MANAGEMENT DISCUSSION AND ANALYSIS
Federated U.S. Government Securities Fund: 2-5 Years
ANNUAL REPORT FOR FISCAL YEAR ENDED JANUARY 31, 1999
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
Federated U.S. Government Securities Fund: 2-5 Years (GOV2-5) invests in U.S.
government securities which include U.S. Treasury and agency obligations. Due to
the elimination of the 3-year Treasury note auction following the May 1998
auction, the Fund's benchmark has been changed from the Merrill Lynch 3-Year
Treasury Index 1 to the Merrill Lynch 3-5 Year Treasury Index.1 By investment
policy, the Fund was managed within an average maturity range of 3 to 4 years.
Effective January 1, 1999, the Fund's average duration was managed within 20% of
the duration of the Merrill Lynch 3-5 Year Treasury Index. As a result of
changing the Fund's benchmark, it is likely that the Fund will have a slightly
longer average duration than it has maintained historically. As of January 1,
1999, the Merrill Lynch 3-5 Year Treasury Index had an average maturity and
duration of 3.9 and 3.4 years, respectively, compared to the 3.5 year midpoint
of the previous average maturity range. Although a longer average duration
increases the interest rate risk of the
Fund, the total return potential of the Fund may also increase. Standard
& Poor's has maintained the Fund's "AAAf" credit rating.2
During the first half of the Fund's annual reporting period, fixed income
performance reflected above trend economic growth combined with subdued
inflation. The 3-year Treasury note yield increased from 5.33% at the end of
January 1998 to 5.73% near the end of April, as the short to intermediate
portion of the yield curve transitioned from pricing in a lower to an unchanged
or possibly higher federal funds target rate. The Federal Reserve Board (the
"Fed") maintained its "wait and see" approach due to the counteracting forces of
the underlying strength in the U.S. economy and the potential deflationary
impact of the Asian financial crisis. The federal funds target rate remained at
5.50%, where it had been since the Fed last tightened near the end of March
1997.
1 These indices are unmanaged.
2 "AAAf" rated fund portfolio holdings and counterparties provide extremely
strong protection against losses from credit defaults. This rating, however, is
subject to change and does not remove market risk.
U.S. Treasury yields significantly declined during the second half of the Fund's
reporting period as the global economic and financial crisis worsened and U.S.
equity markets declined. The Russian default and devaluation in mid-August set
off a dramatic change in market sentiment toward the avoidance of credit risk.
As a result, the highest quality, most liquid securities outperformed all others
with on-the-run (most recently auctioned) Treasury securities outperforming
off-the-run Treasury securities to a significant extent. Treasury yields moved
sharply lower and short-term Treasury yields fell to their lowest levels since
early 1994. The Fund took advantage of dramatically wider agency and off-the-run
Treasury yield spreads by increasing exposure to those sectors versus on-the-run
Treasurys. The Fed's monetary policy bias quickly shifted from tightening in
July, to neutral in August, to easing in September in response to disrupted
financial markets. The federal funds target rate was lowered three times from
5.50% to 4.75% by mid-November. The Fed's responsiveness in providing liquidity
calmed the financial markets and reduced the demand for Treasurys as a safe
haven. After hitting a low of 4.16% in mid-October, the 3-year Treasury note
yield ended the Fund's reporting period at 4.63% as market expectations shifted
from aggressive Fed easing toward an unchanged monetary policy. The minutes of
the November Federal Open Market Committee meeting confirmed a shift from an
easing to a neutral bias.
Although the Fund's average maturity/duration has been managed within its
neutral range, its average maturity/duration was extended past its midpoint when
yields rose in late April and shortened below its midpoint when yields fell in
mid-October. The Fund's average maturity/duration ended the reporting period at
3.6/3.2 years. Although the U.S. economy entered 1999 with considerable
momentum, inflation remains subdued and Fed monetary policy is expected to
remain unchanged in the near term. The Fund's net total returns for the year
ended January 31, 1999, for Institutional Shares and Institutional Service
Shares were 7.01% and 6.75%, respectively, 1 compared to 7.46% for the Merrill
Lynch 3-Year Treasury Index and 8.03% for the Merrill Lynch 3-5 Year Treasury
Index.
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.
INSTITUTIONAL SHARES
GROWTH OF $25,000 INVESTED IN
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
[Graphic]
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED JANUARY 31, 1999
1 Year 7.01%
5 Year 5.88%
10 Year 7.77%
Start of Performance (2/18/83) 8.32%
The graph above illustrates the hypothetical investment of $25,000 1 in
the Federated U.S. Government Securities Fund: 2-5 Years (Institutional
Shares) (the "Fund") from January 31, 1989 to January 31, 1999, compared
to the Merrill Lynch 3-5 Year Treasury Index (MLTFYT),2 , 3 the Merrill
Lynch Three Year Treasury Index (MLTYT),2 the Lipper Short U.S. Government
Funds Average (LSUSGFA),4 and the Lipper Short-Intermediate U.S. Government
Funds Average (LSIUSGFA).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 ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARAN TEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated March
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 MLTFYT, the MLTYT, the LSUSGFA, and the LSIUSGFA have been
adjusted to reflect reinvestment of dividends on securities in the indices and
average.
2 The MLTFYT and the MLTYT are not adjusted to reflect sales charges, expenses,
or other fees that the SEC requires to be reflected in the Fund's performance.
The indices are unmanaged, and investments cannot be made in an index.
3 The Fund's Adviser has elected to change the benchmark index from the MLTYT to
the MLTFYT, because the MLTFYT is more representative of the securities in which
the Fund invests.
4 The LSUSGFA and the LSIUSGFA represent the average of the total returns
reported by all of the mutual funds desig nated by Lipper Analytical Services,
Inc. as following in the respective categories, and are not adjusted to reflect
any sales charges. However, these total returns are reported net of expenses or
other fees that the SEC requires to be reflected in a fund's performance.
INSTITUTIONAL SERVICE SHARES
GROWTH OF $25,000 INVESTED IN
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
[Graphic]
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED JANUARY 31, 1999
1 Year 6.75%
5 Year 5.62%
Start of Performance (5/30/92) 6.11%
The graph above illustrates the hypothetical investment of $25,000 1
in the Federated U.S. Government Securities Fund: 2-5 Years
(Institutional Service Shares) (the "Fund") from May 30, 1992
(start of performance) to January 31, 1999, compared to the Merrill
Lynch 3-5 Year Treasury Index (MLTFYT),2 , 3 the Merrill Lynch Three
Year Treasury Index (MLTYT),2 the Lipper Short U.S. Government Funds
Average (LSUSGFA),4 and the Lipper Short-Intermediate U.S. Government
Funds Average (LSIUSGFA).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 ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARAN TEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated March
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 MLTFYT, the MLTYT, the LSUSGFA, and the LSIUSGFA have been
adjusted to reflect reinvestment of dividends on securities in the indices and
average.
2 The MLTFYT and the MLTYT are not adjusted to reflect sales charges, expenses,
or other fees that the SEC requires to be reflected in the Fund's performance.
The indices are unmanaged, and investments cannot be made in an index.
3 The Fund's Adviser has elected to change the benchmark index from the MLTYT to
the MLTFYT, because the MLTFYT is more representative of the securities in which
the Fund invests.
4 The LSUSGFA and the LSIUSGFA represent the average of the total returns
reported by all of the mutual funds desig nated by Lipper Analytical Services,
Inc. as following in the respective categories, and are not adjusted to reflect
any sales charges. However, these total returns are reported net of expenses or
other fees that the SEC requires to be reflected in a fund's performance.
[Graphic]
Federated U.S. Government Securities Fund:2-5 Years
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 31428P103
Cusip 31428P202
8022502ARS (3/99)
[Graphic]
Federated U.S. Government Securities Fund: 2-5 Years
INSTITUTIONAL SHARES
A mutual fund seeking current income by investing in a portfolio of short-
to-intermediate U.S. government securities.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and any representation to the contrary is a criminal offense.
MARCH 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? 6
How is the Fund Sold? 6
How to Purchase Shares 7
How to Redeem Shares 8
Account and Share Information 9
Who Manages the Fund? 10
Financial Information 11
Report of Independent Public Accountants 21
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide current income. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified, short-to-intermediate term portfolio of
direct obligations of the U.S. government, its agencies and instrumentalities.
The Fund maintains a weighted average portfolio duration that is within 20
percent of the weighted average portfolio duration of the Merrill Lynch 3-5 Year
Treasury Index. This index is a market capitalization weighted index including
all U.S. Treasury Notes and Bonds with maturities greater than or equal to three
years and less than five years.
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 factor that may reduce the Fund's returns
is changes in prevailing interest rates. An increase in interest rates may
result in a decrease in the value of Fund Shares.
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
[Graphic]
The bar chart shows the variability of the Fund's Institutional Shares total
returns on a yearly basis.
The Fund's Institutional Shares are not sold subject to a sales charge (load).
Hence, the total returns displayed above are based upon the net asset value.
Within the period shown in the Chart, the Fund's highest quarterly return was
6.64% (quarter ended June 30, 1989). Its lowest quarterly return was 1.51%
(quarter ended March 31, 1994).
The following table represents the Fund's Average Annual Total Return through
12/31/98 as compared to the Merrill Lynch Three Year Treasury Index (MLTYT), the
Merrill Lynch 3-5 Year Treasury Index (MLTFYT), 1 the Lipper Short U.S.
Government Funds Average (LSUSGFA) and the Lipper Short Intermediate U.S.
Government Funds Average (LSIUSGFA).
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
CALENDAR PERIOD ENDED 12/31/98 FUND MLTYT MLTFYT LSUSGFA LSIUSGFA
<S> <C> <C> <C> <C> <C>
1 Year 8.11% 8.28% 8.87% 6.56% 6.61%
5 Years 5.97% 6.20% 6.64% 5.63% 5.39%
10 Years 7.82% 7.88% 8.69% 6.56% 7.48%
</TABLE>
1 The Fund's Adviser has elected to change the benchmark index from the MLTYT to
the MLTFYT, because the MLTFYT is more representative of the securities in which
the Fund invests.
While 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 U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
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 Waiver) 1
Expenses That are Deducted From Fund Assets (as a percentage
of average net assets)
Management Fee 0.40%
Distribution (12b-1) Fee None
Shareholder Services Fee 2 0.25%
Other Expenses 0.14%
Total Annual Fund Operating Expenses 0.79%
1 Although not contractually obligated to do so, the
shareholder services provider waived certain amounts. These
are shown below along with the net expenses the Fund actually
paid for the fiscal year ended January 31, 1999.
Waiver of Fund Expenses 0.24%
Total Actual Annual Fund Operating Expenses (after waiver) 0.55%
2 The shareholder services fee for Institutional Shares has been voluntarily
reduced. This voluntary reduction can be terminated at any time. The shareholder
services fee paid by the Fund (after voluntary reduction) was 0.01% for the year
ended January 31, 1999.
</TABLE>
EXAMPLE
The following 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 are BEFORE
WAIVERS as shown above and remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year $ 81
3 Years $ 252
5 Years $ 439
10 Years $ 978
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of direct obligations of the U.S. government,
its agencies and instrumentalities. The Fund's adviser actively manages its
portfolio, seeking to limit the interest rate risk taken by the Fund while
selecting investments that should offer enhanced returns based upon the
adviser's interest rate outlook.
The adviser manages the Fund's interest rate risk by limiting the
dollar-weighted average duration of its portfolio securities. "Duration"
measures the sensitivity of a security's price to changes in interest rates. The
greater a portfolio's average duration, the greater the change in the
portfolio's value in response to a change in market interest rates. As a matter
of investment policy, under normal market conditions, the adviser limits the
average duration of the portfolio to within 20% of the duration of the Merrill
Lynch 3-5 Year Treasury Index (the "Index"). This Index includes all U.S.
Treasury notes and bonds with maturities of three years or greater and less than
five years. This policy should prevent the volatility of the Fund's Share price
from significantly exceeding the average volatility of short-to-intermediate
term U.S. Treasury securities.
The adviser uses three principal methods to enhance the portfolio's returns as
compared to the Index. First, the adviser tries to extend the portfolio's
average duration when it expects interest rates to fall and shorten the duration
when it expects interest rates to rise. This method seeks to enhance the returns
from favorable interest rate changes and reduce the effect of unfavorable
changes.
Second, in constructing a portfolio with a targeted average duration, the
adviser tries to combine individual portfolio securities with different
durations to take advantage of relative changes in interest rates. Relative
changes in interest rates may occur whenever longer-term interest rates move
more, less, or in a different direction than shorter-term interest rates. As a
general matter, the adviser typically structures the portfolio in one of three
ways:
* A "bulleted" portfolio structure consists primarily of securities with
durations close to the portfolio's average duration. The adviser may use this
structure, for example, when it expects the difference between longer-term and
shorter-term interest rates to increase.
* A "barbelled" portfolio structure consists primarily of securities with
durations above and below the average duration. The adviser may use this
structure, for example, when it expects the difference between longer-term and
shorter-term interest rates to decrease.
* A "laddered" portfolio structure consists of securities with durations above,
below, and at the average duration. The adviser may use this structure, for
example, when it expects longer-term and shorter-term interest rates to change
by approximately the same amount.
Third, the adviser tries to obtain securities issued by agencies and
instrumentalities of the U.S. that it expects to provide better returns than
U.S. Treasury securities of comparable duration. The adviser generally uses
ongoing relative value analysis to compare the current yield differences of
securities to their historical and expected yield differences.
The adviser's interest rate outlook is the most important factor in selecting
the methods used to manage the Fund's portfolio. The adviser formulates its
interest rate outlook by analyzing a variety of factors such as:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve Board's monetary policy; and
* changes in the supply of or demand for U.S. government securities.
In selecting individual securities, the adviser analyzes how the security should
perform in response to expected interest rate changes as compared to other
securities of comparable risk.
As a consequence of this strategy, most of the Fund's portfolio consists of
securities paying interest exempt from state taxation. The Fund also invests in
repurchase agreements for U.S. government securities. Although repurchase
agreements are collateralized by the same types of securities in which the Fund
invests, income from repurchase agreements is not exempt from state taxation.
The Fund uses repurchase agreements to invest cash balances and shorten
duration, so the amount of state taxable income may vary with market conditions.
See "Tax Information" for an explanation of how your investment in the Fund may
be taxed.
What are the Principal Securities in Which the Fund Invests?
The Fund invests primarily in the following types of U.S. government
securities:
U.S. TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
U.S. GOVERNMENT AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority.
What are the Specific Risks of Investing in the Fund?
Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall. This is also referred to as "interest rate risk."
Due to the Fund's average duration policy, it is expected to have less interest
rate risk than Federated U.S. Government Securities Fund: 5-10 Years or
Federated U.S. Government Bond Fund, both of which have longer average durations
than the Fund, and more interest rate risk than Federated U.S. Government
Securities Fund: 1-3 Years, which has a shorter average duration than the Fund.
What Do Shares Cost?
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is
open. When the Fund receives your transaction request in proper form, it is
processed at the next calculated net asset value (NAV).
The Fund does not charge a front-end sales charge. NAV is determined at 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 markets the Shares described in this prospectus to
institutions acting in an agency or fiduciary capacity or to individuals
directly or through 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).
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 or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange 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 the 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, non- retirement
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. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.
Fund distributions are expected to be primarily dividends. 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 total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
SUSAN M. NASON
Susan M. Nason has been the Fund's portfolio manager since September 1991.
She is Vice President of the Fund. Ms. Nason joined Federated in 1987 and
has been a Senior Portfolio Manager and Senior Vice President of the Fund's
investment adviser since 1997. Ms. Nason served as a Portfolio Manager and
Vice President of the investment adviser from 1993 to 1997. Ms. Nason is a
Chartered Financial Analyst and received her M.S.I.A. concentrating in
Finance from Carnegie Mellon University.
ROBERT J. OSTROWSKI
Robert J. Ostrowski has been the Fund's portfolio manager since September
1991. Mr. Ostrowski joined Federated in 1987 as an Investment Analyst and
became a Portfolio Manager in 1990. He has been a Senior Vice President
of the Fund's Adviser since 1997 and served as a Vice President of the
Fund's Adviser from 1996 to 1997. Prior to that, Mr. Ostrowski served as
a Vice President of a Federated advisory subsidiary from 1993 to 1996.
Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S. in
Industrial Administration from Carnegie Mellon University.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
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-Institutional Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 21.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.73 $10.48 $10.74 $10.11 $10.78
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.55 0.59 0.57 0.64 0.54
Net realized and unrealized gain (loss) on investments 0.18 0.25 (0.26) 0.63 (0.67)
Total from investment operations 0.73 0.84 0.31 1.27 (0.13)
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.55) (0.59) (0.57) (0.64) (0.54)
NET ASSET VALUE, END OF PERIOD $10.91 $10.73 $10.48 $10.74 $10.11
TOTAL RETURN 1 7.01% 8.24% 3.01% 12.86% (1.18%)
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.55% 0.54% 0.54% 0.54% 0.54%
Net investment income 5.13% 5.58% 5.42% 6.07% 5.16%
Expense waiver/reimbursement 2 0.24% 0.25% 0.26% 0.25% 0.02%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $739,058 $696,613 $782,056 $871,966 $731,280
Portfolio turnover 126% 71% 99% 117% 163%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
JANUARY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT AGENCIES-11.3%
$ 10,000,000 Federal Farm Credit System, 5.680%, 3/12/2001 $ 10,150,400
7,000,000 Federal Farm Credit System, 5.750%, 2/20/2003 7,156,660
5,000,000 Federal Home Loan Bank System, 5.500%, 1/21/2003 5,067,400
35,000,000 Federal Home Loan Bank System, 5.755%, 6/24/2003 35,888,300
5,625,000 Federal Home Loan Bank System, 5.600%, 9/2/2003 5,733,450
10,000,000 Federal Home Loan Bank System, 5.627%, 9/2/2003 10,203,700
15,000,000 Federal Home Loan Bank System, 5.125%, 9/15/2003 15,043,950
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $88,490,783) 89,243,860
U.S. TREASURY NOTES-84.7%
3,000,000 4.625%, 12/31/2000 3,001,620
75,000,000 6.625%, 3/31/2002 79,293,000
47,000,000 6.625%, 4/30/2002 49,757,020
67,000,000 6.500%, 5/31/2002 70,769,420
25,000,000 6.250%, 6/30/2002 26,246,000
29,500,000 6.000%, 7/31/2002 30,766,140
77,000,000 6.375%, 8/15/2002 81,236,540
30,000,000 5.875%, 9/30/2002 31,216,200
33,000,000 5.750%, 10/31/2002 34,217,370
70,000,000 5.750%, 11/30/2002 72,621,500
35,000,000 5.625%, 12/31/2002 36,191,050
85,000,000 5.500%, 3/31/2003 87,698,750
50,000,000 5.750%, 4/30/2003 52,090,000
14,000,000 5.750%, 8/15/2003 14,632,520
TOTAL U.S. TREASURY NOTES (IDENTIFIED COST $658,392,329) 669,737,130
REPURCHASE AGREEMENT-2.6% 1
20,345,000 Societe Generale, Securities Corp., 4.730%, dated 1/29/1999,
due 2/1/1999 (AT AMORTIZED COST) 20,345,000
TOTAL INVESTMENTS (IDENTIFIED COST $767,228,112) 2 $ 779,325,990
</TABLE>
1 The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio. The investment in the
repurchase agreement is through participation in a joint account with other
Federated funds.
2 The cost of investments for federal tax purposes amounts to $767,228,112. The
net unrealized appreciation of investments on a federal tax basis amounts to
$12,097,878 which is comprised of $12,467,433 appreciation and $369,555
depreciation at January 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($790,281,631) at January 31, 1999.
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
JANUARY 31, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and
tax cost $767,228,112) $ 779,325,990
Income receivable 12,491,552
Receivable for shares sold 2,320,089
TOTAL ASSETS 794,137,631
LIABILITIES:
Payable for shares redeemed $ 860,106
Income distribution payable 1,552,485
Payable to bank 1,387,834
Accrued expenses 55,575
TOTAL LIABILITIES 3,856,000
Net assets for 72,424,257 shares outstanding $ 790,281,631
NET ASSETS CONSIST OF:
Paid in capital $ 789,663,320
Net unrealized appreciation of investments 12,097,878
Accumulated net realized loss on investments (11,481,224)
Undistributed net investment income 1,657
TOTAL NET ASSETS $ 790,281,631
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER
SHARE:
INSTITUTIONAL SHARES:
$739,057,952 / 67,729,868 shares outstanding $10.91
INSTITUTIONAL SERVICE SHARES:
$51,223,679 / 4,694,389 shares outstanding $10.91
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED JANUARY 31, 1999
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 43,076,242
EXPENSES:
Investment advisory fee $ 3,034,022
Administrative personnel and services fee 571,913
Custodian fees 45,066
Transfer and dividend disbursing agent fees and expenses 207,086
Directors'/Trustees' fees 6,961
Auditing fees 13,713
Legal fees 4,394
Portfolio accounting fees 132,180
Distribution services fee-Institutional Service Shares 112,451
Shareholder services fee-Institutional Shares 1,783,815
Shareholder services fee-Institutional Service Shares 112,451
Share registration costs 53,678
Printing and postage 29,495
Insurance premiums 7,515
Miscellaneous 19,490
TOTAL EXPENSES 6,134,230
WAIVERS AND REIMBURSEMENTS:
Waiver of distribution services fee-Institutional Service
Shares $ 103,455)
Waiver of shareholder services fee-Institutional Shares (1,712,463)
Waiver of shareholder services fee-Institutional Service
Shares (4,498)
TOTAL WAIVERS (1,820,416)
Net expenses 4,313,814
Net investment income 38,762,428
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 18,462,945
Net change in unrealized depreciation of investments (5,047,854)
Net realized and unrealized gain on investments 13,415,091
Change in net assets resulting from operations $ 52,177,519
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 38,762,428 $ 41,828,798
Net realized gain/loss on investments ($18,462,945 net gain
and $477,074 net loss, respectively, as computed for federal
tax purposes) 18,462,945 229,718
Net change in unrealized appreciation/depreciation (5,047,854) 16,005,120
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 52,177,519 58,063,636
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
Institutional Shares (36,624,367) (40,228,730)
Institutional Service Shares (2,130,792) (1,605,680)
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS
TO SHAREHOLDERS (38,755,159) (41,834,410)
SHARE TRANSACTIONS:
Proceeds from sale of shares 395,513,622 267,414,601
Net asset value of shares issued to shareholders in payment
of distributions declared 17,839,525 17,158,644
Cost of shares redeemed (369,831,679) (375,312,466)
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 43,521,468 (90,739,221)
Change in net assets 56,943,828 (74,509,995)
NET ASSETS:
Beginning of period 733,337,803 807,847,798
End of period $ 790,281,631 $ 733,337,803
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
JANUARY 31, 1999
ORGANIZATION
Federated U.S. Government Securities Fund: 2-5 Years is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's investment
objective is to provide current income. The Fund offers two classes of
shares: Institutional Shares and Institutional Service Shares.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Short- term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
This difference is due to differing treatments for expiring capital loss
carryforwards.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At January 31, 1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $11,481,224, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2003 $11,004,150
2006 477,074
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when- issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
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 JANUARY 31 1999 1998
INSTITUTIONAL SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 33,291,694 $ 359,916,788 23,359,912 $ 246,238,107
Shares issued to shareholders in payment of distributions
declared 1,494,967 16,132,483 1,500,543 15,786,018
Shares redeemed (32,008,413) (346,233,579) (34,540,057) (362,903,965)
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS 2,778,248 $ 29,815,692 (9,679,602) $ (100,879,840)
<CAPTION>
YEAR ENDED JANUARY 31 1999 1998
INSTITUTIONAL SERVICE SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,294,054 $ 35,596,834 2,011,745 $ 21,176,494
Shares issued to shareholders in payment of distributions
declared 158,154 1,707,042 130,348 1,372,626
Shares redeemed (2,182,036) (23,598,100) (1,179,138) (12,408,501)
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE
SHARE TRANSACTIONS 1,270,172 $ 13,705,776 962,955 $ 10,140,619
NET CHANGE RESULTING FROM SHARE TRANSACTIONS 4,048,420 $ 43,521,468 (8,716,647) $ (90,739,221)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.40% of the Fund's average daily net assets. Effective March 31, 1999, the
Adviser will merge into Federated Investment Management Company (formerly
Federated Advisers).
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors, 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 Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25% of the average daily net assets of the
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive any portion of its fee. FSC 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 Fund will pay FSSC up to 0.25% of average net
assets of the Fund 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.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities for the
period ended January 31, 1999, were as follows:
Purchases $966,345,183
Sales $939,704,353
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund'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 Fund'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 Fund.
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS:
We have audited the accompanying statement of assets and liabilities of
Federated U.S. Government Securities Fund: 2-5 Years (a Massachusetts business
trust), including the schedule of portfolio of investments, as of January 31,
1999, and the related statement of operations for the year then ended, the
statement of changes in net assets, and the financial highlights (see page 12)
for each of 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
January 31, 1999, by correspondence with the custodian. 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 U.S. Government Securities Fund: 2-5 Years as of January 31, 1999, the
results of its operations for the year then ended, the changes in its net
assets, and its financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 26, 1999
Federated U.S. Government Securities Fund: 2-5 Years
INSTITUTIONAL SHARES
MARCH 31, 1999
A Statement of Additional Information (SAI) dated March 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's annual report to shareholders. 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 and other information without charge, call
your investment professional or the Fund at 1-800-341-7400.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
[Graphic]
Federated U.S. Government Securities Fund: 2-5 Years
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. 811-3387
Cusip 31428P103
8022502A-IS (3/99)
[Graphic]
Federated U.S. Government Securities Fund: 2-5 Years
INSTITUTIONAL SERVICE SHARES
A mutual fund seeking current income by investing in a portfolio of short-
to-intermediate U. S. government securities.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and any representation to the contrary is a criminal offense.
MARCH 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? 6
What are the Specific Risks of Investing in the Fund? 6
What Do Shares Cost? 6
How is the Fund Sold? 7
How to Purchase Shares 7
How to Redeem and Exchange Shares 8
Account and Share Information 10
Who Manages the Fund? 11
Financial Information 12
Report of Independent Public Accountants 22
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide current income. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified, short-to-intermediate term portfolio of
direct obligations of the U.S. government, its agencies and instrumentalities.
The Fund maintains a weighted average portfolio duration that is within 20
percent of the weighted average portfolio duration of the Merrill Lynch 3-5 Year
Treasury Index. This index is a market capitalization weighted index including
all U.S. Treasury Notes and Bonds with maturities greater than or equal to three
years and less than five years.
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 factor that may reduce the Fund's returns
is changes in prevailing interest rates. An increase in interest rates may
result in a decrease in the value of Fund Shares.
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
[Graphic]
The bar chart shows the variability of the Fund's Institutional Service Shares
total returns on a yearly basis.
The Fund's Institutional Service Shares are not sold subject to a sales charge
(load). Hence, the total returns displayed above are based upon the net asset
value.
Within the period shown in the Chart, the Fund's highest quarterly return was
4.66% (quarter ended September 30, 1998). Its lowest quarterly return was 1.57%
(quarter ended March 31, 1994).
The following table represents the Fund's Average Annual Total Return through
12/31/98 as compared to the Merrill Lynch Three Year Treasury Index (MLTYT), the
Merrill Lynch 3-5 Year Treasury Index (MLTFYT), 1 the Lipper Short U.S.
Government Funds Average (LSUSGFA) and the Lipper Short Intermediate U.S.
Government Funds Average ( LSIUSGFA).
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
CALENDAR PERIOD ENDED 12/31/98 FUND MLTYT MLTFYT LSUSGFA LSIUSGFA
<S> <C> <C> <C> <C> <C>
1 Year 7.84% 8.28% 8.87% 6.56% 6.61%
5 Years 5.71% 6.20% 6.64% 5.63% 5.39%
Start of Performance 2 6.14% 6.59% 7.31% 5.15% 5.99%
</TABLE>
1 The Fund's Adviser has elected to change the benchmark index from the MLTYT to
the MLTFYT, because the MLTFYT is more representative of the securities in which
the Fund invests.
2 The Fund's Institutional Service Shares start of performance date was May 30,
1992.
While 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 U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
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>
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SHAREHOLDER FEES
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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 0.40%
Distribution (12b-1) Fee 2 0.25%
Shareholder Services Fee 3 0.25%
Other Expenses 0.14%
Total Annual Fund Operating Expenses 1.04%
1 Although not contractually obligated to do so, the
distributor and shareholder services provider waived certain
amounts. These are shown below along with the net expenses
the Fund actually paid for the fiscal year ended January 31,
1999.
Waiver of Fund Expenses 0.24%
Total Actual Annual Fund Operating Expenses (after waivers) 0.80%
2 The distribution (12b-1) fee for Institutional Service Shares has been
voluntarily reduced. This voluntary reduction can be terminated at any time. The
distribution (12b-1) fee paid by the Fund (after the voluntary reduction) was
0.02% for the year ended January 31, 1999. 3 The shareholder services fee for
Institutional Service Shares has been voluntarily reduced. This voluntary
reduction can be terminated at any time. The shareholder services fee paid by
the Fund (after the voluntary reduction) was 0.24% for the year ended January
31, 1999.
</TABLE>
EXAMPLE
The following 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 are BEFORE WAIVERS as shown above and remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year $ 106
3 Years $ 331
5 Years $ 574
10 Years $ 1,271
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of direct obligations of the U.S. government,
its agencies and instrumentalities. The Fund's adviser actively manages its
portfolio, seeking to limit the interest rate risk taken by the Fund while
selecting investments that should offer enhanced returns based upon the
adviser's interest rate outlook.
The adviser manages the Fund's interest rate risk by limiting the
dollar-weighted average duration of its portfolio securities. "Duration"
measures the sensitivity of a security's price to changes in interest rates. The
greater a portfolio's average duration, the greater the change in the
portfolio's value in response to a change in market interest rates. As a matter
of investment policy, under normal market conditions, the adviser limits the
average duration of the portfolio to within 20% of the duration of the Merrill
Lynch 3-5 Year Treasury Index (the "Index"). This Index includes all U.S.
Treasury notes and bonds with maturities of three years or greater and less than
five years. This policy should prevent the volatility of the Fund's Share price
from significantly exceeding the average volatility of short-to-intermediate
term U.S. Treasury securities.
The adviser uses three principal methods to enhance the portfolio's returns as
compared to the Index. First, the adviser tries to extend the portfolio's
average duration when it expects interest rates to fall and shorten the duration
when it expects interest rates to rise. This method seeks to enhance the returns
from favorable interest rate changes and reduce the effect of unfavorable
changes.
Second, in constructing a portfolio with a targeted average duration, the
adviser tries to combine individual portfolio securities with different
durations to take advantage of relative changes in interest rates. Relative
changes in interest rates may occur whenever longer-term interest rates move
more, less, or in a different direction than shorter-term interest rates. As a
general matter, the adviser typically structures the portfolio in one of three
ways:
* A "bulleted" portfolio structure consists primarily of securities with
durations close to the portfolio's average duration. The adviser may use this
structure, for example when it expects the difference between longer-term and
shorter-term interest rates to increase.
* A "barbelled" portfolio structure consists primarily of securities with
durations above and below the average duration. The adviser may use this
structure, for example, when it expects the difference between longer-term and
shorter-term interest rates to decrease.
* A "laddered" portfolio structure consists of securities with durations above,
below, and at the average duration. The adviser may use this structure, for
example, when it expects longer-term and shorter-term interest rates to change
by approximately the same amount.
Third, the adviser tries to obtain securities issued by agencies and
instrumentalities of the U.S. that it expects to provide better returns than
U.S. Treasury securities of comparable duration. The adviser generally uses
ongoing relative value analysis to compare the current yield differences of
securities to their historical and expected yield differences.
The adviser's interest rate outlook is the most important factor in selecting
the methods used to manage the Fund's portfolio. The adviser formulates its
interest rate outlook by analyzing a variety of factors such as:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve Board's monetary policy; and
* changes in the supply of or demand for U.S. government securities.
In selecting individual securities, the adviser analyzes how the security should
perform in response to expected interest rate changes as compared to other
securities of comparable risk.
As a consequence of this strategy, most of the Fund's portfolio consists of
securities paying interest exempt from state taxation. The Fund also invests in
repurchase agreements for U.S. government securities. Although repurchase
agreements are collateralized by the same types of securities in which the Fund
invests, income from repurchase agreements is not exempt from state taxation.
The Fund uses repurchase agreements to invest cash balances and shorten
duration, so the amount of state taxable income may vary with market conditions.
See "Tax Information" for an explanation of how your investment in the Fund may
be taxed.
What are the Principal Securities in Which the Fund Invests?
The Fund invests primarily in the following types of U.S. government
securities:
U.S. TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
U.S. GOVERNMENT AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority.
What are the Specific Risks of Investing in the Fund?
Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall. This is also referred to as "interest rate risk."
Due to the Fund's average duration policy, it is expected to have less interest
rate risk than Federated U.S. Government Securities Fund: 5-10 Years or
Federated U.S. Government Bond Fund, both of which have longer average durations
than the Fund, and more interest rate risk than Federated U.S. Government
Securities Fund: 1-3 Years, which has a shorter average duration than the Fund.
What Do Shares Cost?
You can purchase, redeem, or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form,
it is processed at the next calculated net asset value (NAV).
The Fund does not charge a front-end sales charge. NAV is determined at 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 markets the Shares described in this prospectus to retail
and private banking customers of financial institutions or to individuals
directly or through investment professionals.
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, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange 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).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
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 and Exchange Shares
You should redeem or exchange 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 or exchange 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 or exchange 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 or exchange 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 or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
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;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* IF EXCHANGING (TRANSFERRING) into another fund with a different shareholder
registration.
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.
EXCHANGE PRIVILEGES
You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment Adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
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 or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange 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, redemptions and exchanges. 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 the 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, non- retirement
accounts may be closed if redemptions or exchanges 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. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.
Fund distributions are expected to be primarily dividends. Redemptions and
exchanges 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 total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
SUSAN M. NASON
Susan M. Nason has been the Fund's portfolio manager since September 1991.
She is Vice President of the Fund. Ms. Nason joined Federated in 1987 and
has been a Senior Portfolio Manager and Senior Vice President of the Fund's
Adviser since 1997. Ms. Nason served as a Portfolio Manager and Vice
President of the Adviser from 1993 to 1997. Ms. Nason is a Chartered
Financial Analyst and received her M.S.I.A. concentrating in Finance from
Carnegie Mellon University.
ROBERT J. OSTROWSKI
Robert J. Ostrowski has been the Fund's portfolio manager since September
1991. Mr. Ostrowski joined Federated in 1987 as an Investment Analyst and
became a Portfolio Manager in 1990. He has been a Senior Vice President of
the Fund's Adviser since 1997 and served as a Vice President of the Fund's
Adviser from 1996 to 1997. Prior to that, Mr. Ostrowski served as a Vice
President of a Federated advisory subsidiary from 1993 to 1996.
Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S. in
Industrial Administration from Carnegie Mellon University.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
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-Institutional Service Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 22.
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<CAPTION>
YEAR ENDED JANUARY 31 1999 1998 1997 1996 1995
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NET ASSET VALUE, BEGINNING OF PERIOD $10.73 $10.48 $10.74 $10.11 $10.78
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.54 0.56 0.54 0.61 0.51
Net realized and unrealized gain (loss) on investments 0.18 0.25 (0.26) 0.63 (0.67)
TOTAL FROM INVESTMENT OPERATIONS 0.72 0.81 0.28 1.24 (0.16)
LESS DISTRIBUTIONS:
Distributions from net investment income (0.54) (0.56) (0.54) (0.61) (0.51)
NET ASSET VALUE, END OF PERIOD $10.91 $10.73 $10.48 $10.74 $10.11
TOTAL RETURN 1 6.75% 7.97% 2.76% 12.58% (1.42%)
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.80% 0.79% 0.79% 0.79% 0.79%
Net investment income 4.88% 5.33% 5.16% 5.85% 5.00%
Expense waiver/reimbursement 2 0.24% 0.25% 0.26% 0.25% 0.21%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $51,224 $36,725 $25,791 $32,317 $33,117
Portfolio turnover 126% 71% 99% 117% 163%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
JANUARY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
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U.S. GOVERNMENT AGENCIES-11.3%
$ 10,000,000 Federal Farm Credit System, 5.680%, 3/12/2001 $ 10,150,400
7,000,000 Federal Farm Credit System, 5.750%, 2/20/2003 7,156,660
5,000,000 Federal Home Loan Bank System, 5.500%, 1/21/2003 5,067,400
35,000,000 Federal Home Loan Bank System, 5.755%, 6/24/2003 35,888,300
5,625,000 Federal Home Loan Bank System, 5.600%, 9/2/2003 5,733,450
10,000,000 Federal Home Loan Bank System, 5.627%, 9/2/2003 10,203,700
15,000,000 Federal Home Loan Bank System, 5.125%, 9/15/2003 15,043,950
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $88,490,783) 89,243,860
U.S. TREASURY NOTES-84.7%
3,000,000 4.625%, 12/31/2000 3,001,620
75,000,000 6.625%, 3/31/2002 79,293,000
47,000,000 6.625%, 4/30/2002 49,757,020
67,000,000 6.500%, 5/31/2002 70,769,420
25,000,000 6.250%, 6/30/2002 26,246,000
29,500,000 6.000%, 7/31/2002 30,766,140
77,000,000 6.375%, 8/15/2002 81,236,540
30,000,000 5.875%, 9/30/2002 31,216,200
33,000,000 5.750%, 10/31/2002 34,217,370
70,000,000 5.750%, 11/30/2002 72,621,500
35,000,000 5.625%, 12/31/2002 36,191,050
85,000,000 5.500%, 3/31/2003 87,698,750
50,000,000 5.750%, 4/30/2003 52,090,000
14,000,000 5.750%, 8/15/2003 14,632,520
TOTAL U.S. TREASURY NOTES (IDENTIFIED COST $658,392,329) 669,737,130
REPURCHASE AGREEMENT-2.6% 1
20,345,000 Societe Generale, Securities Corp., 4.730%, dated 1/29/1999,
due 2/1/1999 (AT AMORTIZED COST) 20,345,000
TOTAL INVESTMENTS (IDENTIFIED COST $767,228,112) 2 $ 779,325,990
</TABLE>
1 The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio. The investment in the
repurchase agreement is through participation in a joint account with other
Federated funds.
2 The cost of investments for federal tax purposes amounts to $767,228,112. The
net unrealized appreciation of investments on a federal tax basis amounts to
$12,097,878 which is comprised of $12,467,433 appreciation and $369,555
depreciation at January 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($790,281,631) at January 31, 1999.
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
JANUARY 31, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and
tax cost $767,228,112) $ 779,325,990
Income receivable 12,491,552
Receivable for shares sold 2,320,089
TOTAL ASSETS 794,137,631
LIABILITIES:
Payable for shares redeemed $ 860,106
Income distribution payable 1,552,485
Payable to bank 1,387,834
Accrued expenses 55,575
TOTAL LIABILITIES 3,856,000
Net assets for 72,424,257 shares outstanding $ 790,281,631
NET ASSETS CONSIST OF:
Paid in capital $ 789,663,320
Net unrealized appreciation of investments 12,097,878
Accumulated net realized loss on investments (11,481,224)
Undistributed net investment income 1,657
TOTAL NET ASSETS $ 790,281,631
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER
SHARE:
INSTITUTIONAL SHARES:
$739,057,952 / 67,729,868 shares outstanding $10.91
INSTITUTIONAL SERVICE SHARES:
$51,223,679 / 4,694,389 shares outstanding $10.91
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED JANUARY 31, 1999
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 43,076,242
EXPENSES:
Investment advisory fee $ 3,034,022
Administrative personnel and services fee 571,913
Custodian fees 45,066
Transfer and dividend disbursing agent fees and expenses 207,086
Directors'/Trustees' fees 6,961
Auditing fees 13,713
Legal fees 4,394
Portfolio accounting fees 132,180
Distribution services fee-Institutional Service Shares 112,451
Shareholder services fee-Institutional Shares 1,783,815
Shareholder services fee-Institutional Service Shares 112,451
Share registration costs 53,678
Printing and postage 29,495
Insurance premiums 7,515
Miscellaneous 19,490
TOTAL EXPENSES 6,134,230
WAIVERS AND REIMBURSEMENTS:
Waiver of distribution services fee-Institutional Service
Shares $ (103,455)
Waiver of shareholder services fee-Institutional Shares (1,712,463)
Waiver of shareholder services fee-Institutional Service
Shares (4,498)
TOTAL WAIVERS (1,820,416)
Net expenses 4,313,814
Net investment income 38,762,428
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 18,462,945
Net change in unrealized depreciation of investments (5,047,854)
Net realized and unrealized gain on investments 13,415,091
Change in net assets resulting from operations $ 52,177,519
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 38,762,428 $ 41,828,798
Net realized gain/loss on investments ($18,462,945 net gain
and $477,074 net loss, respectively, as computed for federal
tax purposes) 18,462,945 229,718
Net change in unrealized appreciation/depreciation (5,047,854) 16,005,120
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 52,177,519 58,063,636
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
Institutional Shares (36,624,367) (40,228,730)
Institutional Service Shares (2,130,792) (1,605,680)
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS
TO SHAREHOLDERS (38,755,159) (41,834,410)
SHARE TRANSACTIONS:
Proceeds from sale of shares 395,513,622 267,414,601
Net asset value of shares issued to shareholders in payment
of distributions declared 17,839,525 17,158,644
Cost of shares redeemed (369,831,679) (375,312,466)
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 43,521,468 (90,739,221)
Change in net assets 56,943,828 (74,509,995)
NET ASSETS:
Beginning of period 733,337,803 807,847,798
End of period $ 790,281,631 $ 733,337,803
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
JANUARY 31, 1999
ORGANIZATION
Federated U.S. Government Securities Fund: 2-5 Years is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's investment
objective is to provide current income. The Fund offers two classes of
shares: Institutional Shares and Institutional Service Shares.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
This difference is due to differing treatments for expiring capital loss
carryforwards.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At January 31, 1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $11,481,224, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2003 $11,004,150
2006 477,074
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when- issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
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 JANUARY 31 1999 1998
INSTITUTIONAL SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 33,291,694 $ 359,916,788 23,359,912 $ 246,238,107
Shares issued to shareholders in payment of distributions
declared 1,494,967 16,132,483 1,500,543 15,786,018
Shares redeemed (32,008,413) (346,233,579) (34,540,057) (362,903,965)
NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS 2,778,248 $ 29,815,692 (9,679,602) $ (100,879,840)
<CAPTION>
YEAR ENDED JANUARY 31 1999 1998
INSTITUTIONAL SERVICE SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C>
Shares sold 3,294,054 $ 35,596,834 2,011,745 $ 21,176,494
Shares issued to shareholders in payment of distributions
declared 158,154 1,707,042 130,348 1,372,626
Shares redeemed (2,182,036) (23,598,100) (1,179,138) (12,408,501)
NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE
SHARE TRANSACTIONS 1,270,172 $ 13,705,776 962,955 $ 10,140,619
NET CHANGE RESULTING FROM SHARE TRANSACTIONS 4,048,420 $ 43,521,468 (8,716,647) $ (90,739,221)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.40% of the Fund's average daily net assets. Effective March 31, 1999, the
Adviser will merge into Federated Investment Company (formerly Federated
Adviser).
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors, 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 Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25% of the average daily net assets of the
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive any portion of its fee. FSC 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 Fund will pay FSSC up to 0.25% of average net
assets of the Fund 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.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities for the
period ended January 31, 1999, were as follows:
Purchases $966,345,183
Sales $939,704,353
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund'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 Fund'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 Fund.
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS:
We have audited the accompanying statement of assets and liabilities of
Federated U.S. Government Securities Fund: 2-5 Years (a Massachusetts business
trust), including the schedule of portfolio of investments, as of January 31,
1999, and the related statement of operations for the year then ended, the
statement of changes in net assets, and the financial highlights (see page 13)
for each of 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
January 31, 1999, by correspondence with the custodian. 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 U.S. Government Securities Fund: 2-5 Years as of January 31, 1999, the
results of its operations for the year then ended, the changes in its net
assets, and its financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 26, 1999
Federated U.S. Government Securities Fund: 2-5 Years
INSTITUTIONAL SERVICE SHARES
MARCH 31, 1999
A Statement of Additional Information (SAI) dated March 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is available in the Fund's annual report to shareholders. 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 and other information without charge, call
your investment professional or the Fund at 1-800-341-7400.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
[Graphic]
Federated U.S. Government Securities Fund: 2-5 Years
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. 811-3387
Cusip 31428P202
8022502A-SS (3/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated U.S. Government
Securities Fund: 2-5 Years
[Graphic]
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 U.S. Government Securities Fund:
2-5 Years, dated March 31, 1999. Obtain the prospectuses without charge by
calling 1-800-341-7400.
MARCH 31, 1999
[Graphic]
Federated U.S. Government
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
8022502B (3/99)
CONTENTS
How is the Fund Organized? 1
Investment Strategy 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 3
How is the Fund Sold? 4
Exchanging Securities for Shares 4
Subaccounting Services 4
Redemption in Kind 4
Massachusetts Partnership Law 5
Account and Share Information 5
Tax Information 5
Who Manages and Provides Services to the Fund? 6
How Does the Fund Measure Performance? 9
Who is Federated Investors, Inc.? 10
Addresses 12
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 December 10,
1981. The Fund changed its name from Federated Intermediate Government Trust to
Federated U.S. Government Securities Fund: 2-5 Years on April 13, 1995. The
Fund's investment adviser is Federated Investment Management Company (Adviser).
Effective March 31, 1999, Federated Management, Adviser to the Fund, merged into
Federated Investment Management Company (formerly Federated Advisers).
Investment Strategy
The Fund's dollar-weighted average portfolio maturity may not exceed five years.
Further, the Fund is required to maintain a minimum weighted average portfolio
maturity of two years. The Adviser manages the portfolio by targeting a
dollar-weighted average duration that is consistent with the Fund's maturity
constraints because duration is a more accurate and useful measure of interest
rate risk.
Duration is a measure of the average time to receipt of cash from a bond. The
only instance in which duration is equal to time-to-maturity is a zero- coupon
bond; where all cash is received at maturity. In the case of a coupon bond, cash
is received at least annually or semi-annually. In the case of a coupon bond
with a five-year maturity, the average time to receipt of cash should be between
one and five. The formula for duration places more weight on the dates when cash
flows are relatively large. Since in the case of the five-year coupon bond, most
of the cash is received at the end of year five, the average time to receipt of
cash will be closer to five than to one.
The Adviser selects securities used to lengthen or shorten the portfolio's
average duration by comparing the returns currently offered by different
investments to their historical and expected returns.
Securities in Which the Fund Invests
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
FIXED INCOME SECURITIES
U.S. government securities pay interest at a specified rate. The rate may
be a fixed percentage of the principal or adjusted periodically. In
addition, the issuer of the security must repay the principal amount of the
security, normally within a specified time.
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 securities in which the Fund invests:
U.S. 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.
U.S. GOVERNMENT 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 government 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.
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.
There are many forms of zero coupon securities. Some are issued at a discount
and are referred to as zero coupon or capital appreciation bonds. Others are
created from interest bearing bonds by separating the right to receive the
bond's coupon payments from the right to receive the bond's principal due at
maturity, a process known as coupon stripping. Treasury STRIPs are the most
common forms of stripped zero coupon securities.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a U.S. government
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.
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 market
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 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. This may
cause the Fund to miss favorable trading opportunities or to realize losses on
special transactions.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of affiliated money market funds,
as an efficient means of carrying out its investment policies and managing its
uninvested cash.
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.
INVESTMENT RISKS
BOND MARKET RISKS
* Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.
* Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
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.
* 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.
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.
FUNDAMENTAL INVESTMENT POLICIES
The Fund will invest only in U.S. government securities with remaining
maturities of five years or less. The term "U.S. government securities" as used
herein refers to (1) obligations of the United States maturing in five years or
less and (2) evidences of indebtedness issued or fully guaranteed as to
principal and interest by Federal Home Loan Banks, the Federal National Mortgage
Association, the Government National Mortgage Association, Banks for
Cooperatives (including the Central Bank for Cooperatives), Federal Land Banks,
Federal Intermediate Credit Banks, The Tennessee Valley Authority, The
Export-Import Bank of the United States, The Commodity Credit Corporation, The
Federal Financing Bank, The Student Loan Marketing Association, The Federal Home
Loan Mortgage Association, The Federal Home Loan Mortgage Association or the
National Credit Union Administration. No assurance can be given that the U.S.
government will provide financial support to U.S. government agencies or
instrumentalities as described above in the future, other than as set forth
above, since it is not obligated to do so by law. The Fund may enter into
repurchase agreements with financial institutions such as banks and brokers. The
Fund may also purchase U.S. government securities on a when-issued or delayed
delivery basis.
Portfolio transactions are undertaken principally to accomplish the Fund's
objective in relation to movement in the general level of interest rates and to
invest new money obtained from the sale of Fund Shares and to meet redemptions
of Fund Shares. The Fund is free to dispose of portfolio securities at any time
when changes in circumstances or conditions make such a move desirable in light
of the investment objective and policies heretofore stated. The Fund will not
attempt to achieve or be limited to a predetermined rate of portfolio turnover.
Such turnover will be incidental to transactions undertaken with a view to
achieve the investment objective.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on margin
but may obtain such short-term credits as may be necessary for clearance of
purchases and sales of portfolio securities.
BORROWING MONEY
The Fund will not borrow money except as a temporary measure for extraordinary
or emergency purposes and then only in amounts not in excess of 5% of the value
of its total assets or in an amount up to one-third of the value of its total
assets, including the amount borrowed, in order to meet redemption requests
without immediately selling portfolio securities. This borrowing provision is
not for investment leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. However,
such use will not assure that portfolio securities will not be liquidated at a
disadvantageous time.
Interest paid by the Fund on borrowed funds will not be available for
investment. While borrowings are outstanding, no portfolio securities may be
purchased by the Fund.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, it may mortgage, pledge, or hypothecate
assets having a market value not exceeding 10% of the value of total assets at
the time of the borrowing.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or hold
U.S. government securities, including repurchase agreements, permitted by its
investment objective and policies.
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 "vote of a
majority of its outstanding voting securities," as defined by the Investment
Company Act. Shareholders will be notified before any material change in these
limitations becomes effective.
As a matter of investment practice, which can be changed without shareholder
approval, the Fund will not invest more than 15% of its total assets in
securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund did not borrow money or pledge securities in excess of 5% of the value
of its total assets during the last fiscal year and has no present intent to do
so in the coming fiscal year.
As a matter of operating policy, the Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
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;
* 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.
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?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
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)
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.
Exchanging Securities for Shares
You may contact the Distributor to request a purchase of Shares in exchange for
securities you own. The Fund reserves the right to determine whether to accept
your securities and the minimum market value to accept. The Fund will value your
securities in the same manner as it values its assets. This exchange is treated
as a sale of your securities for federal tax purposes.
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 Trust 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. 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 of all series entitled to vote.
As of January 7, 1999, the following shareholder owned of record, beneficially,
or both, 5% or more of outstanding Shares: Charles Schwab & Co. Inc., San
Francisco, CA owned approximately 8,160,731 Shares (12.29%) of the outstanding
Institutional Shares of the Fund.
As of January 7, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: Charles Schwab & Co. Inc., San
Francisco, CA owned approximately 312,945 Shares (6.45%); and Chittenden Bank,
Burlington, VT owned approximately 335,309 (6.91%) Shares of the outstanding
Institutional Service Shares of the Fund.
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Fund,
principal occupations for the past five years and other notable positions held,
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 Fund is comprised of one fund, and the
Federated Fund Complex is comprised of 56 investment companies, whose investment
advisers are affiliated with the Fund's Adviser.
As of January 7, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Institutional or Institutional Service Shares.
An asterisk (*) denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940. The following symbol (#) denotes
a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.
<TABLE>
<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION COMPENSATION
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND FROM FUND
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer and Director or Trustee of the $0 $0 for the
Birth Date: July 28, 1924 Federated Fund Complex; Chairman and Director, Federated Fund and 54
Federated Investors Tower Investors, Inc.; Chairman and Trustee, Federated Investment other investment
1001 Liberty Avenue Management Company; Chairman and Director, Federated companies in
Pittsburgh, PA Investment Counseling, and Federated Global Investment the Fund Complex
CHAIRMAN AND TRUSTEE Management Corp.; Chairman, Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of the Federated Fund Complex; Director, $1,497.59 $113,860.22
Birth Date: February 3, 1934 Member of Executive Committee, Children's Hospital of for the Fund
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst & Young LLP; and 54 other
Pittsburgh, PA Director, MED 3000 Group, Inc.; Director, Member of investment
TRUSTEE Executive Committee, University of Pittsburgh. companies in
the Fund Complex
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund Complex; $1,647.60 $125,264.48
Birth Date: June 23, 1937 President, Investment Properties Corporation; Senior Vice for the Fund
Wood/IPC Commercial Dept. President, John R. Wood and Associates, Inc., Realtors; and 54 other
John R. Wood Associates, Partner or Trustee in private real estate ventures in investment
Inc. Realtors Southwest Florida; formerly: President, Naples Property companies in
3255 Tamiami Trial North Management, Inc. and Northgate Village Development the Fund Complex
Naples, FL Corporation.
TRUSTEE
NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund Complex; formerly: $0 $47,958.02
Birth Date: September 3, 1939 Partner, Andersen Worldwide SC. for the Fund
175 Woodshire Drive and 29 other
Pittsburgh, PA investment
TRUSTEE companies in
the Fund Complex
WILLIAM J. COPELAND Director or Trustee of the Federated Fund Complex; Director $1,647.60 $125,264.48
Birth Date: July 4, 1918 and Member of the Executive Committee, Michael Baker, Inc.; for the Fund
One PNC Plaza-23rd Floor formerly: Vice Chairman and Director, PNC Bank, N.A. and PNC and 54 other
Pittsburgh, PA Bank Corp.; Director, Ryan Homes, Inc. investment
TRUSTEE Previous Positions: Director, United Refinery; Director, companies in
Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, the Fund Complex
Pittsburgh Civic Light Opera.
JOHN F. CUNNINGHAM## Director or Trustee of some of the Federated Funds; $0 $0 for the Fund
Birth Date: March 5, 1943 Chairman, President and Chief Executive Officer, Cunningham and 26 other
353 El Brillo Way & Co., Inc. ; Trustee Associate, Boston College; Director, investment
Palm Beach, FL EMC Corporation; formerly: Director, Redgate Communications. Companies in
TRUSTEE the Fund Complex
Previous Positions: Chairman of the Board and Chief
Executive Officer, Computer Consoles, Inc.; President and
Chief Operating Officer, Wang Laboratories; Director, First
National Bank of Boston; Director, Apollo Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund Complex; Professor $1,497.59 $113,860.22
Birth Date: October 11, 1932 of Medicine, University of Pittsburgh; Medical Director, for the Fund and
3471 Fifth Avenue University of Pittsburgh Medical Center-Downtown; 54 other
Suite 1111 Hematologist, Oncologist, and Internist, University of investment
Pittsburgh, PA Pittsburgh Medical Center; Member, National Board of companies in
TRUSTEE Trustees, Leukemia Society of America. the Fund Complex
<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION COMPENSATION
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND FROM FUND
<S> <C> <C> <C>
PETER E. MADDEN Director or Trustee of the Federated Fund Complex; formerly: $1,497.59 $113,860.22
Birth Date: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; for the Fund
One Royal Palm Way President, State Street Bank and Trust Company and State and 54 other
100 Royal Palm Way Street Corporation. investment
Palm Beach, FL Previous Positions: Director, VISA USA and VISA companies in
TRUSTEE International; Chairman and Director, Massachusetts Bankers the Fund Complex
Association; Director, Depository Trust Corporation.
JOHN E. MURRAY, JR., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; $1,497.59 $113,860.22
Birth Date: December 20, 1932 President, Law Professor, Duquesne University; Consulting for the Fund
President, Duquesne University Partner, Mollica & Murray. And 54 other
Pittsburgh, PA Previous Positions: Dean and Professor of Law, University of investment
TRUSTEE Pittsburgh School of Law; Dean and Professor of Law, companies in
Villanova University School of Law. the Fund Complex
MARJORIE P. SMUTS Director or Trustee of the Federated Fund Complex; Public $1,497.59 $113,860.22
Birth Date: June 21, 1935 Relations/Marketing/Conference Planning. For the Fund
4905 Bayard Street Previous Positions: National Spokesperson, Aluminum Company and 54 other
Pittsburgh, PA of America; business owner. investment
TRUSTEE companies in
the Fund Complex
JOHN S. WALSH++ Director or Trustee of some of the Federated Funds; $0 $0 for the Fund
Birth Date: November 28, 1957 President and Director, Heat Wagon, Inc.; President and and 23 other
2007 Sherwood Drive Director, Manufacturers Products, Inc.; President, Portable investment
Valparaiso, IN Heater Parts, a division of Manufacturers Products, Inc.; companies in
TRUSTEE Director, Walsh & Kelly, Inc.; formerly: Vice President, the Fund Complex
Walsh & Kelly, Inc.
GLEN R. JOHNSON Trustee, Federated Investors, Inc.; staff member, Federated $0 $0 for the Fund
Birth Date: May 2, 1929 Securities Corp. and 8 other
Federated Investors Tower investment
1001 Liberty Avenue companies in
Pittsburgh, PA the Fund Complex
PRESIDENT
J. CHRISTOPHER DONAHUE+ President or Executive Vice President of the Federated Fund $0 $0 for the Fund
Birth Date: April 11, 1949 Complex; Director or Trustee of some of the Funds in the and 16 other
Federated Investors Tower Federated Fund Complex; President and Director, Federated investment
1001 Liberty Avenue Investors, Inc.; President and Trustee, Federated Investment companies in
Pittsburgh, PA Management Company; President and Director, Federated the Fund Complex
EXECUTIVE VICE PRESIDENT Investment Counseling and Federated Global Investment
Management Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company; Director,
Federated Services Company.
EDWARD C. GONZALES Trustee or Director of some of the Funds in the Federated $0 $0 for the Fund
Birth Date: October 22, 1930 Fund Complex; President, Executive Vice President and and 1 other
Federated Investors Tower Treasurer of some of the Funds in the Federated Fund Complex; investment
1001 Liberty Avenue Vice Chairman, Federated Investors, Inc.; Vice President, company in
Pittsburgh, PA Federated Investment Management Company and Federated the Fund Complex
EXECUTIVE VICE PRESIDENT Investment 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 Federated Fund $0 $0 for the Fund
Birth Date: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, and 54 other
Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Investment investment
1001 Liberty Avenue Management Company; Director, Federated Investment companies in
Pittsburgh, PA Counseling and Federated Global Investment Management Corp.; the Fund Complex
EXECUTIVE VICE PRESIDENT Director, Federated Services Company; Director, Federated
and SECRETARY Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; Vice President - $0 $0 for the Fund
Birth Date: June 17, 1954 Funds Financial Services Division, Federated Investors, and 54 other
Federated Investors Tower Inc.; formerly: various management positions within Funds investment
1001 Liberty Avenue Financial Services Division of Federated Investors, Inc. companies in
Pittsburgh, PA the Fund Complex
TREASURER
<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION COMPENSATION
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND FROM FUND
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and various other $0 $0 for the Fund
Birth Date: March 3, 1949 Funds in the Federated Fund Complex; Executive Vice and 41 other
Federated Investors Tower President, Federated Investment Counseling, Federated Global investment
1001 Liberty Avenue Investment Management Corp., Federated Investment Management companies in
Pittsburgh, PA Company and Passport Research, Ltd.; Registered the Fund Complex
CHIEF INVESTMENT OFFICER Representative, Federated Securities Corp.; Portfolio
Manager, Federated Administrative Services;
Vice President, Federated Investors, Inc.;
formerly: Executive Vice President and Senior
Vice President, Federated Investment
Counseling Institutional Portfolio Management
Services Division; Senior Vice President,
Federated Investment Management Company and
Passport Research, Ltd.
SUSAN M. NASON Susan M. Nason has been the Fund's portfolio manager since $0 $0 for the Fund
Birth Date: August 29, 1961 September 1991. She is Vice President of the Fund. Ms. Nason and 3 other
Federated Investors Tower joined Federated in 1987 and has been a Senior Portfolio investment
1001 Liberty Avenue Manager and Senior Vice President of the Fund's Adviser companies in
Pittsburgh, PA since 1997. Ms. Nason served as a Portfolio Manager and Vice the Fund Complex
VICE PRESIDENT President of the Adviser from 1993 to 1997. Ms. Nason is a
Chartered Financial Analyst and received her M.S.I.A.
concentrating in Finance from Carnegie Mellon University.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Fund.
++ Messrs. Cunningham and Walsh became members of the Board of Trustees on
January 1, 1999. They did not earn 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.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
RESEARCH SERVICES
Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
For the fiscal year ended, January 31, 1999, the Fund's Adviser directed
brokerage transactions to certain brokers due to research services they
provided.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
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 AVERAGE AGGREGATE DAILY ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED
FUNDS 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750
million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by
shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP is the independent public accountant for the Fund.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 31 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $3,034,022 $3,003,737 $3,384,916
Advisory Fee Reduction - - 69,622
Brokerage Commissions - - -
Administrative Fee 571,913 566,831 639,583
12B-1 FEE
Institutional Service Shares 8,996 - -
SHAREHOLDER SERVICES FEE
Institutional Shares 71,352 - -
Institutional Service Shares 107,953 - -
</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.
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.
Unless otherwise stated, any quoted Share performance reflects the effect of
non-recurring charges, such as maximum sales charges, which, if excluded, would
increase the total return and yield. The performance of Shares depends upon such
variables as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences in the
Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns given for the one-, five- and ten-year periods ended January 31,
1999.
Yield given for the 30-day period ended January 31, 1999.
<TABLE>
<CAPTION>
SHARE CLASS 30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
INSTITUTIONAL SHARES:
<S> <C> <C> <C> <C>
Total Return N/A 7.01% 5.88% 7.77%
Yield 4.26% N/A N/A N/A
<CAPTION>
SINCE INCEPTION ON
SHARE CLASS 30-DAY PERIOD 1 YEAR 5 YEARS MAY 30, 1992
INSTITUTIONAL SERVICE SHARES:
<S> <C> <C> <C> <C>
Total Return N/A 6.75% 5.62% 6.11%
Yield 4.01% N/A N/A N/A
</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 does 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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* 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;
* 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
* 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.
Lipper Analytical Services, Inc. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the U.S. government
funds category in advertising and sales literature.
MERRILL LYNCH 3-5 YEAR TREASURY INDEX
Merrill Lynch 3-5 Year Treasury Index is an unmanaged index comprised of U.S.
Treasury securities maturing between 3 and 4.99 years.
MERRILL LYNCH 3-YEAR TREASURY INDEX
Merrill Lynch 3-Year Treasury Index is an unmanaged index comprised of the most
recently issued 3-year U.S. Treasury notes.
MORNINGSTAR, INC.
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 manages 9
mortgage-backed, 5 government/agency, and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion, and $41.6 billion,
respectively. Federated trades approximately $425 million in U.S. government and
mortgage-backed securities daily and places approximately $25 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $43.2 billion in government funds within
these maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime, and 23 municipal with assets
approximating $41.6 billion, $22.8 billion, and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield-
J. Thomas Madden; U.S. fixed income-William D. Dawson, III; and global
equities and fixed income-Henry A. Frantzen. The Chief Investment Officers
are Executive Vice Presidents of the Federated advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide-we have over 2,200 broker/dealer and bank broker/dealer relationships
across the country-supported by more wholesalers than any other mutual fund
distributor. Federated's service to financial professionals and institutions has
earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement. The
marketing effort to these firms is headed by James F. Getz, President,
Broker/Dealer Sales Division, Federated Securities Corp.
Addresses
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
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
