 3.67% (SS) on June 30, 1999. The
fund's yield is relatively attractive when compared to municipal bonds of
similar maturity and quality that are currently being issued in the market. For
example, a "AA+" rated two-year maturity municipal bond issued on June 30, 1999,
would have a yield of approximately 3.95%.
1 Performance quoted represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
2 Lipper rankings are based on total return and do not reflect sales charges.
The Institutional Shares were ranked 10 out of 19 and 3 out of 6 in the
short-term municipal debt funds category for the 5- and 10-year periods ended
June 30, 1999. The Institutional Service Shares were ranked 14 out of 19 in the
short-term municipal debt funds category for the 5- year period ended June 30,
1999.
3 Income may be subject to the federal alternative minimum tax and state and
local taxes.
MARKET OVERVIEW
The shape and direction of the short-end of the yield curve (5 years and less)
are highly influenced by the actions of the Federal Reserve Board (the "Fed") as
well as market perceptions regarding future actions by the Fed. Presently, the
Fed is very concerned that tight labor markets and a robust domestic economy
could eventually lead to inflation, and that the economy's risks are shifting to
excessively strong growth. At the end of the reporting period, the Fed proceeded
to confirm these concerns by raising the federal funds target rate by 25 basis
points to 5.0%. Over the one-year period, real GDP has grown at an average of
over 4.0% while unemployment has declined from 4.5% to 4.3%. The Fed remains
concerned that the relatively recent (past several years) pickup in productivity
growth could slow, leading to increased compensation costs that could heighten
the pressure on firms to raise the price of goods and services. The Fed appears
to have a long-term bias to further tighten monetary policy and remove two or
more of the easings of the fall of 1998.
The municipal bond market was influenced by a number of events over the 12-
month period ended June 30, 1999. In the fall of 1998, uncertainties in many of
the world economies resulted in a liquidity crisis affecting both the domestic
and international equity markets, notably the Latin American and Russian
economies. A flight to quality ensued and the Fed eased three times and lowered
the federal funds target rate by 75 basis points. This action settled the
domestic and international markets and provided liquidity to the securities
markets. Since October 1998, when the Treasury bond market experienced its low
yield point (3.85%) over the period, the two-year treasury bond yield has risen
over 165 basis points (1.65%) and currently stands near 5.50%. The magnitude of
the yield increase is analogous to 1994, but has occurred with only one 25 basis
point tightening in 1999 as compared to over 125 basis points in 1994. From this
viewpoint, the fixed-income markets appear to be more bearish about the
prospects for increasing interest rates and inflation than indicated by the
Fed's actions, and certainly much more so than the domestic equity market, which
has largely ignored this possibility.
The supply of municipal bonds brought to market over the period decreased
significantly compared to the prior fiscal year. In the first half of 1999,
issuance declined 22% from the prior year period-mainly due to rising interest
rates-making municipal bond refundings less attractive to issuers. This decline
in supply combined with rising yields for Treasury bonds has resulted in
declining municipal-to-Treasury yield ratios. Consequently, municipal bonds
outperformed Treasury bonds on both a price basis and after-tax total return
basis.
Credit spreads continue to remain in a narrow range when compared with the
benchmark "AAA" municipal yield curve. This general lack of compensation for
buying lower credit quality has resulted in management maintaining a high
quality portfolio with an average credit rating of "AA."
STRATEGY
In what has generally been a more difficult environment for bonds (strong
economy, inflationary concerns, rising interest rates) duration, sector, and
yield curve management continue to be the primary strategy.
Management has concentrated on purchasing bonds in the two- to five-year
maturity range, with more recent purchases occurring on the short end of this
range. Individual security and sector selection are also very important in
making certain that every bond held in the portfolio contains the credit and
structural attributes that meet management's municipal bond market outlook.
Bonds that have rolled into money fund eligible range are often sold and the
proceeds allocated further out the yield curve. This strategy allows us to
maintain or even increase the distribution yield of the portfolio. We also
continue to keep the portfolio's average maturity shorter so as to minimize the
impact of higher interest rates.
MARKET OUTLOOK
Going forward, the activity of the Fed will strongly influence the yield
movement on the short end of the yield curve. We continue to expect interest
rates to edge a little higher, but see no structural factors (inflation,
productivity declines) that would lead to significantly higher rates. Municipal
yields continue to exhibit considerably less volatility than treasury yields.
The volume of municipal bond supply should remain rather low as the number of
potentially refundable bonds diminishes and as interest rates trend higher. A
pick-up in retail demand for tax-exempt bonds is also expected as these
investors find higher yields more attractive than a year ago. Also, any
correction in the equity market is likely to increase investor demand for the
relative safe-haven of municipal bonds. The supply of, and demand for, municipal
bonds is a very important technical factor that determines how municipal bonds
will perform as compared to other fixed income asset classes.
SHAREHOLDER MEETING RESULTS
A Special Meeting of Fund shareholders was held on March 23, 1999. On January
22, 1999, the record date for shareholders voting at the meeting, there were
20,250,789 total outstanding shares. The following items were considered by
shareholders and the results of their voting were as follows:
AGENDA ITEM 1
Election of Trustees: 1
<TABLE>
<CAPTION>
WITHHELD
AUTHORITY
FOR TO VOTE
<S> <C> <C>
Thomas G. Bigley 11,865,449 104,713
John T. Conroy, Jr. 11,865,810 104,352
John F. Cunningham 11,865,810 104,352
Peter E. Madden 11,865,810 104,352
Charles F. Mansfield, Jr. 11,865,810 104,352
John E. Murray, Jr., J.D., S.J.D. 11,865,810 104,352
John S. Walsh 11,865,810 104,352
</TABLE>
1 The following Trustees of the Fund continued their terms as Trustees of
the Fund: John F. Donahue, Lawrence D. Ellis, M.D. and Marjorie P. Smuts.
AGENDA ITEM 2
To ratify the selection of Arthur Andersen LLP as the Fund's Independent Public
Auditors.
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST NON-VOTES
<S> <C> <C>
11,952,241 6,873 11,046
</TABLE>
AGENDA ITEM 3
To approve a revision in the Fund's fundamental investment policy with regard to
diversification of its investments.
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST NON-VOTES
<S> <C> <C>
10,156,074 521,530 1,292,558
</TABLE>
AGENDA ITEM 4
To eliminate the Fund's fundamental investment policy on investing in oil, gas,
and minerals.
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST NON-VOTES
<S> <C> <C>
10,020,921 648,822 1,300,419
</TABLE>
AGENDA ITEM 5
To approve a clarifying amendment to the Fund's Investment Advisory Agreement to
exclude Rule 12b-1 fees and shareholder service fees from the expense cap.
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST NON-VOTES
<S> <C> <C>
11,409,291 472,750 88,120
</TABLE>
AGENDA ITEM 6
To approve an amendment and restatement to the Fund's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Fund, its series and
classes, without shareholder approval.
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST NON-VOTES
<S> <C> <C>
10,017,366 640,914 1,311,882
</TABLE>
INSTITUTIONAL SHARES
GROWTH OF $25,000 INVESTED IN FEDERATED SHORT-TERM MUNICIPAL TRUST
[Graphic representation omitted; see Appendix A.]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED JUNE 30, 1999
<S> <C>
1 Year 3.39%
5 Years 4.40%
10 Years 4.82%
</TABLE>
The graph above illustrates the hypothetical investment of $25,000 3 in the
Federated Short-Term Municipal Trust (Institutional Shares) (the "Fund") from
June 30, 1989 to June 30, 1999, compared to the Lehman Brothers 1 Year Municipal
Index (LB1YRMI),4 , 5 the Lehman Brothers 3 Year Municipal Index (LB3YRMI),4, 5
the Lehman Brothers 1 Year General Obligation Index (LB1YRGOI)4 and the Lehman
Brothers 3 Year General Obligation Index (LB3YRGOI).4
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
August 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 For this illustration, the LB3YRMI began performance on January 1, 1990. The
index was assigned a beginning value of $26,635, the value of the Fund on June
30, 1990.
2 For this illustration, the LB1YRGOI and the LB1YRMI began performance on July
1, 1993. The indices were assigned a beginning value of $31,715, the value of
the Fund on June 30, 1993.
3 The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB1YRMI, the LB3YRMI, the LB1YRGOI and the LB3YRGOI have been
adjusted to reflect reinvestment of dividends on securities in the indices.
4 The LB1YRMI, the LB3YRMI, the LB1YRGOI and the LB3YRGOI are not adjusted to
reflect sales charges, expenses, or other fees that the Securities and Exchange
Commission requires to be reflected in the Fund's performance. These indices are
unmanaged and investments cannot be made in an index.
5 The Fund's Adviser has elected to change the benchmark indices from the
LB1YRGOI and the LB3YRGOI to the LB1YRMI and the LB3YRMI, because the LB1YRMI
and the LB3YRMI are more representative of the securities in which the Fund
invests.
INSTITUTIONAL SERVICE SHARES
GROWTH OF $25,000 INVESTED IN FEDERATED SHORT-TERM MUNICIPAL TRUST
[Graphic representation omitted; see Appendix B.]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED JUNE 30, 1999
<S> <C>
1 Year 3.13%
5 Years 4.14%
Start of Performance (9/1/93) 3.73%
</TABLE>
The graph above illustrates the hypothetical investment of $25,000 1 in the
Federated Short-Term Municipal Trust (Institutional Service Shares) (the "Fund")
from September 1, 1993 (start of performance) to June 30, 1999, compared to the
Lehman Brothers 1 Year Municipal Index (LB1YRMI),2 , 3 the Lehman Brothers 3
Year Municipal Index (LB3YRMI),2, 3 the Lehman Brothers 1 Year General
Obligation Index (LB1YRGOI)2 and the Lehman Brothers 3 Year General Obligation
Index (LB3YRGOI).2
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
August 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB1YRMI, the LB3YRMI, the LB1YRGOI and the LB3YRGOI have been
adjusted to reflect reinvestment of dividends on securities in the indices.
2 The LB1YRMI, the LB3YRMI, the LB1YRGOI and the LB3YRGOI are not adjusted to
reflect sales charges, expenses, or other fees that the Securities and Exchange
Commission requires to be reflected in the Fund's performance. These indices are
unmanaged and investments cannot be made in an index.
3 The Fund's Adviser has elected to change the benchmark indices from the
LB1YRGOI and the LB3YRGOI to the LB1YRMI and the LB3YRMI, because the LB1YRMI
and the LB3YRMI are more representative of the securities in which the Fund
invests.
[Graphic]
Federated
Federated Short-Term Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 313907107
Cusip 313907206
8072507ARS (8/99)
[Graphic]
APPENDIX
A. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left quadrant
of the graph. The Institutional Shares of Federated Short-Term Municipal Trust
are represented by a black solid line. The Lehman Brothers 1 Year General
Obligation Index ("LB1YRGOI") is represented by a dotted line, the Lehman
Brothers 3 Year General Obligation Index ("LB3YRGOI") is represented by a tight
broken line, the Lehman Brothers 1 Year Municipal Index ("LB1YRMI") is
represented by a loose broken line, and the Lehman Brothers 3 Year Municipal
Index ("LB3YRMI") is represented by a gray solid line. The line graph is a
visual representation of a comparison of change in value of a $25,000
hypothetical investment in the Institutional Shares of the fund, the LB1YRGOI,
the LB3YRGOI, the LB1YRMI, and the LB3YRMI. The "x" axis reflects computation
periods from 6/30/89 through 6/30/99. The "y" axis reflects the cost of the
investment, starting at $25,000 and increasing in increments of $5,000 up to
$45,000. The right margin reflects the ending value of the hypothetical
investment in the fund's Institutional Shares, as compared to the LB1YRGOI, the
LB3YRGOI, the LB1YRMI, and the LB3YRMI. The ending values were $40,021, $40,831,
$44,209, $40,772, and $44,254, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the fund's Institutional Shares Average
Annual Total Returns for the one-year, five-year and ten-year periods ended
6/30/99. The total returns were 3.39%, 4.40%, and 4.82%, respectively.
B. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left quadrant
of the graph. The Institutional Service Shares of Federated Short-Term Municipal
Trust are represented by a black solid line. The Lehman Brothers 1 Year General
Obligation Index ("LB1YRGOI") is represented by a dotted line, the Lehman
Brothers 3 Year General Obligation Index ("LB3YRGOI") is represented by a tight
broken line, the Lehman Brothers 1 Year Municipal Index ("LB1YRMI") is
represented by a loose broken line, and the Lehman Brothers 3 Year Municipal
Index ("LB3YRMI") is represented by a gray solid line. The line graph is a
visual representation of a comparison of change in value of a $25,000
hypothetical investment in the Institutional Service Shares of the fund, the
LB1YRGOI, the LB3YRGOI, the LB1YRMI, and the LB3YRMI. The "x" axis reflects
computation periods from 9/1/93 through 6/30/99. The "y" axis reflects the cost
of the investment, starting at $25,000 and increasing in increments of $5,000 up
to $35,000. The right margin reflects the ending value of the hypothetical
investment in the fund's Institutional Service Shares, as compared to the
LB1YRGOI, the LB3YRGOI, the LB1YRMI, and the LB3YRMI. The ending values were
$30,945, $32,186, $32,817, $32,140, and $32,792, respectively. The legend in the
bottom quadrant of the graphic presentation indicates the fund's Institutional
Service Shares Average Annual Total Returns for the one-year and five-year
periods ended 6/30/99, and from the Institutional Service Shares' start of
performance (9/1/93) to 6/30/99. The total returns were 3.13%, 4.14%, and 3.73%,
respectively.
