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FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares offered by this prospectus represent interests in a
diversified portfolio of securities of Federated U.S. Government Securities
Fund: 1-3 Years (the "Trust"). The Trust is an open-end management investment
company (a mutual fund).
The investment objective of the Trust is to provide current income. The Trust
invests primarily in U.S. government securities. Institutional Shares are sold
at net asset value.
THE INSTITUTIONAL SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Trust. Keep this prospectus for future
reference.
The Trust has also filed a Statement of Additional Information for Institutional
Shares and Institutional Service Shares dated April 30, 1996, with the
Securities and Exchange Commission. The information contained in the Statement
of Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Statement of Additional Information or a paper copy of
this prospectus, if you have received your prospectus electronically, free of
charge by calling 1-800-235-4669. To obtain other information or make inquiries
about the Trust, contact the Trust at the address listed in the back of this
prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated April 30, 1996
TABLE OF CONTENTS
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SUMMARY OF TRUST EXPENSES 1
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FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SHARES 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Investment Limitations 4
TRUST INFORMATION 5
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Management of the Trust 5
Distribution of Institutional Shares 6
Administration of the Trust 6
NET ASSET VALUE 7
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INVESTING IN INSTITUTIONAL SHARES 7
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Share Purchases 7
Minimum Investment Required 8
What Shares Cost 8
Certificates and Confirmations 8
Dividends 8
Capital Gains 8
REDEEMING INSTITUTIONAL SHARES 9
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Telephone Redemption 9
Written Requests 9
Accounts with Low Balances 10
SHAREHOLDER INFORMATION 10
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Voting Rights 10
TAX INFORMATION 10
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Federal Income Tax 10
State and Local Taxes 11
PERFORMANCE INFORMATION 11
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OTHER CLASSES OF SHARES 11
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FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SERVICE SHARES 12
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FINANCIAL STATEMENTS 13
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 22
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ADDRESSES 23
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SUMMARY OF TRUST EXPENSES
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<TABLE>
<S> <C> <C>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)..................................................................... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)...................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........... None
Exchange Fee................................................................. None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)............................................. 0.39%
12b-1 Fee.................................................................... None
Total Other Expenses......................................................... 0.15%
Shareholder Services Fee (after waiver)(2)......................... 0.00%
Total Operating Expenses(3)............................................. 0.54%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.40%.
(2) The maximum shareholder services fee is 0.25%.
(3) The total operating expenses would have been 0.80% absent the voluntary
waivers of portions of the management fee and the shareholder services fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SHARES OF THE
TRUST WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS
OF THE VARIOUS COSTS AND EXPENSES, SEE "TRUST INFORMATION" AND "INVESTING IN
INSTITUTIONAL SHARES." WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE
SUBJECT TO ADDITIONAL FEES.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period............. $6 $17 $30 $ 68
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 22.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, OR 29,
-------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET
ASSET
VALUE,
BEGINNING
OF
PERIOD $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81 $10.21 $10.42 $10.39
- ----
INCOME
FROM
INVESTMENT
OPERATIONS
- ----
Net
investment
income 0.61 0.52 0.37 0.48 0.67 0.72 0.84 0.82 0.81 0.84
- ----
Net
realized
and
unrealized
gain
(loss)
on
investments 0.13 (0.21) (0.07) 0.19 0.22 0.19 0.12 (0.40) (0.16) 0.03
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total
from
investment
operations 0.74 0.31 0.30 0.67 0.89 0.91 0.96 0.42 0.65 0.87
- ----
LESS
DISTRIBUTIONS
- ----
Distributions
from net
investment
income (0.61) (0.52) (0.37) (0.48) (0.67) (0.72) (0.84) (0.82) (0.81) (0.84)
- ----
Distributions
from net
realized
gain on
investment
transactions -- -- -- -- -- -- -- -- (0.05) --
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total
distributions (0.61) (0.52) (0.37) (0.48) (0.67) (0.72) (0.84) (0.82) (0.86) (0.84)
- ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----
NET
ASSET
VALUE,
END OF
PERIOD $10.38 $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81 $10.21 $10.42
- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
RETURN(A) 7.41% 3.14% 2.93% 6.64% 9.07% 10.11% 10.08% 4.23% 6.58% 8.73%
- ----
RATIOS
TO
AVERAGE
NET
ASSETS
- ----
Expenses 0.54% 0.54% 0.51% 0.49% 0.48% 0.48% 0.48% 0.47% 0.46% 0.45%
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Net
investment
income 5.91% 5.06% 3.56% 4.63% 6.57% 7.79% 8.42% 8.14% 7.89% 7.97%
- ----
Expense
waiver/
reimbursement(b) 0.26% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.02%
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SUPPLEMENTAL
DATA
- ----
Net
assets,
end of
period
(000
omitted) $697,692 $687,037 $858,556 $1,034,374 $1,171,633 $1,296,579 $1,725,112 $2,236,208 $3,016,355 $4,348,532
- ----
Portfolio
turnover 142% 265% 150% 132% 114% 96% 172% 112% 85% 99%
- ----
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) 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)
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 3, 1984. On April 13, 1995, the Board of Trustees (the
"Trustees") changed the name of the Trust from Federated Short-Intermediate
Government Trust to Federated U.S. Government Securities Fund: 1-3 Years. The
Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interests representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in separate classes.
As of the date of this prospectus, the Trustees have established two classes of
shares of the Trust, known as Institutional Shares and Institutional Service
Shares. This prospectus relates only to Institutional Shares of the Trust.
Institutional Shares ("Shares") of the Trust are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity, or other
accounts where the financial institution maintains master accounts with an
aggregate investment of at least $400 million in certain funds which are advised
or distributed by affiliates of Federated Investors. Shares are also made
available to financial intermediaries, public, and private organizations. An
investment in the Trust serves as a convenient means of accumulating an interest
in a professionally managed, diversified portfolio of U.S. government
securities. A minimum initial investment of $25,000 over a 90-day period is
required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Trust.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Trust is to provide current income. While there
is no assurance that the Trust will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus. Unless otherwise noted, the investment objective and the policies
and limitations described below cannot be changed without approval of
shareholders.
INVESTMENT POLICIES
The Trust pursues its investment objective by investing in U.S. government
securities with remaining maturities of 3 1/2 years or less. As a matter of
investment practice which can be changed without shareholder approval, the Trust
will maintain a dollar-weighted average portfolio maturity of 1 to 3 years.
ACCEPTABLE INVESTMENTS. The U.S. government securities in which the Trust
invests are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities are limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student
Loan Marketing Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so. The
instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Trust and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Trust, the Trust
could receive less than the repurchase price on any sale of such securities.
As a matter of investment practice which can be changed without shareholder
approval, the Trust will not invest more than 15% of the value of its net assets
in securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. As a matter of investment
practice, which can be changed without shareholder approval, the Trust may
purchase U.S. government securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Trust purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Trust to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Trust may pay
more/less than the market value of the securities on the settlement date.
The Trust may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Trust may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Trust may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TRANSACTIONS. The Trust conducts portfolio transactions to accomplish
its investment objective as interest rates change, to invest new money obtained
from selling its shares, and to meet redemption requests. The Trust may dispose
of portfolio securities at any time if it appears that selling the securities
will help the Trust achieve its investment objective.
INVESTMENT LIMITATIONS
The Trust will not borrow money or pledge assets except, under certain
circumstances, the Trust may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of those assets to secure such
borrowings.
TRUST INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Trust are made by Federated
Management, the Trust's investment adviser, subject to direction by the
Trustees. The adviser continually conducts investment research and supervision
for the Trust and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Trust.
ADVISORY FEES. The Trust's adviser receives an annual investment advisory
fee equal to .40 of 1% of the Trust's average daily net assets. The adviser
has also undertaken to reimburse the Trust for operating expenses in excess
of limitations established by certain states. This does not include
reimbursement to the Trust of any expenses incurred by shareholders who use
the transfer agent's subaccounting facilities.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. With over $80 billion invested across
more than 250 funds under management and/or administration by its
subsidiaries, as of December 31, 1995, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,800 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
The Trust and the adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Trust and its portfolio securities.
These codes recognize that such persons owe a fiduciary duty to the Trust's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or
being considered for purchase or sale, by the Trust; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are
subject to review by the Board of Trustees and could result in severe
penalties.
Susan M. Nason has been the Trust's portfolio manager since 1991. Ms. Nason
joined Federated Investors in 1987 and has been a Vice President of the
Trust's investment adviser since 1993. Ms. Nason served as an Assistant
Vice President of the investment adviser from 1990 until 1992. Ms. Nason is
a Chartered Financial Analyst and received her M.S. in Industrial
Administration from Carnegie Mellon University.
Joseph M. Balestrino has been the Trust's portfolio manager since March
1995. Mr. Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Trust's investment adviser since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment adviser from 1991
to 1995. Mr. Balestrino is a Chartered Financial Analyst and received his
Master's Degree in Urban and Regional Planning from the University of
Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for the Shares. It is a
Pennsylvania corporation organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated Securities Corp. is
a subsidiary of Federated Investors.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
SHAREHOLDER SERVICES. The Trust has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Trust may make payments up to .25 of 1% of the
average daily net asset value of the Institutional Shares, computed at an annual
rate, to obtain certain personal services for shareholders and to maintain
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. Under the
Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Trust and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services, or shareholder services. The
support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Trust. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Trust's investment adviser or its affiliates.
ADMINISTRATION OF THE TRUST
ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of Federated
Investors, provides administrative personnel and services (including certain
legal and financial reporting services) necessary to operate the Trust.
Federated Services Company provides these at an annual rate which
relates to the average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- -----------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
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 choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
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The Trust's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Trust, subtracting the interest of the Shares
in the liabilities of the Trust and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Institutional Shares may exceed that of Institutional Service Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN INSTITUTIONAL SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail.
To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish an account will be taken over the telephone. The
Trust reserves the right to reject any purchase request.
BY WIRE. To purchase Shares by Federal Reserve wire, call the Trust before 4:00
p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal wire funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Shareholder Services Company c/o State
Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For
Credit to: Federated U.S. Government Securities Fund: 1-3 Years--Institutional
Shares; Trust Number (this number can be found on the account statement or by
contacting the Trust); Group Number or Wire Order Number; Nominee or Institution
Name; and ABA Number 011000028. Shares cannot be purchased by wire on holidays
when wire transfers are restricted. Questions on wire purchases should be
directed to your shareholder services representative at the telephone number
listed on your account statement.
BY MAIL. To purchase Shares by mail, send a check made payable to Federated
U.S. Government Securities Fund: 1-3 Years--Institutional Shares to Federated
Shareholder Services Company, P.O. Box 8600,Boston, Massachusetts 02266-8600.
Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company, into federal
funds. This is generally the next business day after State Street Bank and Trust
Company receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $25,000, plus any bank or broker's
fee, if applicable. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Trust. Accounts established through a bank or broker may be
subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Trust. Investors who purchase
Shares through a financial intermediary may be charged a fee by that financial
intermediary.
The net asset value is determined as of the close of trading (normally 4:00 p.m.
Eastern time) on the New York Stock Exchange, Monday through Friday, except on
(i) days on which there are not sufficient changes in the value of the Trust's
portfolio securities such that its net asset value might be materially affected;
(ii) days during which no Shares are tendered for redemption and no orders to
purchase Shares are received; and (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Trust, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested by contacting the Trust.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank and Trust Company. If
the order for Shares and payment by wire are received on the same day, Shares
begin earning dividends on the next business day. Shares purchased by check
begin earning dividends on the business day after the check is converted by the
transfer agent into federal funds. Dividends are automatically reinvested on
payment dates in additional Shares unless cash payments are requested by
contacting the Trust.
CAPITAL GAINS
Capital gains realized by the Trust, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
The Trust redeems Shares at their net asset value next determined after
Federated Shareholder Services Company receives the redemption request.
Investors who redeem Shares through a financial intermediary may be charged a
service fee by that financial intermediary. Redemptions will be made on days on
which the Trust computes its net asset value. Redemption requests must be
received in proper form and can be made by telephone request or by written
request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Trust before 4:00 p.m.
(Eastern time). Telephone redemption instructions may be recorded. All proceeds
will normally be wire transferred the following business day, but in no event
more than seven days, to the shareholder's account at a domestic commercial bank
that is a member of the Federal Reserve System. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following business day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If at
any time the Trust shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Trust to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests", should be considered. If
reasonable procedures are not followed by the Trust, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Trust, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Trust does not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Trust may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Trust and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Trust may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Trust's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights except that in matters
affecting only a particular portfolio or class, only shares of that portfolio or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's operation and for the election of
Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders for this purpose shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
outstanding shares of the Trust entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Trust will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.
STATE AND LOCAL TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Shares may
be subject to personal property taxes imposed by counties, municipalities, and
school districts in Pennsylvania to the extent that the portfolio securities in
the Trust would be subject to such taxes if owned directly by residents of those
jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Trust advertises its total return and yield for Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares of the Trust after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Shares of the Trust is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Shares over a thirty-day period by the maximum offering price per share of
Shares on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Trust's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Trust's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Trust also offers another class of shares called Institutional Service
Shares. Institutional Service Shares are sold at net asset value primarily to
retail and private banking customers of financial institutions and are subject
to a minimum initial investment of $25,000 over a 90-day period.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses; however, Institutional Service Shares are distributed under a
12b-1 Plan adopted by the Trust. Expense differences between Institutional
Shares and Institutional Service Shares may affect the performance of each
class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-235-4669.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 22.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, OR 29,
-------------------------------------------
1996 1995 1994 1993(A)
------ ------ ------ -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.25 $10.46 $10.53 $10.37
- -------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------
Net investment income 0.59 0.50 0.35 0.34
- -------------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.13 (0.21) (0.07) 0.16
- ------------------------------------------------- ------ ------ ------ -------
Total from investment operations 0.72 0.29 0.28 0.50
- ------------------------------------------------- ------ ------ ------ -------
LESS DISTRIBUTIONS
- -------------------------------------------------
Distributions from net investment income (0.59) (0.50) (0.35) (0.34 )
- ------------------------------------------------- ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $10.38 $10.25 $10.46 $10.53
- ------------------------------------------------- ------ ------ ------ -------
TOTAL RETURN(B) 7.14% 2.88% 2.68% 4.28%
- -------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------
Expenses 0.79% 0.79% 0.76% 0.74%*
- -------------------------------------------------
Net investment income 5.68% 4.76% 3.33% 4.14%*
- -------------------------------------------------
Expense waiver/reimbursement (c) 0.26% 0.25% -- --
- -------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------
Net assets, end of period (000 omitted) $26,432 $29,208 $39,905 $72,722
- -------------------------------------------------
Portfolio turnover 142% 265% 150% 132%
- -------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 29, 1992 (date of initial public
investment) to February 28, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and the net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
PORTFOLIO OF INVESTMENTS
FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -------------------------------------------------------------- ------------
<C> <C> <S> <C>
SHORT-INTERMEDIATE TERM OBLIGATIONS--98.8%
- ----------------------------------------------------------------------------------
U.S. TREASURY NOTES--98.8%
--------------------------------------------------------------
$40,000,000 4.75%, 2/15/1997 $ 39,809,200
--------------------------------------------------------------
15,000,000 6.875%, 2/28/1997 15,233,100
--------------------------------------------------------------
50,000,000 6.625%, 3/31/1997 50,708,000
--------------------------------------------------------------
50,000,000 8.50%, 4/15/1997 51,724,500
--------------------------------------------------------------
50,000,000 6.50%, 4/30/1997 50,675,500
--------------------------------------------------------------
25,000,000 6.125%, 5/31/1997 25,238,750
--------------------------------------------------------------
50,000,000 6.50%, 8/15/1997 50,797,500
--------------------------------------------------------------
1,200,000 5.50%, 9/30/1997 1,202,388
--------------------------------------------------------------
40,000,000 5.75%, 9/30/1997 40,223,200
--------------------------------------------------------------
32,000,000 5.75%, 10/31/1997 32,173,760
--------------------------------------------------------------
45,000,000 7.375%, 11/15/1997 46,403,550
--------------------------------------------------------------
25,000,000 5.375%, 11/30/1997 24,980,000
--------------------------------------------------------------
25,000,000 5.25%, 12/31/1997 24,927,000
--------------------------------------------------------------
25,000,000 5.625%, 1/31/1998 25,085,750
--------------------------------------------------------------
25,000,000 7.25%, 2/15/1998 25,826,250
--------------------------------------------------------------
30,000,000 5.125%, 2/28/1998 29,826,000
--------------------------------------------------------------
20,000,000 7.875%, 4/15/1998 20,958,800
--------------------------------------------------------------
35,000,000 5.375%, 5/31/1998 34,924,750
--------------------------------------------------------------
20,000,000 4.75%, 10/31/1998 19,613,800
--------------------------------------------------------------
50,000,000 5.50%, 11/15/1998 49,943,000
--------------------------------------------------------------
40,000,000 5.00%, 2/15/1999 39,402,800
--------------------------------------------------------------
15,000,000 6.75%, 6/30/1999 15,510,900
-------------------------------------------------------------- ------------
TOTAL SHORT-INTERMEDIATE TERM OBLIGATIONS
(IDENTIFIED COST $709,882,312) 715,188,498
-------------------------------------------------------------- ------------
</TABLE>
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -------------------------------------------------------------- ------------
<C> <C> <S> <C>
(A) REPURCHASE AGREEMENTS--0.1%
- ----------------------------------------------------------------------------------
$ 810,000 BT Securities Corp., 5.45%, dated 2/29/1996, due 3/1/1996
(AT AMORTIZED COST) $ 810,000
-------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $710,692,312)(B) $715,998,498
-------------------------------------------------------------- ------------
</TABLE>
(a) 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.
(b) The cost of investments for federal tax purposes amounts to $710,692,312.
The net unrealized appreciation of investments on a federal tax basis
amounts to $5,306,186 which is comprised of $6,290,967 appreciation and
$984,781 depreciation at February 29, 1996.
Note: The categories of investments are shown as a percentage of net assets
($724,123,884) at February 29, 1996.
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost
$710,692,312) $ 715,998,498
- -------------------------------------------------------------------------------
Income receivable 11,654,942
- -------------------------------------------------------------------------------
Receivable for shares sold 1,580,648
- ------------------------------------------------------------------------------- -------------
Total assets 729,234,088
- -------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------
Payable for shares redeemed $1,305,109
- ------------------------------------------------------------------
Income distribution payable 1,731,639
- ------------------------------------------------------------------
Payable to bank 2,031,948
- ------------------------------------------------------------------
Accrued expenses 41,508
- ------------------------------------------------------------------ ----------
Total liabilities 5,110,204
- ------------------------------------------------------------------------------- -------------
NET ASSETS for 69,775,656 shares outstanding $ 724,123,884
- ------------------------------------------------------------------------------- -------------
NET ASSETS CONSISTS OF:
- -------------------------------------------------------------------------------
Paid in capital $ 840,179,675
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,306,186
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (121,361,977)
- ------------------------------------------------------------------------------- -------------
Total Net Assets $ 724,123,884
- ------------------------------------------------------------------------------- -------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
($697,691,973 / 67,228,699 shares outstanding) $10.38
- ------------------------------------------------------------------------------- -------------
INSTITUTIONAL SERVICE SHARES:
($26,431,911 / 2,546,957 shares outstanding) $10.38
- ------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------
Interest $46,807,176
- ---------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------
Investment advisory fee $ 2,902,888
- ------------------------------------------------------------------------------
Administrative personnel and services fee 549,195
- ------------------------------------------------------------------------------
Custodian fees 54,529
- ------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 269,993
- ------------------------------------------------------------------------------
Directors'/Trustees' fees 11,761
- ------------------------------------------------------------------------------
Auditing fees 17,927
- ------------------------------------------------------------------------------
Legal fees 5,120
- ------------------------------------------------------------------------------
Portfolio accounting fees 122,563
- ------------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 78,957
- ------------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 1,735,351
- ------------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 78,957
- ------------------------------------------------------------------------------
Share registration costs 52,926
- ------------------------------------------------------------------------------
Printing and postage 31,717
- ------------------------------------------------------------------------------
Insurance premiums 12,486
- ------------------------------------------------------------------------------
Taxes 687
- ------------------------------------------------------------------------------
Miscellaneous 7,401
- ------------------------------------------------------------------------------ -----------
Total expenses 5,932,458
- ------------------------------------------------------------------------------
Waivers--
- ------------------------------------------------------------------------------
Waiver of investment advisory fee $ (96,365)
- ----------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares (75,789)
- ----------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (1,735,351)
- ----------------------------------------------------------------
Waiver of shareholder services fee--Institutional Service
Shares (3,158)
- ---------------------------------------------------------------- -----------
Total waivers (1,910,663)
- ------------------------------------------------------------------------------ -----------
Net expenses 4,021,795
- --------------------------------------------------------------------------------------------- -----------
Net investment income 42,785,381
- --------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------
Net realized gain on investments 10,131,471
- ---------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments (1,041,038)
- --------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 9,090,433
- --------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $51,875,814
- --------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------
Net investment income $ 42,785,381 $ 38,636,472
- -----------------------------------------------------------
Net realized gain (loss) on investments ($292,806 net gain
and $16,372,726 net loss, respectively, as computed for
federal tax purposes) 10,131,471 (26,211,391)
- -----------------------------------------------------------
Net change in unrealized appreciation (depreciation) (1,041,038) 9,714,843
- ----------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 51,875,814 22,139,924
- ----------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------
Distributions from net investment income
- -----------------------------------------------------------
Institutional Shares (40,992,648) (37,103,608)
- -----------------------------------------------------------
Institutional Service Shares (1,792,733) (1,532,864)
- ----------------------------------------------------------- ------------ ------------
Change in net assets resulting from distributions
to shareholders (42,785,381) (38,636,472)
- ----------------------------------------------------------- ------------ ------------
SHARE TRANSACTIONS--
- -----------------------------------------------------------
Proceeds from sale of shares 320,860,683 269,660,686
- -----------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of distributions declared 18,801,398 16,766,815
- -----------------------------------------------------------
Cost of shares redeemed (340,873,455) (452,147,512)
- ----------------------------------------------------------- ------------ ------------
Change in net assets resulting from share transactions (1,211,374) (165,720,011)
- ----------------------------------------------------------- ------------ ------------
Change in net assets 7,879,059 (182,216,559)
- -----------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------
Beginning of period 716,244,825 898,461,384
- ----------------------------------------------------------- ------------ ------------
End of period $724,123,884 $716,244,825
- ----------------------------------------------------------- ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated U.S. Government Securities Fund: 1-3 Years (the "Trust") is registered
under the Investment Company Act of 1940, as amended (the "Act") as a
diversified, open-end, management investment company. The investment objective
of the Trust is to provide current income. The Trust provides two classes of
shares: Institutional Shares and Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at
the mean of the latest bid and asked price as provided 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 sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Trust 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 Trust 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 Trust will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust'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 Trust
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.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
FEDERAL TAXES--It is the Trust's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At February 29, 1996, the Trust, for federal tax purposes, had a capital
loss carryforward of $121,361,977, which will reduce the Trust's taxable
income arising from future net realized gain on investments, if any, to the
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Trust of any liability for federal tax. Pursuant to the Code, such
capital loss carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
- ------------------ --------------------
<S> <C>
1997 $39,495,292
1998 $65,200,181
2003 $16,666,504
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Trust may engage in
when-issued or delayed delivery transactions. The Trust records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES
- -----------------------------------
Shares sold 28,772,490 $ 297,888,019 23,657,172 $ 242,387,271
- -----------------------------------
Shares issued to shareholders in
payment of distributions declared 1,662,938 17,222,812 1,514,470 15,527,541
- -----------------------------------
Shares redeemed (30,221,046) (313,113,463) (40,237,187) (413,639,011)
- ----------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional share transactions 214,382 1,997,368 (15,065,545) $(155,724,199)
- ----------------------------------- ----------- ------------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 1996 FEBRUARY 28, 1995
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES
- -------------------------------------
Shares sold 2,223,967 $ 22,972,664 2,652,469 $ 27,273,415
- -------------------------------------
Shares issued to shareholders in
payment of distributions declared 152,468 1,578,586 120,824 1,239,274
- -------------------------------------
Shares redeemed (2,678,513) (27,759,992) (3,739,382) (38,508,501)
- ------------------------------------- ---------- ------------ ----------- -------------
Net change resulting from
Institutional Service share
transactions (302,078) (3,208,742) (966,089) $ (9,995,812)
- ------------------------------------- ---------- ------------ ----------- -------------
Net change resulting from Trust
share transactions (87,696) (1,211,374) (16,031,634) $(165,720,011)
- ------------------------------------- ---------- ------------ ----------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Trust's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.40% of the Trust 's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Trust with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Trust will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Trust to finance activities intended to
result in the sale of the Trust 's Institutional Service Shares. The Plan
provides that the Trust may incur distribution expenses up to 0.25% of the
average daily net assets of the Trust 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 ("FSS"), the Fund will pay FSS up to 0.25%
of daily average net assets of the Trust for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
For the fiscal year ended February 29, 1996, Institutional Shares fully waived
its shareholder services fee.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through
its registered transfer and dividend disbursing agent, Federated Shareholder
Services Company, maintains all necessary shareholder records and receives a fee
based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Trust's accounting records
for which it receives a fee. The fee is based on the level of the Trust's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended
February 29, 1996, were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
Purchases $1,002,227,902
- ----------------------------------------------------------------------------- --------------
Sales $1,003,849,805
- ----------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated U.S. Government Securities Fund: 1-3
Years as of February 29, 1996, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and financial highlights (see pages 2 and 12 of
this prospectus) for the periods presented therein. 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 audits 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
February 29, 1996, by correspondence with the custodian and broker. 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: 1-3 Years at February 29, 1996, and
the results of its operations for the year then ended, changes in its net assets
for each of the two years in the period then ended, and financial highlights for
the periods presented therein, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
April 12, 1996
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated U.S. Government Securities Fund: 1-3 Years
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEDERATED U.S.
GOVERNMENT SECURITIES
FUND: 1-3 YEARS
INSTITUTIONAL SHARES
PROSPECTUS
An Open-End, Diversified Management
Investment Company
Prospectus dated April 30, 1996
LOGO
CUSIP 31428M100
8032806A-IS (4/96)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares offered by this prospectus represent interests
in a diversified portfolio of securities of Federated U.S. Government Securities
Fund: 1-3 Years (the "Trust"). The Trust is an open-end management investment
company (a mutual fund).
The investment objective of the Trust is to provide current income. The Trust
invests primarily in U.S. government securities. Institutional Service Shares
are sold at net asset value.
THE INSTITUTIONAL SERVICE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Trust. Keep this prospectus for
future reference.
The Trust has also filed a Statement of Additional Information for Institutional
Service Shares and Institutional Shares dated April 30, 1996, with the
Securities and Exchange Commission. The information contained in the Statement
of Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Statement of Additional Information or a paper copy of
this prospectus, if you have received your prospectus electronically, free of
charge by calling 1-800-235-4669. To obtain other information or make inquiries
about the Trust, contact the Trust at the address listed in the back of this
prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated April 30, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF TRUST EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SERVICE SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Investment Limitations 4
TRUST INFORMATION 5
- ------------------------------------------------------
Management of the Trust 5
Distribution of Institutional Service Shares 6
Administration of the Trust 7
NET ASSET VALUE 7
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE SHARES 7
- ------------------------------------------------------
Share Purchases 7
Minimum Investment Required 8
What Shares Cost 8
Certificates and Confirmations 8
Dividends 9
Capital Gains 9
REDEEMING INSTITUTIONAL SERVICE SHARES 9
- ------------------------------------------------------
Telephone Redemption 9
Written Requests 9
Accounts with Low Balances 10
SHAREHOLDER INFORMATION 10
- ------------------------------------------------------
Voting Rights 10
TAX INFORMATION 11
- ------------------------------------------------------
Federal Income Tax 11
State and Local Taxes 11
PERFORMANCE INFORMATION 11
- ------------------------------------------------------
OTHER CLASSES OF SHARES 12
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SHARES 13
- ------------------------------------------------------
FINANCIAL STATEMENTS 14
- ------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 23
- ------------------------------------------------------
ADDRESSES 24
- ------------------------------------------------------
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)..................................................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)............................................................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)..................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........... None
Exchange Fee................................................................. None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)............................................. 0.39%
12b-1 Fee (after waiver)(2).................................................. 0.01%
Total Other Expenses......................................................... 0.39%
Shareholder Services Fee (after waiver)(3)......................... 0.24%
Total Operating Expenses(4)............................................. 0.79%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.40%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The maximum shareholder services fee is 0.25%.
(4) The total operating expenses would have been 1.05% absent the voluntary
waivers of portions of the management fee, the shareholder services fee and the
12b-1 fee.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SERVICE SHARES OF
THE TRUST WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE
DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "TRUST INFORMATION" AND
"INVESTING IN INSTITUTIONAL SERVICE SHARES". WIRE-TRANSFERRED REDEMPTIONS OF
LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ----------------------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period.................................. $ 8 $ 25 $ 44 $98
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 23.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, OR 29,
-------------------------------------------
1996 1995 1994 1993(A)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.25 $10.46 $10.53 $10.37
- -----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------
Net investment income 0.59 0.50 0.35 0.34
- -----------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.13 (0.21) (0.07) 0.16
- ----------------------------------------------- ------ ------ ------ ------
Total from investment operations 0.72 0.29 0.28 0.50
- -----------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------
Distributions from net investment income (0.59) (0.50) (0.35) (0.34)
- ----------------------------------------------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.38 $10.25 $10.46 $10.53
- ----------------------------------------------- ------ ------ ------ ------
TOTAL RETURN (B) 7.14% 2.88% 2.68% 4.28%
- -----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------
Expenses 0.79% 0.79% 0.76% 0.74%*
- -----------------------------------------------
Net investment income 5.68% 4.76% 3.33% 4.14%*
- -----------------------------------------------
Expense waiver/reimbursement (c) 0.26% 0.25% - -
- -----------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------
Net assets, end of period (000 omitted) $26,432 $29,208 $39,905 $72,722
- -----------------------------------------------
Portfolio turnover 142% 265% 150% 132%
- -----------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 29, 1992 (date of initial public
investment) to February 28, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 3, 1984. On April 13, 1995, the Board of Trustees (the
"Trustees") changed the name of the Trust from Federated Short-Intermediate
Government Trust to Federated U.S. Government Securities Fund: 1-3 Years. The
Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of securities.
The shares in any one portfolio may be offered in separate classes. As of the
date of this prospectus, the Trustees have established two classes of shares of
the Trust, known as Institutional Service Shares and Institutional Shares. This
prospectus relates only to Institutional Service Shares of the Trust.
Institutional Service Shares ("Shares") are designed primarily for retail and
private banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $25,000 over a 90-
day period is required.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Trust.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Trust is to provide current income. While there
is no assurance that the Trust will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus. Unless otherwise noted, the investment objective and the policies
and limitations described below cannot be changed without approval of
shareholders.
INVESTMENT POLICIES
The Trust pursues its investment objective by investing in U.S. government
securities with remaining maturities of 3 1/2 years or less. As a matter of
investment practice which can be changed without shareholder approval, the Trust
will maintain a dollar-weighted average portfolio maturity of 1 to 3 years.
ACCEPTABLE INVESTMENTS. The U.S. government securities in which the Trust
invests are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities are limited to:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student Loan
Marketing Association.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial
support to other agencies or instrumentalities, since it is not obligated to do
so. The instrumentalities are supported by:
- the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
- discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
- the credit of the agency or instrumentality.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Trust and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Trust, the Trust
could receive less than the repurchase price on any sale of such securities.
As a matter of investment practice which can be changed without shareholder
approval, the Trust will not invest more than 15% of the value of its net assets
in securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. As a matter of investment
practice which can be changed without shareholder approval, the Trust may
purchase U.S. government securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Trust purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Trust to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Trust may pay
more/less than the market value of the securities on the settlement date.
The Trust may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Trust may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Trust may realize short-term profits or losses upon the sale of such
commitments.
PORTFOLIO TRANSACTIONS. The Trust conducts portfolio transactions to accomplish
its investment objective as interest rates change, to invest new money obtained
from selling its shares, and to meet redemption requests. The Trust may dispose
of portfolio securities at any time if it appears that selling the securities
will help the Trust achieve its investment objective.
INVESTMENT LIMITATIONS
The Trust will not borrow money or pledge assets except, under certain
circumstances, the Trust may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of those assets to secure such
borrowings.
TRUST INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Trust are made by Federated
Management, the Trust's investment adviser, subject to direction by the
Trustees. The adviser continually conducts investment research and supervision
for the Trust and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Trust.
ADVISORY FEES. The Trust's adviser receives an annual investment advisory
fee equal to .40 of 1% of the Trust's average daily net assets. The adviser
has also undertaken to reimburse the Trust for operating expenses in excess
of limitations established by certain states. This does not include
reimbursement to the Trust of any expenses incurred by shareholders who use
the transfer agent's subaccounting facilities.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. With over $80 billion invested across
more than 250 funds under management and/or administration by its
subsidiaries, as of December 31, 1995, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,800 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
The Trust and the adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Trust and its portfolio securities.
These codes recognize that such persons owe a fiduciary duty to the Trust's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or
being considered for purchase or sale, by the Trust; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are
subject to review by the Board of Trustees and could result in severe
penalties.
Susan M. Nason has been the Trust's portfolio manager since 1991. Ms. Nason
joined Federated Investors in 1987 and has been a Vice President of the
Trust's investment adviser since 1993. Ms. Nason served as an Assistant
Vice President of the investment adviser from 1990 until 1992. Ms. Nason is
a Chartered Financial Analyst and received her M.S. in Industrial
Administration from Carnegie Mellon University.
Joseph M. Balestrino has been the Trust's portfolio manager since March
1995. Mr. Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Trust's investment adviser since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment adviser from 1991
to 1995. Mr. Balestrino is a Chartered Financial Analyst and received his
Master's Degree in Urban and Regional Planning from the University of
Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for the Shares. It is a
Pennsylvania corporation organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated Securities Corp. is
a subsidiary of Federated Investors.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan adopted
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"Plan"), the distributor may be paid a fee by the Trust in an amount computed at
an annual rate of .25 of 1% of the average daily net asset value of Shares of
the Trust. The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers.
The Plan is a compensation-type plan. As such, the Trust makes no payments to
the distributor except as described above. Therefore, the Trust does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Trust, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Trust
under the Plan.
In addition, the Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Trust may make payments up to .25 of 1% of the average daily net asset value
of the Institutional Service Shares to obtain certain personal services for
shareholders and to maintain shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Trust and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to receiving the
payments under the Plan and Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. The support may include sponsoring
sales, educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Trust. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Trust's investment
adviser or its affiliates.
ADMINISTRATION OF THE TRUST
ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of Federated
Investors, provides administrative personnel and services (including certain
legal and financial reporting services) necessary to operate the Trust.
Federated Services Company provides these at an annual rate which relates to the
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors ("Federated Funds") as specified below.
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- -----------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
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 choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Trust's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Trust, subtracting the interest of the Shares
in the liabilities of the Trust and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding. The net asset value for
Institutional Shares may exceed that of Institutional Service Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.
INVESTING IN INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail.
To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish an account will be taken over the telephone. The
Trust reserves the right to reject any purchase request.
BY WIRE. To purchase Shares by Federal Reserve wire, call the Trust before 4:00
p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal wire funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Shareholder Services Company, c/o State
Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For
Credit to: Federated U.S. Government Securities Fund: 1-3 Years--Institutional
Service Shares; Trust Number (this number can be found on the account statement
or by contacting the Trust); Group Number or Wire Order Number; Nominee or
Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire
on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement.
BY MAIL. To purchase Shares by mail, send a check made payable to Federated
U.S. Government Securities Fund: 1-3 Years--Institutional Service Shares to
Federated Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received after payment by check is
converted by the transfer agent's bank, State Street Bank and Trust Company,
into federal funds. This is generally the next business day after State Street
Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $25,000, plus any bank or broker's
fee, if applicable. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Trust. Accounts established through a bank or broker may be
subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Trust. Investors who purchase
Shares through a financial intermediary may be charged a fee by that financial
intermediary.
The net asset value is determined as of the close of trading (normally 4:00 p.m.
Eastern time) on the New York Stock Exchange, Monday through Friday, except on
(i) days on which there are not sufficient changes in the value of the Trust's
portfolio securities such that its net asset value might be materially affected;
(ii) days during which no Shares are tendered for redemption and no orders to
purchase Shares are received; and (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Trust, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested by contacting the Trust.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank and Trust Company. If
the order for Shares and payment by wire are received on the same day, Shares
begin earning dividends on the next business day. Shares purchased by check
begin earning dividends on the business day after the check is converted by the
transfer agent into federal funds. Dividends are automatically reinvested on
payment dates in additional Shares unless cash payments are requested by
contacting the Trust.
CAPITAL GAINS
Capital gains realized by the Trust, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
The Trust redeems Shares at their net asset value next determined after
Federated Shareholder Services Company receives the redemption request.
Investors who redeem Shares through a financial intermediary may be charged a
service fee by that financial intermediary. Redemptions will be made on days on
which the Trust computes its net asset value. Redemption requests must be
received in proper form and can be made by telephone request or by written
request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Trust before 4:00 p.m.
(Eastern time). Telephone redemption instructions may be recorded. All proceeds
will normally be wire transferred the following business day, but in no event
more than seven days, to the shareholder's account at a domestic commercial bank
that is a member of the Federal Reserve System. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following business day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If at
any time the Trust shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.
An authorization form permitting the Trust to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests", should be considered. If
reasonable procedures are not followed by the Trust, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they
should be sent unendorsed with the written request by registered or certified
mail to the address noted above.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Trust, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Trust does not accept signatures guaranteed by a notary public.
The Trust and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Trust may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Trust and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Trust may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Trust's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Trust gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights except that in matters
affecting only a particular portfolio or class, only shares of that portfolio or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's operation and for the election of
Trustees under certain circumstances. As of April 1, 1996, Charles Schwab & Co.
Inc., owned 805,562 shares (30%) of voting securities of the Institutional
Service Shares of the Trust, and, therefore, may, for certain purposes, be
deemed to control the Trust and be able to affect the outcome of certain matters
presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders for this purpose shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
outstanding shares of the Trust entitled to vote.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Trust will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.
STATE AND LOCAL TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Shares may
be subject to personal property taxes imposed by counties, municipalities, and
school districts in Pennsylvania to the extent that the portfolio securities in
the Trust would be subject to such taxes if owned directly by residents of those
jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Trust advertises its total return and yield for Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares of the Trust after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Shares of the Trust is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Shares over a thirty-day period by the maximum offering price per share of
Shares on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Trust's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Trust's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Trust also offers another class of shares called Institutional Shares.
Institutional Shares are sold at net asset value primarily to accounts for which
financial institutions act in a fiduciary or agency capacity and are subject to
a minimum initial investment of $25,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-235-4669.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 23.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, OR 29,
-------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET
ASSET
VALUE,
BEGINNING
OF
PERIOD $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81 $10.21 $10.42 $10.39
- ----
INCOME
FROM
INVESTMENT
OPERATIONS
- ----
Net
investment
income 0.61 0.52 0.37 0.48 0.67 0.72 0.84 0.82 0.81 0.84
- ----
Net
realized
and
unrealized
gain
(loss)
on
investments 0.13 (0.21) (0.07) 0.19 0.22 0.19 0.12 (0.40) (0.16) 0.03
- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
from
investment
operations 0.74 0.31 0.30 0.67 0.89 0.91 0.96 0.42 0.65 0.87
LESS
DISTRIBUTIONS
- ----
Distributions
from net
investment
income (0.61) (0.52) (0.37) (0.48) (0.67) (0.72) (0.84) (0.82) (0.81) (0.84)
- ----
Distributions
from net
realized
gain on
investment
transactions -- -- -- -- -- -- -- -- (0.05) --
- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions (0.61) (0.52) (0.37) (0.48) (0.67) (0.72) (0.84) (0.82) (0.86) (0.84)
- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET
ASSET
VALUE,
END OF
PERIOD $10.38 $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81 $10.21 $10.42
- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
RETURN(A) 7.41% 3.14% 2.93% 6.64% 9.07% 10.11% 10.08% 4.23% 6.58% 8.73%
- ----
RATIOS
TO
AVERAGE
NET
ASSETS
- ----
Expenses 0.54% 0.54% 0.51% 0.49% 0.48% 0.48% 0.48% 0.47% 0.46% 0.45%
- ----
Net
investment
income 5.91% 5.06% 3.56% 4.63% 6.57% 7.79% 8.42% 8.14% 7.89% 7.97%
- ----
Expense
waiver/
reimbursement(b) 0.26% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.02%
- ----
SUPPLEMENTAL
DATA
- ----
Net
assets,
end of
period
(000
omitted) $697,692 $687,037 $858,556 $1,034,374 $1,171,633 $1,296,579 $1,725,112 $2,236,208 $3,016,355 $4,348,532
- ----
Portfolio
turnover 142% 265% 150% 132% 114% 96% 172% 112% 85% 99%
- ----
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) 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)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
PORTFOLIO OF INVESTMENTS
FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -------------------------------------------------------------- ------------
<C> <C> <S> <C>
SHORT-INTERMEDIATE TERM OBLIGATIONS--98.8%
- ----------------------------------------------------------------------------------
U.S. TREASURY NOTES--98.8%
--------------------------------------------------------------
$40,000,000 4.75%, 2/15/1997 $ 39,809,200
--------------------------------------------------------------
15,000,000 6.875%, 2/28/1997 15,233,100
--------------------------------------------------------------
50,000,000 6.625%, 3/31/1997 50,708,000
--------------------------------------------------------------
50,000,000 8.50%, 4/15/1997 51,724,500
--------------------------------------------------------------
50,000,000 6.50%, 4/30/1997 50,675,500
--------------------------------------------------------------
25,000,000 6.125%, 5/31/1997 25,238,750
--------------------------------------------------------------
50,000,000 6.50%, 8/15/1997 50,797,500
--------------------------------------------------------------
1,200,000 5.50%, 9/30/1997 1,202,388
--------------------------------------------------------------
40,000,000 5.75%, 9/30/1997 40,223,200
--------------------------------------------------------------
32,000,000 5.75%, 10/31/1997 32,173,760
--------------------------------------------------------------
45,000,000 7.375%, 11/15/1997 46,403,550
--------------------------------------------------------------
25,000,000 5.375%, 11/30/1997 24,980,000
--------------------------------------------------------------
25,000,000 5.25%, 12/31/1997 24,927,000
--------------------------------------------------------------
25,000,000 5.625%, 1/31/1998 25,085,750
--------------------------------------------------------------
25,000,000 7.25%, 2/15/1998 25,826,250
--------------------------------------------------------------
30,000,000 5.125%, 2/28/1998 29,826,000
--------------------------------------------------------------
20,000,000 7.875%, 4/15/1998 20,958,800
--------------------------------------------------------------
35,000,000 5.375%, 5/31/1998 34,924,750
--------------------------------------------------------------
20,000,000 4.75%, 10/31/1998 19,613,800
--------------------------------------------------------------
50,000,000 5.50%, 11/15/1998 49,943,000
--------------------------------------------------------------
40,000,000 5.00%, 2/15/1999 39,402,800
--------------------------------------------------------------
15,000,000 6.75%, 6/30/1999 15,510,900
-------------------------------------------------------------- ------------
TOTAL SHORT-INTERMEDIATE TERM OBLIGATIONS
(IDENTIFIED COST $709,882,312) 715,188,498
-------------------------------------------------------------- ------------
</TABLE>
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -------------------------------------------------------------- ------------
<C> <C> <S> <C>
(A) REPURCHASE AGREEMENTS--0.1%
- ----------------------------------------------------------------------------------
$ 810,000 BT Securities Corp., 5.45%, dated 2/29/1996, due 3/1/1996
(AT AMORTIZED COST) $ 810,000
-------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $710,692,312)(B) $715,998,498
-------------------------------------------------------------- ------------
</TABLE>
(a) 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.
(b) The cost of investments for federal tax purposes amounts to $710,692,312.
The net unrealized appreciation of investments on a federal tax basis
amounts to $5,306,186 which is comprised of $6,290,967 appreciation and
$984,781 depreciation at February 29, 1996.
Note: The categories of investments are shown as a percentage of net assets
($724,123,884) at February 29, 1996.
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost
$710,692,312) $ 715,998,498
- -------------------------------------------------------------------------------
Income receivable 11,654,942
- -------------------------------------------------------------------------------
Receivable for shares sold 1,580,648
- ------------------------------------------------------------------------------- -------------
Total assets 729,234,088
- -------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------
Payable for shares redeemed $1,305,109
- ------------------------------------------------------------------
Income distribution payable 1,731,639
- ------------------------------------------------------------------
Payable to bank 2,031,948
- ------------------------------------------------------------------
Accrued expenses 41,508
- ------------------------------------------------------------------ ----------
Total liabilities 5,110,204
- ------------------------------------------------------------------------------- -------------
NET ASSETS for 69,775,656 shares outstanding $ 724,123,884
- ------------------------------------------------------------------------------- -------------
NET ASSETS CONSISTS OF:
- -------------------------------------------------------------------------------
Paid in capital $ 840,179,675
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,306,186
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (121,361,977)
- ------------------------------------------------------------------------------- -------------
Total Net Assets $ 724,123,884
- ------------------------------------------------------------------------------- -------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
($697,691,973 / 67,228,699 shares outstanding) $10.38
- ------------------------------------------------------------------------------- -------------
INSTITUTIONAL SERVICE SHARES:
($26,431,911 / 2,546,957 shares outstanding) $10.38
- ------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------
Interest $46,807,176
- ---------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------
Investment advisory fee $ 2,902,888
- ------------------------------------------------------------------------------
Administrative personnel and services fee 549,195
- ------------------------------------------------------------------------------
Custodian fees 54,529
- ------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 269,993
- ------------------------------------------------------------------------------
Directors'/Trustees' fees 11,761
- ------------------------------------------------------------------------------
Auditing fees 17,927
- ------------------------------------------------------------------------------
Legal fees 5,120
- ------------------------------------------------------------------------------
Portfolio accounting fees 122,563
- ------------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 78,957
- ------------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 1,735,351
- ------------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 78,957
- ------------------------------------------------------------------------------
Share registration costs 52,926
- ------------------------------------------------------------------------------
Printing and postage 31,717
- ------------------------------------------------------------------------------
Insurance premiums 12,486
- ------------------------------------------------------------------------------
Taxes 687
- ------------------------------------------------------------------------------
Miscellaneous 7,401
- ------------------------------------------------------------------------------ -----------
Total expenses 5,932,458
- ------------------------------------------------------------------------------
Waivers--
- ------------------------------------------------------------------------------
Waiver of investment advisory fee $ (96,365)
- ----------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares (75,789)
- ----------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (1,735,351)
- ----------------------------------------------------------------
Waiver of shareholder services fee--Institutional Service
Shares (3,158)
- ---------------------------------------------------------------- -----------
Total waivers (1,910,663)
- ------------------------------------------------------------------------------ -----------
Net expenses 4,021,795
- --------------------------------------------------------------------------------------------- -----------
Net investment income 42,785,381
- --------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------
Net realized gain on investments 10,131,471
- ---------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments (1,041,038)
- --------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 9,090,433
- --------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $51,875,814
- --------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------
Net investment income $ 42,785,381 $ 38,636,472
- -----------------------------------------------------------
Net realized gain (loss) on investments ($292,806 net gain
and $16,372,726 net loss, respectively, as computed for
federal tax purposes) 10,131,471 (26,211,391)
- -----------------------------------------------------------
Net change in unrealized appreciation (depreciation) (1,041,038) 9,714,843
- ----------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations 51,875,814 22,139,924
- ----------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------
Distributions from net investment income
- -----------------------------------------------------------
Institutional Shares (40,992,648) (37,103,608)
- -----------------------------------------------------------
Institutional Service Shares (1,792,733) (1,532,864)
- ----------------------------------------------------------- ------------- -------------
Change in net assets resulting from distributions
to shareholders (42,785,381) (38,636,472)
- ----------------------------------------------------------- ------------- -------------
SHARE TRANSACTIONS--
- -----------------------------------------------------------
Proceeds from sale of shares 320,860,683 269,660,686
- -----------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of distributions declared 18,801,398 16,766,815
- -----------------------------------------------------------
Cost of shares redeemed (340,873,455) (452,147,512)
- ----------------------------------------------------------- ------------- -------------
Change in net assets resulting from share transactions (1,211,374) (165,720,011)
- ----------------------------------------------------------- ------------- -------------
Change in net assets 7,879,059 (182,216,559)
- -----------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------
Beginning of period 716,244,825 898,461,384
- ----------------------------------------------------------- ------------- -------------
End of period $ 724,123,884 $ 716,244,825
- ----------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated U.S. Government Securities Fund: 1-3 Years (the "Trust") is registered
under the Investment Company Act of 1940, as amended (the "Act") as a
diversified, open-end, management investment company. The investment objective
of the Trust is to provide current income. The Trust provides two classes of
shares: Institutional Shares and Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at
the mean of the latest bid and asked price as provided 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 sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Trust 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 Trust 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 Trust will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust'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 Trust
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.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
FEDERAL TAXES--It is the Trust's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At February 29, 1996, the Trust, for federal tax purposes, had a capital
loss carryforward of $121,361,977, which will reduce the Trust's taxable
income arising from future net realized gain on investments, if any, to the
extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to relieve
the Trust of any liability for federal tax. Pursuant to the Code, such
capital loss carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
- ------------------ --------------------
<S> <C>
1997 $39,495,292
1998 $65,200,181
2003 $16,666,504
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Trust may engage in
when-issued or delayed delivery transactions. The Trust records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 1996 FEBRUARY 28, 1995
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES
- -----------------------------------
Shares sold 28,772,490 $ 297,888,019 23,657,172 $ 242,387,271
- -----------------------------------
Shares issued to shareholders in
payment of distributions declared 1,662,938 17,222,812 1,514,470 15,527,541
- -----------------------------------
Shares redeemed (30,221,046) (313,113,463) (40,237,187) (413,639,011)
- ----------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional share transactions 214,382 1,997,368 (15,065,545) $(155,724,199)
- ----------------------------------- ----------- ------------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 1996 FEBRUARY 28, 1995
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES
- -------------------------------------
Shares sold 2,223,967 $ 22,972,664 2,652,469 $ 27,273,415
- -------------------------------------
Shares issued to shareholders in
payment of distributions declared 152,468 1,578,586 120,824 1,239,274
- -------------------------------------
Shares redeemed (2,678,513) (27,759,992) (3,739,382) (38,508,501)
- ------------------------------------- ---------- ------------ ----------- -------------
Net change resulting from
Institutional Service share
transactions (302,078) (3,208,742) (966,089) $ (9,995,812)
- ------------------------------------- ---------- ------------ ----------- -------------
Net change resulting from Trust
share transactions (87,696) (1,211,374) (16,031,634) $(165,720,011)
- ------------------------------------- ---------- ------------ ----------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Trust's investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.40% of the Trust 's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Trust with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Trust will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Trust to finance activities intended to
result in the sale of the Trust 's Institutional Service Shares. The Plan
provides that the Trust may incur distribution expenses up to 0.25% of the
average daily net assets of the Trust 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 ("FSS"), the Fund will pay FSS up to 0.25%
of daily average net assets of the Trust for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
For the fiscal year ended February 29, 1996, Institutional Shares fully waived
its shareholder services fee.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through
its registered transfer and dividend disbursing agent, Federated Shareholder
Services Company, maintains all necessary shareholder records and receives a fee
based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Trust's accounting records
for which it receives a fee. The fee is based on the level of the Trust's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended
February 29, 1996, were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
Purchases $1,002,227,902
- ----------------------------------------------------------------------------- --------------
Sales $1,003,849,805
- ----------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated U.S. Government Securities Fund: 1-3
Years as of February 29, 1996, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and financial highlights (see pages 2 and 13 of
this prospectus) for the periods presented therein. 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 audits 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
February 29, 1996, by correspondence with the custodian and broker. 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: 1-3 Years at February 29, 1996, and
the results of its operations for the year then ended, changes in its net assets
for each of the two years in the period then ended, and financial highlights for
the periods presented therein, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
April 12, 1996
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated U.S. Government Securities Fund: 1-3 Years
Institutional Service Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
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Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
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FEDERATED U.S.
GOVERNMENT SECURITIES
FUND: 1-3 YEARS
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
An Open-End, Diversified Management
Investment Company
Prospectus dated April 30, 1996
LOGO
CUSIP 31428M209
8032806A-SS (4/96)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1 - 3 YEARS
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
The Institutional Shares and Institutional Service Shares represent
interests in a diversified portfolio of securities of Federated U.S.
Government Securities Fund: 1 - 3 Years (the "Trust"). This Statement of
Additional Information should be read with the respective prospectuses for
Institutional Shares and Institutional Service Shares dated April 30, 1996.
This Statement is not a prospectus itself. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-235-4669.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated April 30, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE TRUST 2
INVESTMENT OBJECTIVE AND POLICIES2
TYPES OF INVESTMENTS 2
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 2
REPURCHASE AGREEMENTS 3
PORTFOLIO TURNOVER 3
INVESTMENT LIMITATIONS 3
SELLING SHORT AND BUYING ON MARGIN 4
BORROWING MONEY 4
PLEDGING ASSETS 4
LENDING CASH OR SECURITIES 4
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS MANAGEMENT 5
TRUST OWNERSHIP 14
TRUSTEE COMPENSATION 14
TRUSTEE LIABILITY 16
INVESTMENT ADVISORY SERVICES 17
ADVISER TO THE TRUST 17
ADVISORY FEES 17
STATE EXPENSE LIMITATIONS 17
OTHER ADVISORY SERVICES 18
BROKERAGE TRANSACTIONS 18
OTHER SERVICES 20
TRUST ADMINISTRATION 20
CUSTODIAN AND PORTFOLIO ACCOUNTANT 20
TRANSFER AGENT 21
INDEPENDENT AUDITORS 21
PURCHASING SHARES 21
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES 21
CONVERSION TO FEDERAL FUNDS 23
DETERMINING NET ASSET VALUE 23
DETERMINING MARKET VALUE OF SECURITIES 23
REDEEMING SHARES 24
REDEMPTION IN KIND 24
MASSACHUSETTS PARTNERSHIP LAW 24
TAX STATUS 25
THE TRUST'S TAX STATUS 25
SHAREHOLDERS' TAX STATUS 26
CAPITAL GAINS 26
TOTAL RETURN 26
YIELD 26
PERFORMANCE COMPARISONS 27
DURATION 29
ABOUT FEDERATED INVESTORS 30
MUTUAL FUND MARKET 30
INSTITUTIONAL CLIENTS 30
TRUST ORGANIZATIONS 31
BROKER/DEALERS AND 31
BANK BROKER/DEALER SUBSIDIARIES
GENERAL INFORMATION ABOUT THE TRUST
Federated U.S. Government Securities Fund: 1 - 3 Years was established as a
Massachusetts business trust under a Declaration of Trust dated January 3,
1984. On April 13, 1995 the name of the Trust was changed from Federated
Short-Intermediate Government Trust to Federated U.S. Government Securities
Fund: 1 - 3 Years.
Shares of the Trust are offered in two classes, known as Institutional Shares
and Institutional Service Shares (individually and collectively referred to as
"Shares," as the context may require). This Statement of Additional
Information relates to the above mentioned Shares of the Trust.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide current income.
TYPES OF INVESTMENTS
The Trust invests only in U.S. government securities with remaining maturities
of three and one-half (3 1/2) years or less. This investment policy and the
objective stated above cannot be changed without approval of shareholders. As
a matter of investment practice, which can be changed without shareholder
approval, the Trust will invest in U.S. government securities with remaining
maturities of 3 years or less.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Trust. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Trust
sufficient to make payment for the securities to be purchased are segregated
on the Trust`s records at the trade date. These assets are marked to market
daily and are maintained until the transaction has been settled. The Trust
does not intend to engage in when-issued and delayed delivery transactions to
an extent that would cause the segregation of more than 20% of the total value
of its assets.
REPURCHASE AGREEMENTS
The Trust requires its custodian to take possession of the securities subject
to repurchase agreements, and these securities are marked to market daily. To
the extent that the original seller does not repurchase the securities from
the Trust, the Trust could receive less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Trust
might be delayed pending court action. The Trust believes that under the
regular procedures normally in effect for custody of the Trust's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Trust and allow retention or disposition of such
securities. The Trust will only enter into repurchase agreements with banks
and other recognized financial institutions such as broker/dealers which are
deemed by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
PORTFOLIO TURNOVER
The Trust will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Trust's investment objective. During the fiscal years ended
February 29, 1996, and February 28, 1995, the portfolio turnover rates were
142% and 265%, respectively.
INVESTMENT LIMITATIONS
The Trust will not change any of the investment limitations described below
without approval of shareholders.
SELLING SHORT AND BUYING ON MARGIN
The Trust will not sell any securities short or purchase any securities
on margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
BORROWING MONEY
The Trust 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 Trust to
meet redemption requests when the liquidation of portfolio securities
would be inconvenient or disadvantageous.
Interest paid on borrowed funds will not be available for investment. The
Trust will liquidate any such borrowings as soon as possible and may not
purchase any portfolio securities while the borrowings are outstanding.
PLEDGING ASSETS
The Trust 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 Trust 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.
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 Trust did not borrow money or pledge securities in excess of 5% of the
value of its net assets during the last fiscal year and has no present intent
to do so in the coming fiscal year.
As a matter of operating policy, the Trust will not purchase any securities
while borrowings in excess of 5% of its total assets are outstanding.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated U.S. Government Securities Fund: 1-3 Years, and
principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds. Mr. Donahue is
the father of J. Christopher Donahue, Executive Vice President of the Trust .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; Director or Trustee
of the Funds; formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director or Trustee of the Funds; formerly, President, Naples
Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director
or Trustee of the Funds; formerly, Vice Chairman and Director, PNC Bank, N.A.,
and PNC Bank Corp. and Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director
or Trustee of the Funds; formerly, Counsel, Horizon Financial, F.A., Western
Region.
Peter E. Madden
Seacliff
562 Bellevue Avenue
Newport, RI
Birthdate: March 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts; Director or
Trustee of the Funds; formerly, President, State Street Bank and Trust Company
and State Street Boston Corporation.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee
of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director or Trustee of the Funds; President Emeritus, University of
Pittsburgh; founding Chairman, National Advisory Council for Environmental
Policy and Technology and Federal Emergency Management Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director or Trustee of the Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated Services
Company; President and Trustee, Federated Shareholder Services; Director,
Federated Securities Corp.; Executive Vice President and Secretary of the
Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President and Trustee, Federated Investors; Vice President,
Federated Shareholder Services; Executive Vice President, Federated Securities
Corp.; Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable
Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA
Trust; Federated Government Income Securities, Inc.; Federated Government
Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-
Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 3-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series
Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series, Inc.
TRUST OWNERSHIP
Officers and Trustees own less than 1% of the Trust's outstanding shares.
As of April 1, 1996, the following shareholders of record owned 5% or more of
the outstanding Institutional Service Shares of the Trust: Charles Schwab and
Company, Inc., San Francisco, California acting in various capacities for
numerous accounts, owned approximately 805,562 shares (30.41%); Hauser
Chemical Research, Inc., Boulder, Colorado, owned approximately 199,242 shares
(7.52%); FM Co, Holland Michigan, owned approximately 136,559 shares (5.15%);
Industricorp and Co Inc., Minneapolis, Minnesota owned approximately 260,342
shares (9.83%) .
As of April 1, 1996, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Trust: Charles Schwab and
Company, Inc., San Francisco, California acting in various capacities for
numerous accounts owned approximately 3,689,626 shares (5.55%);The Northern
Trust Company as Trustee for the Libbey Owens Ford Savings Trust, Chicago,
Illinois, owned approximately 6,935,746 shares (10.44%); ACO, Integra Trust
Services, Pittsburgh , Pennsylvania, owned approximately 4,827,711 shares
(7.27%).
TRUSTEE COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue, $-0- $-0- for the Trust and
Chairman and Trustee 54 other investment companies in the Fund
Complex
Thomas G. Bigley,++ $ 835.00 $86,331 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John T. Conroy, $ 1,821.29 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
William J. Copeland, $ 1,821.29 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
James E. Dowd, $ 1,821.29 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D.,$ 1,690.90 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr.,$ 1,821.29 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Peter E. Madden, $ 1,690.90 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Gregor F. Meyer, $ 1,690.90 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John E. Murray, Jr., $ 1,690.90 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Wesley W. Posvar, $ 1,690.90 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Marjorie P. Smuts, $ 1,690.90 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
*Information is furnished for the fiscal year ended February 29, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
one portfolio.
+The information is provided for the last calendar year.
++ Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through September 30, 1995. On October 1, 1995, he was
appointed a Trustee on 15 additional Federated Funds.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE TRUST
The Trust's investment adviser is Federated Management. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue.
The adviser shall not be liable to the Trust or any shareholder of the Trust
for any losses that may be sustained in the purchase, holding, or sale of any
security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. During the fiscal year ended
February 29, 1996, and for the fiscal years ended February 28, 1995, and
1994, the Trust's adviser earned $2,902,888, $3,060,247, and $3,924,302,
respectively, which were reduced by $96,365, $152,733, and $0, respectively,
because of undertakings to limit the Trust's expenses.
STATE EXPENSE LIMITATIONS
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Trust's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2 1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1 1/2% per
year of the remaining average net assets, the adviser will reimburse the
Trust for its expenses over the limitation.
If the Trust's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the excess,
subject to an annual adjustment. If the expense limitation is exceeded, the
amount to be reimbursed by the adviser will be limited, in any single fiscal
year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
OTHER ADVISORY SERVICES
Federated Research Corp. receives fees from certain depository institutions
for providing consulting and portfolio advisory services relating to each
institution's program of asset management. Federated Research Corp. may advise
such clients to purchase or redeem shares of investment companies, such as the
Trust, which are managed, for a fee, by Federated Research Corp. or other
affiliates of Federated Investors, such as the adviser, and may advise such
clients to purchase and sell securities in the direct markets. Further,
Federated Research Corp., and other affiliates of adviser, may, from time to
time, provide certain consulting services and equipment to depository
institutions in order to facilitate the purchase of shares of funds offered by
Federated Securities Corp.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to guidelines established by the Trustees.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Trust or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services.
Research services provided by brokers and dealers may be used by the adviser
or its affiliates in advising the Trust and other accounts. To the extent that
receipt of these services may supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage
and research services provided. For the fiscal years ended February 29, 1996,
and February 28, 1995, and 1994, the Trust paid no brokerage commissions.
Although investment decisions for the Trust are made independently from those
of the other accounts managed by the adviser, investments of the type the
Trust may make may also be made by those other accounts. When the Trust and
one or more other accounts managed by the adviser are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Trust or the size of the position obtained
or disposed of by the Trust. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Trust.
OTHER SERVICES
Affiliates of the adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds by Federated Securities Corp.
TRUST ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Trust for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative
Services served as the Trust's Administrator. Prior to March 1, 1994,
Federated Administrative Services, Inc. served as the Trust's Administrator.
Both former Administrators are subsidiaries of Federated Investors. For
purposes of this Statement of Additional Information, Federated Services
Company, Federated Administrative Services and Federated Administrative
Services, Inc. may hereinafter collectively be referred to as the
"Administrators." For the fiscal years ended February 29, 1996, and February
28, 1995, and 1994, the Administrators earned $549,195, $654,725, and
$629,337, respectively.
Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the
Trust, holds approximately 20% of the outstanding common stock and serves as a
director of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Services Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Trust. Federated Services Company, Pittsburgh, PA,
provides certain accounting and recordkeeping services with respect to the
Trust's portfolio investments. The fee paid for this service is based upon the
level of the Trust's average net assets for the period plus out-of-pocket
expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the number of
shareholder accounts.
INDEPENDENT AUDITORS
The independent auditors for the Trust are Ernst & Young LLP, Pittsburgh, PA.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange is open for business. The procedure for purchasing
Shares is explained in the respective prospectus under "Investing in
Institutional Shares" or "Investing in Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER SERVICES
As explained in the respective prospectuses, with respect to Shares of the
Trust, the Trust has adopted a Shareholder Services Agreement, and, with
respect to Instituitional Service Shares the Trust has adopted a Distribution
Plan.
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and
assisting clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, the Trustees expect that the Trust will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Trust in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Trust's objectives, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ending February 29, 1996, payments in the amount of
$78,957 were made pursuant to the Distribution Plan (Institutional Service
Shares only), all of which was paid to financial institutions, of which
$75,789, was waived. In addition, for the period ending February 29, 1996,
payments in the amount of $1,735,351 and $78,957 for the Institutional and
Institutional Service Shares, respectively, were made pursuant to the
Shareholder Services Agreement of which $1,735,351 and $3,158, respectively,
were waived.
CONVERSION TO FEDERAL FUNDS
It is the Trust's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. State Street Bank acts as
the shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value
is calculated by the Trust are described in the respective prospectuses. Net
asset value will not be calculated on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Trust's portfolio securities are determined as follows:
o according to the mean between the over-the-counter bid and asked prices
provided by an independent pricing service, if available, or at fair
value as determined in good faith by the Trust's Board of Trustees; or
o for short-term obligations with remaining maturities of less than 60 days
at the time of purchase, at amortized cost unless the Board of Trustees
determines that particular circumstances of the security indicate
otherwise.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
REDEEMING SHARES
The Trust redeems Shares at the next computed net asset value after the Trust
receives the redemption request. Redemption procedures are explained in the
respective prospectuses under "Redeeming Institutional Shares" and "Redeeming
Institutional Service Shares." Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, the Trust will pay all or a portion of
the remainder of the redemption in portfolio instruments, valued in the same
way as the Trust determines net asset value. The portfolio instruments will be
selected in a manner that the Trustees deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act
or obligation of the Trust. Therefore, financial loss resulting from liability
as a shareholder will occur only if the Trust itself cannot meet its
obligations to indemnify shareholders and pay judgments against them.
TAX STATUS
THE TRUST'S TAX STATUS
The Trust will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Trust must,
among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. No portion of any income dividend paid
by the Trust is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable
as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as
long-term capital gains regardless of how long shareholders have held
Shares.
TOTAL RETURN
The Trust's average annual total return for Institutional Shares for the one-
year and five-year periods ended February 29, 1996, and for the period from
March 15, 1984 (effective date of the Trust's registration statement) to
February 29, 1996 were 7.41%, 5.81%, and 7.94%, respectively. The Trust's
cumulative total return for Institutional Service Shares for the period from
June 18, 1992 (start of performance of Institutional Service Shares), through
February 29, 1996, and for the year ended February 29, 1996, was 4.66% and
7.14%, respectively.
YIELD
The Trust's yield for the thirty day period ended February 29, 1996, was 4.51%
and 4.26% for Institutional Shares and Institutional Service Shares,
respectively.
The yield for both classes of shares of the Trust is determined by dividing
the net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
maximum offering price per share of either class on the last day of the
period. This value is annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by the
Trust because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, performance will be reduced for those shareholders paying
those fees.
PERFORMANCE COMPARISONS
The performance of both classes of shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Trust's expenses or either class of Share's expenses; and
o various other factors.
Either class of Shares' performance fluctuates on a daily basis largely
because net earnings and offering price per share fluctuate daily. Both net
earnings and net asset value per share are factors in the computation of yield
and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Trust's performance. When comparing performance,
investors should consider all relevant factors such as the composition of any
index used, prevailing market conditions, portfolio compositions of other
funds and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Trust uses in
advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various 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 Trust will quote its Lipper
ranking in the "U.S. government funds" category in advertising and sales
literature.
o MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking
short-term U.S. government securities with maturities between 1 and 2.99
years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith,
Inc.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic debt of the
U.S. government or any agency thereof, or any quasi-federal corporation
and of corporate debt guaranteed by the U.S. government. Only notes and
bonds with minimum outstanding principal of $1 million and minimum
maturity of one year and maximum maturity of ten years are included.
o MERRILL LYNCH 2-YEAR TREASURY CURVE INDEX is comprised of the most
recently issued 2-year U.S. Treasury notes. Index returns are calculated
as total returns for periods of one, three, six, and twelve months as
well as year-to-date.
o MERRILL LYNCH U.S. TREASURY SHORT TERM INDEX (1-2.99 YEARS) is an
unmanaged index tracking short-term U.S. government securities with
maturities between 1 and 2.99 years. The index is produced by Merrill
Lynch, Pierce, Fenner & Smith, Inc.
o 2-YEAR TREASURY NOTE--Source: Wall Street Journal, Bloomberg Financial
Markets, and Telerate.
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.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an investment
in either class of shares based on monthly reinvestment of dividends over a
specified period of time.
DURATION
Duration is a commonly used measure of the potential volatility in the price
of a bond, or other fixed income security, or in a portfolio of fixed income
securities, prior to maturity. Volatility is the magnitude of the change in
the price of a bond relative to a given change in the market rate of interest.
A bond's price volatility depends on three primary variables: the bond's
coupon rate; maturity date; and the level of market yields of similar fixed
income securities. Generally, bonds with lower coupons or longer maturities
will be more volatile than bonds with higher coupons or shorter maturities.
Duration combines these variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values of the
cash flows of a bond or bonds, including interest and principal payments, by
the sum of the present values of the cash flows.
When the Trust invests in mortgage pass-through securities, its duration will
be calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this calculation
is available upon request from the Trust.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected
in its investment decision making-structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands
of clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, 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
advisors. The marketing effort to these institutional clients is headed by
John B. Fisher, President, Institutional Sales Division.
*Source: Investment Company Institute
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
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 Mark R. Gensheimer,
Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
CUSIP 31428M100
CUSIP 31428M209
