Statement of Additional Information
FEDERATED U.S. GOVERNMENT
SECURITIES FUND: 2-5 YEARS
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
(Revised april 26, 1999)
Contents
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Exchanging Securities for Shares
Subaccounting Services
Redemption in Kind
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Addresses
Cusip 31428P103
Cusip 31428P02
8022502B (3/99)
<PAGE>
HOW IS THE FUND ORGANIZED?
The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on 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.
<PAGE>
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
o 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.
o 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
o 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.
o 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
o 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.
o 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 pre-determined 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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Aggregate Total
Birth Date Compensation Compensation From Fund
Address Principal Occupations From Fund
Position With Fund for Past Five Years
John F. Donahue*+ Chief Executive Officer and Director or Trustee of the $0 $0 for the Fund and 54
Birth Date: July 28, 1924 Federated Fund Complex; Chairman and Director, Federated other investment
Federated Investors Tower Investors, Inc.; Chairman and Trustee, Federated companies in the Fund
1001 Liberty Avenue Investment Management Company; Chairman and Director, Complex
Pittsburgh, PA Federated Investment Counseling, and Federated Global
CHAIRMAN AND TRUSTEE Investment Management Corp.; Chairman, Passport
Research, Ltd.
Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $1,497.59 $113,860.22 for the
Birth Date: February 3, 1934 Director, Member of Executive Committee, Children's Fund and 54 other
15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, Ernst investment companies
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, Inc.; Director, in the Fund Complex
TRUSTEE Member of Executive Committee, University of Pittsburgh.
John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $1,647.60 $125,264.48 for the
Birth Date: June 23, 1937 President, Investment Properties Corporation; Senior Fund and 54 other
Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., investment companies
John R. Wood Associates, Inc. Realtors; Partner or Trustee in private real estate in the Fund Complex
Realtors ventures in Southwest Florida; formerly: President,
3255 Tamiami Trial North Naples Property Management, Inc. and Northgate Village
Naples, FL Development Corporation.
TRUSTEE
William J. Copeland Director or Trustee of the Federated Fund Complex; $1,647.60 $125,264.48 for the
Birth Date: July 4, 1918 Director and Member of the Executive Committee, Michael Fund and 54 other
One PNC Plaza-23rd Floor Baker, Inc.; formerly: Vice Chairman and Director, PNC investment companies
Pittsburgh, PA Bank, N.A. and PNC Bank Corp.; Director, Ryan Homes, Inc. in the Fund Complex
TRUSTEE
Previous Positions: Director, United Refinery; Director,
Forbes Fund; Chairman, Pittsburgh Foundation; Chairman,
Pittsburgh Civic Light Opera.
Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $1,497.59 $113,860.22 for the
Birth Date: October 11, 1932 Professor of Medicine, University of Pittsburgh; Medical Fund and 54 other
3471 Fifth Avenue Director, University of Pittsburgh Medical Center - investment companies
Suite 1111 Downtown; Hematologist, Oncologist, and Internist, in the Fund Complex
Pittsburgh, PA University of Pittsburgh Medical Center; Member,
TRUSTEE National Board of Trustees, Leukemia Society of America.
Peter E. Madden Director or Trustee of the Federated Fund Complex; $1,497.59 $113,860.22 for the
Birth Date: March 16, 1942 formerly: Representative, Commonwealth of Massachusetts Fund and 54 other
One Royal Palm Way General Court; President, State Street Bank and Trust investment companies
100 Royal Palm Way Company and State Street Corporation. in the Fund Complex
Palm Beach, FL
TRUSTEE Previous Positions: Director, VISA USA and VISA
International; Chairman and Director, Massachusetts
Bankers Association; Director, Depository Trust
Corporation.
Charles F. Mansfield, Jr. Director or Trustee of some of the Federated Fund $0 $0 for the Fund and
Birth Date: April 10, 1945 Complex; Management Consultant. 26 other investment
80 South Road companies in the Fund
Westhampton Beach, NY Previous Positions: Chief Executive Officer, PBTC Complex
TRUSTEE International Bank; Chief Financial Officer of Retail
Banking Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank; Vice
President, Citibank; Assistant Professor of
Banking and Finance, Frank G. Zarb School of
Business, Hofstra University.
John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $1,497.59 $113,860.22 for the
S.J.D. President, Law Professor, Duquesne University; Fund and 54 other
Birth Date: December 20, 1932 Consulting Partner, Mollica & Murray. investment companies
President, Duquesne University in the Fund Complex
Pittsburgh, PA Previous Positions: Dean and Professor of Law,
TRUSTEE University of Pittsburgh School of Law; Dean and
Professor of Law, Villanova University School of Law.
Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $1,497.59 $113,860.22 for the
Birth Date: June 21, 1935 Public Relations/Marketing/Conference Planning. Fund and 54 other
4905 Bayard Street investment companies
Pittsburgh, PA Previous Positions: National Spokesperson, Aluminum in the Fund Complex
TRUSTEE Company of America; business owner.
John S. Walsh Director or Trustee of some of the Federated Funds; $0 $0 for the Fund and 23
Birth Date: November 28, 1957 President and Director, Heat Wagon, Inc.; President and other investment
2007 Sherwood Drive Director, Manufacturers Products, Inc.; President, companies in the Fund
Valparaiso, IN Portable Heater Parts, a division of Manufacturers Complex
TRUSTEE Products, Inc.; Director, Walsh & Kelly, Inc.; formerly:
Vice President, Walsh & Kelly, Inc.
Glen R. Johnson Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Fund and 8
Birth Date: May 2, 1929 Federated Securities Corp. other investment
Federated Investors Tower companies in the Fund
1001 Liberty Avenue Complex
Pittsburgh, PA
PRESIDENT
J. Christopher Donahue+ President or Executive Vice President of the Federated $0 $0 for the Fund and
Birth Date: April 11, 1949 Fund Complex; Director or Trustee of some of the Funds 16 other investment
Federated Investors Tower in the Federated Fund Complex; President and Director, companies in the Fund
1001 Liberty Avenue Federated Investors, Inc.; President and Trustee, Complex
Pittsburgh, PA Federated Investment Management Company; President and
EXECUTIVE VICE PRESIDENT Director, Federated Investment Counseling and Federated
Global Investment Management Corp.; President,
Passport Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.
<PAGE>
Edward C. Gonzales Trustee or Director of some of the Funds in the $0 $0 for the Fund and
Birth Date: October 22, 1930 Federated Fund Complex; President, Executive Vice 1 other investment
Federated Investors Tower President and Treasurer of some of the Funds in the company in the Fund
1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated Complex
Pittsburgh, PA Investors, Inc.; Vice President, Federated Investment
EXECUTIVE VICE PRESIDENT Management Company and Federated 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 $0 $0 for the Fund and
Birth Date: October 26, 1938 Fund Complex; Executive Vice President, Secretary, and 54 other investment
Federated Investors Tower Director, Federated Investors, Inc.; Trustee, Federated companies in the Fund
1001 Liberty Avenue Investment Management Company; Director, Federated Complex
Pittsburgh, PA Investment Counseling and Federated Global Investment
EXECUTIVE VICE PRESIDENT AND Management Corp.; Director, Federated Services Company;
SECRETARY Director, Federated Securities Corp.
Richard J. Thomas Treasurer of the Federated Fund Complex; Vice President $0 $0 for the Fund and
Birth Date: June 17, 1954 - Funds Financial Services Division, Federated 54 other investment
Federated Investors Tower Investors, Inc.; formerly: various management positions companies in the Fund
1001 Liberty Avenue within Funds Financial Services Division of Federated Complex
Pittsburgh, PA Investors, Inc.
TREASURER
William D. Dawson, III Chief Investment Officer of this Fund and various other $0 $0 for the Fund and
Birth Date: March 3, 1949 Funds in the Federated Fund Complex; Executive Vice 41 other investment
Federated Investors Tower President, Federated Investment Counseling, Federated companies in the Fund
1001 Liberty Avenue Global Investment Management Corp., Federated Investment Complex
Pittsburgh, PA Management Company and Passport Research, Ltd.;
CHIEF INVESTMENT OFFICER Registered 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 $0 $0 for the Fund and
Birth Date: August 29, 1961 since September 1991. She is Vice President of the 3 other investment
Federated Investors Tower Fund. Ms. Nason joined Federated in 1987 and has been a companies in the Fund
1001 Liberty Avenue Senior Portfolio Manager and Senior Vice President of Complex
Pittsburgh, PA the Fund's Adviser since 1997. Ms. Nason served as a
VICE PRESIDENT 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.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Fund.
++ Messrs. Cunningham, Mansfield, and Walsh became members of the Board of
Trustees 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 whollyowned 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 Administrative Fee Average Aggregate Daily 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FEES PAID BY THE FUND FOR SERVICES
For the Year ended January 31 1999 1998 1997
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>
<S> <C> <C> <C> <C>
30 -Day Period 1 Year 5 Years 10 Years
Institutional Shares
Total Return N/A 7.01% 5.88% 7.77%
Yield 4.26% N/A N/A N/A
</TABLE>
Total returns given for the one-, five- and since inception periods ended
January 31, 1999.
Yield given for the 30-day period ended January 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
30 -Day Period 1 Year 5 Years Since
Inception
on May 30, 1992
Institutional Service Shares
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:
o references to ratings, rankings, and financial publications and/or performance
comparisons of Shares to certain indices;
o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Funds; and
o information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:
o 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.
o Merrill Lynch 3-5 Year Treasury Index is an unmanaged index comprised of
U.S. Treasury securities maturing between 3 and 4.99 years.
o Merrill Lynch 3-Year Treasury Index is an unmanaged index comprised of the
most recently issued 3-year U.S. Treasury notes.
o 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
