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, 1998, with the
Securities and Exchange Commission ("SEC"). 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 1-800-341-7400. To obtain other
information or make inquiries about the Trust, contact the Trust at the address
listed in the back of this prospectus. The Statement of Additional Information,
material incorporated by reference into this document, and other information
regarding the Trust is maintained electronically with the SEC at Internet Web
site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated April 30, 1998
TABLE OF CONTENTS
Summary of Trust Expenses 1 Financial HighlightsInstitutional Shares 2 General
Information 3 Investment Information 3 Investment Objective 3 Investment
Policies 3 Investment Limitations 4 Trust Information 4 Management of the Trust
4 Distribution of Institutional Shares 5 Administration of the Trust 5 Net
Asset Value 6 Investing in Institutional Shares 6 Share Purchases 6 Minimum
Investment Required 6 What Shares Cost 6 Confirmations and Account Statements 6
Dividends 6 Capital Gains 7 Redeeming Institutional Shares 7 Telephone
Redemption 7 Written Requests 7 Accounts with Low Balances 8 Shareholder
Information 8 Voting Rights 8 Tax Information 8 Federal Income Tax 8 State and
Local Taxes 8 Performance Information 8 Other Classes of Shares 8 Financial
HighlightsInstitutional Service Shares 9 Financial Statements 10 Report of
Ernst & Young LLP, Independent Auditors Inside Back Cover
SUMMARY OF TRUST EXPENSES
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> 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
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
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 shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole discretion. The maximum
shareholder services fee is 0.25%.
(3) The total operating expenses would have been 0.80% absent the voluntary
waiver of a portion 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
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.
<S> <C>
1 Year $ 6
3 Years $17
5 Years $30
10 Years $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.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
NET ASSET VALUE, $10.32 $10.38 $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81 $10.21
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment 0.56 0.54 0.61 0.52 0.37 0.48 0.67 0.72 0.84 0.82
income
Net realized 0.09 (0.06) 0.13 (0.21) (0.07) 0.19 0.22 0.19 0.12 (0.40)
and unrealized
gain (loss) on
investments
Total from 0.65 0.48 0.74 0.31 0.30 0.67 0.89 0.91 0.96 0.42
investment
operations
LESS
DISTRIBUTIONS
Distributions (0.56) (0.54) (0.61) (0.52) (0.37) (0.48) (0.67) (0.72) (0.84) (0.82)
from net
investment income
NET ASSET VALUE, $10.41 $10.32 $10.38 $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81
END OF PERIOD
TOTAL RETURN(A) 6.41% 4.78% 7.41% 3.14% 2.93% 6.64% 9.07% 10.11% 10.08% 4.23%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.54% 0.54% 0.54% 0.54% 0.51% 0.49% 0.48% 0.48% 0.48% 0.47%
Net investment 5.36% 5.26% 5.91% 5.06% 3.56% 4.63% 6.57% 7.79% 8.42% 8.14%
income
Expense waiver/ 0.26% 0.27% 0.26% 0.02% -- -- -- -- -- --
reimbursement(b)
SUPPLEMENTAL DATA
Net assets, end $597,549$701,498 $697,692 $687,037 $858,556$1,034,374 $1,171,633 $1,296,579 $1,725,112$2,236,208
of period (000
omitted)
Portfolio 118% 145% 142% 265% 150% 132% 114% 96% 172% 112%
turnover
</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)
FURTHER INFORMATION ABOUT THE TRUST'S PERFORMANCE IS CONTAINED IN THE
TRUST'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998, WHICH CAN
BE OBTAINED FREE OF CHARGE.
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 Shares and Institutional Service Shares. This
prospectus relates only to Institutional Shares of the Trust.
Institutional Shares ("Shares") 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
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;
* notes, bonds, and discount notes issued or guaranteed by U.S.
government agencies and instrumentalities supported by the full faith
and credit of the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the
instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government 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.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Trust may invest its assets in securities of other investment companies as
an efficient means of carrying out its investment policies. It should be noted
that investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Trust in shares of other investment companies
may be subject to duplicate expenses.
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 0.40% of
the Trust's average daily net assets. 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 $120 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 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.
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 Senior Vice President of
the Trust's investment adviser since April 1997. Ms. Nason served as a Vice
President of the investment adviser from 1993 to 1997, and as an Assistant
Vice President from 1990 until 1992. Ms. Nason is a Chartered Financial
Analyst and received her M.S.I.A. concentrating in Finance from Carnegie
Mellon University.
Robert J. Ostrowski has been the Trust's portfolio manager since October
1997. Mr. Ostrowski joined Federated in 1987 as an Investment Analyst and
has been a Senior Vice President of the Trust's adviser since September
1997. Mr. Ostrowski served as Vice President of the Trust's adviser from
1993 to 1997, and as an Assistant Vice president from 1992 to 1993. Mr.
Ostrowski is a Chartered Financial Analyst. He received his M.S. in
Industrial Administration from Carnegie Mellon University.
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.
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 0.25% 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:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may 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 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 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 receives
the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $25,000, plus any financial
intermediary'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 financial
intermediary 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 service 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,
Martin Luther King Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Trust will not issue share certificates.
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
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 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 1-800-341-7400.
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
the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993(A)
NET ASSET VALUE, BEGINNING OF PERIOD $10.32 $10.38 $10.25 $10.46 $10.53 $10.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.52 0.59 0.50 0.35 0.34
Net realized and unrealized gain (loss) on 0.09 (0.06) 0.13 (0.21) (0.07) 0.16
investments
Total from investment operations 0.62 0.46 0.72 0.29 0.28 0.50
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.52) (0.59) (0.50) (0.35) (0.34)
NET ASSET VALUE, END OF PERIOD $10.41 $10.32 $10.38 $10.25 $10.46 $10.53
TOTAL RETURN(B) 6.15% 4.52% 7.14% 2.88% 2.68% 4.28%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79%* 0.79% 0.79% 0.79% 0.76% 0.74%*
Net investment income 5.11%* 5.01% 5.68% 4.76% 3.33% 4.14%*
Expense waiver/reimbursement(c) 0.26%* 0.27% 0.26% 0.25% -- --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $33,631 $29,181 $26,432 $29,208$39,905 $72,722
Portfolio turnover 118% 145% 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)
FURTHER INFORMATION ABOUT THE TRUST'S PERFORMANCE IS CONTAINED IN THE
TRUST'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998, WHICH CAN
BE OBTAINED FREE OF CHARGE.
PORTFOLIO OF INVESTMENTS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. SHORT-INTERMEDIATE TERM OBLIGATIONS--98.0%
U.S. TREASURY NOTES--98.0%
$ 18,000,000 6.250%, 3/31/1999 $ 18,141,840
35,000,000 6.375%, 4/30/1999 35,337,050
25,000,000 6.250%, 5/31/1999 25,213,250
20,050,000 6.750%, 5/31/1999 20,339,722
20,000,000 6.875%, 7/31/1999 20,355,200
15,000,000 6.000%, 8/15/1999 15,093,750
45,000,000 5.875%, 8/31/1999 45,216,450
60,000,000 5.750%, 9/30/1999 60,189,000
15,025,000 7.125%, 9/30/1999 15,379,440
56,500,000 5.625%, 10/31/1999 56,547,460
26,000,000 7.500%, 10/31/1999 26,785,460
90,000,000 5.875%, 11/15/1999 90,453,600
15,000,000 7.750%, 11/30/1999 15,540,150
68,000,000 5.625%, 12/31/1999 68,092,480
50,000,000 6.000%, 8/15/2000 50,503,500
55,000,000 5.750%, 11/15/2000 55,259,600
TOTAL INVESTMENTS (IDENTIFIED COST $615,664,440)(A) $ 618,447,952
(a) The cost of investments for federal tax purposes amounts to $615,679,010.
The net unrealized appreciation of investments on a federal tax basis amounts to
$2,768,942 which is comprised of $2,859,730 appreciation and $90,788
depreciation at February 28, 1998.
Note: The categories of investments are shown as a percentage of net assets
($631,179,815) at February 28, 1998.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEBRUARY 28, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 618,447,952
$615,664,440 and tax cost $615,679,010)
Income receivable 10,520,691
Receivable for shares sold 4,684,307
Total assets 633,652,950
LIABILITIES:
Payable for shares redeemed 578,808
Income distribution payable 1,159,004
Payable to Bank 651,018
Accrued expenses 84,305
Total liabilities 2,473,135
NET ASSETS for 60,658,508 shares outstanding $ 631,179,815
NET ASSETS CONSIST OF:
Paid in capital $ 645,077,377
Net unrealized appreciation of investments 2,783,512
Accumulated net realized loss on investments (16,681,074)
Total net assets $ 631,179,815
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$597,548,752 / 57,426,443 shares outstanding $10.41
INSTITUTIONAL SERVICE SHARES:
$33,631,063 / 3,232,065 shares outstanding $10.41
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
YEAR ENDED FEBRUARY 28, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 40,497,681
EXPENSES:
Investment advisory fee $ 2,742,606
Administrative personnel and services fee 517,508
Custodian fees 32,941
Transfer and dividend disbursing agent fees and 224,519
expenses
Directors'/Trustees' fees 11,971
Auditing fees 17,800
Legal fees 4,767
Portfolio accounting fees 126,161
Distribution services fee--Institutional Service 74,536
Shares
Shareholder services fee--Institutional Shares 1,639,592
Shareholder services fee--Institutional Service 74,536
Shares
Share registration costs 42,800
Printing and postage 37,293
Insurance premiums 6,551
Taxes 73
Miscellaneous 14,176
Total expenses 5,567,830
Waivers and reimbursements--
Waiver of investment advisory fee $ (46,875)
Waiver of distribution services fee--Institutional (71,555)
Service Shares
Waiver of shareholder services fee--Institutional (1,639,592)
Shares
Waiver of shareholder services fee--Institutional (2,981)
Service Shares
Total waivers (1,761,003)
Net expenses 3,806,827
Net investment income 36,690,854
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 2,018,431
Net change in unrealized appreciation of investments 3,542,439
Net realized and unrealized gain on investments 5,560,870
Change in net assets resulting from operations $ 42,251,724
</TABLE>
See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
<S> <C> <C>
1998 1997
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 36,690,854 $ 38,315,986
Net realized gain on investments ($2,033,001 and $2,407,185 net 2,018,431 2,407,185
gain, respectively, as computed for federal tax purposes)
Net change in unrealized appreciation (depreciation) 3,542,439 (6,065,113)
Change in net assets resulting from operations 42,251,724 34,658,058
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (35,155,560) (36,995,327)
Institutional Service Shares (1,535,294) (1,320,659)
Change in net assets resulting from distributions to (36,690,854) (38,315,986)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 302,726,969 322,523,461
Net asset value of shares issued to shareholders in payment of 18,874,038 17,987,684
distributions declared
Cost of shares redeemed (426,661,455) (330,297,708)
Change in net assets resulting from share transactions (105,060,448) 10,213,437
Change in net assets (99,499,578) 6,555,509
NET ASSETS:
Beginning of period 730,679,393 724,123,884
End of period $ 631,179,815 $ 730,679,393
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEBRUARY 28, 1998
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 Trust offers
two classes of shares: Institutional Shares and Institutional Service
Shares. The investment objective of the Trust is to provide current income.
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 furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or less
at the time of purchase may be valued at amortized cost, which approximates fair
market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to the expiration of a portion of the
capital loss carryforward. The following reclassifications have been made to the
financial statements.
INCREASE (DECREASE)
ACCUMULATED NET
PAID IN CAPITAL REALIZED LOSS
(63,167,180) 63,167,180
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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 28, 1998, the Trust, for federal tax purposes, had a capital loss
carryforward of $16,666,504, 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 in 2003.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may engage in when-issued or delayed delivery transactions. The Trust
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1998 1997
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 27,005,133 $ 279,621,175 29,434,341 $303,822,056
Shares issued to shareholders 1,693,644 17,556,139 1,630,031 16,817,409
in payment of distributions declared
Shares redeemed (39,219,746) (406,462,678) (30,345,659) (313,337,852)
Net change resulting from
Institutional Share transactions (10,520,969) ($109,285,364) 718,713 $ 7,301,613
<CAPTION>
YEAR ENDED FEBRUARY 28,
1997 1998
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 2,230,331 $ 23,105,794 1,810,402 $ 18,701,405
Shares issued to shareholders in payment of
distributions declared 127,126 1,317,899 113,428 1,170,275
Shares redeemed (1,951,903) (20,198,777) (1,644,276) (16,959,856)
Net change resulting from Institutional
Service Share transactions 405,554 $4,224,916 279,554 $ 2,911,824
Net change resulting from
share transactions (10,115,415) ($105,060,448) 998,267 $ 10,213,437
At February 28, 1998,capital paid-in aggregated $645,077,377.
</TABLE>
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.
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
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive any portion of its fee. FSC can modify or terminate this
voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Trust will pay FSS up to 0.25% of average daily 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 28, 1998, FSS fully waived its shareholder services fee.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary, Federated
Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing
agent for the Trust. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
Federated Services Company 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.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 1998, were as follows:
PURCHASES $795,561,171
SALES $898,733,891
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 28, 1998, 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 the financial highlights (see pages 2 and 9
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 28, 1998, by correspondence with the custodian and brokers or other
appropriate auditing procedures where replies from brokers were not received. 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 28, 1998, 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 15, 1998
[Graphic]
Federated Investors
Federated U.S. Government Securities Fund: 1-3 Years
Institutional Shares
PROSPECTUS
APRIL 30, 1998
An Open-End, Diversified Management Investment Company
FEDERATED U.S. GOVERNMENT SECURITIES FUND:
1-3 YEARS
INSTITUTIONAL SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
1 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp.,Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 31428M100
8032806A-IS (4/98)
[Graphic]
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, 1998, with the
Securities and Exchange Commission ("SEC"). 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 1-800-341-7400. To obtain other
information or make inquiries about the Trust, contact the Trust at the address
listed in the back of this prospectus. The Statement of Additional Information,
material incorporated by reference into this document, and other information
regarding the Trust is maintained electronically with the SEC at Internet Web
site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated April 30, 1998
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 4 Management
of the Trust 4 Distribution of Institutional Service Shares 5 Administration of
the Trust 6 Net Asset Value 6 Investing in Institutional Service Shares 6 Share
Purchases 6 Exchange Privilege 6 Minimum Investment Required 7 What Shares Cost
7 Confirmations and Account Statements 7 Dividends 7 Capital Gains 7 Redeeming
Institutional Service Shares 7 Telephone Redemption 7 Written Requests 8
Accounts with Low Balances 8 Shareholder Information 8 Voting Rights 8 Tax
Information 8 Federal Income Tax 8 State and Local Taxes 8 Performance
Information 9 Other Classes of Shares 9 Financial Highlights--Institutional
Shares 10 Financial Statements 11 Report of Ernst & Young LLP, Independent
Auditors 18
SUMMARY OF TRUST EXPENSES
<TABLE>
<CAPTION>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> 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
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
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 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any time
at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholders services fee. The shareholder service
provider can terminate this voluntary waiver at any time at its sole discretion.
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, 12b-1 fee and 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 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
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.
<S> <C>
1 Year $ 8
3 Years $25
5 Years $44
10 Years $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.
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 18.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993(A)
NET ASSET VALUE, BEGINNING OF PERIOD $10.32 $10.38 $10.25 $10.46 $10.53 $10.37
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.52 0.59 0.50 0.35 0.34
Net realized and unrealized gain (loss) on 0.09 (0.06) 0.13 (0.21) (0.07) 0.16
investments
Total from investment operations 0.62 0.46 0.72 0.29 0.28 0.50
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.52) (0.59) (0.50) (0.35) (0.34)
NET ASSET VALUE, END OF PERIOD $10.41 $10.32 $10.38 $10.25 $10.46 $10.53
TOTAL RETURN(B) 6.15% 4.52% 7.14% 2.88% 2.68% 4.28%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79%* 0.79% 0.79% 0.79% 0.76% 0.74%*
Net investment income 5.11%* 5.01% 5.68% 4.76% 3.33% 4.14%*
Expense waiver/reimbursement(c) 0.26%* 0.27% 0.26% 0.25% -- --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $33,631 $29,181 $26,432 $29,208$39,905 $72,722
Portfolio turnover 118% 145% 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)
FURTHER INFORMATION ABOUT THE TRUST'S PERFORMANCE IS CONTAINED IN THE
TRUST'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998, WHICH CAN
BE OBTAINED FREE OF CHARGE.
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 31U2 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;
* notes, bonds, and discount notes issued or guaranteed by U.S.
government agencies and instrumentalities supported by the full faith
and credit of the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the
instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government 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.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Trust may invest its assets in securities of other investment companies as
an efficient means of carrying out its investment policies. It should be noted
that investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Trust in shares of other investment companies
may be subject to duplicate expenses.
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 0.40% of
the Trust's average daily net assets. 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 $120 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 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.
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 Senior Vice President of
the Trust's investment adviser since April 1997. Ms. Nason served as a Vice
President of the investment adviser from 1993 to 1997, and as an Assistant
Vice President from 1990 until 1992. Ms. Nason is a Chartered Financial
Analyst and received her M.S.I.A. concentrating in Finance from Carnegie
Mellon University.
Robert J. Ostrowski has been the Trust's portfolio manager since October
1997. Mr. Ostrowski joined Federated in 1987 as an Investment Analyst and
has been a Senior Vice President of the Trust's adviser since September
1997. Mr. Ostrowski served as Vice President of the Trust's adviser from
1993 to 1997, and as an Assistant Vice president from 1992 to 1993. Mr.
Ostrowski is a Chartered Financial Analyst. He received his M.S. in
Industrial Administration from Carnegie Mellon University.
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.
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 0.25% 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 0.25% of the average daily net asset value of
the Institutional Service 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 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.
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may 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 YearsInstitutional 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.
EXCHANGE PRIVILEGE
Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors may exchange their Shares for
Institutional Shares of the Trust at net asset value.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $25,000, plus any financial
intermediary'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 financial
intermediary 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 service 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,
Martin Luther King Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Trust will not issue share certificates.
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.
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
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 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 1-800-341-7400.
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 18.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
NET ASSET VALUE, $10.32 $10.38 $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81 $10.21
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment 0.56 0.54 0.61 0.52 0.37 0.48 0.67 0.72 0.84 0.82
income
Net realized 0.09 (0.06) 0.13 (0.21) (0.07) 0.19 0.22 0.19 0.12 (0.40)
and unrealized
gain (loss) on
investments
Total from 0.65 0.48 0.74 0.31 0.30 0.67 0.89 0.91 0.96 0.42
investment
operations
LESS
DISTRIBUTIONS
Distributions (0.56) (0.54) (0.61) (0.52) (0.37) (0.48) (0.67) (0.72) (0.84) (0.82)
from net
investment income
NET ASSET VALUE, $10.41 $10.32 $10.38 $10.25 $10.46 $10.53 $10.34 $10.12 $ 9.93 $ 9.81
END OF PERIOD
TOTAL RETURN(A) 6.41% 4.78% 7.41% 3.14% 2.93% 6.64% 9.07% 10.11% 10.08% 4.23%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.54% 0.54% 0.54% 0.54% 0.51% 0.49% 0.48% 0.48% 0.48% 0.47%
Net investment 5.36% 5.26% 5.91% 5.06% 3.56% 4.63% 6.57% 7.79% 8.42% 8.14%
income
Expense waiver/ 0.26% 0.27% 0.26% 0.02% -- -- -- -- -- --
reimbursement(b)
SUPPLEMENTAL DATA
Net assets, end $597,549$701,498 $697,692 $687,037 $858,556$1,034,374 $1,171,633 $1,296,579 $1,725,112$2,236,208
of period (000
omitted)
Portfolio 118% 145% 142% 265% 150% 132% 114% 96% 172% 112%
turnover
</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)
FURTHER INFORMATION ABOUT THE TRUST'S PERFORMANCE IS CONTAINED IN THE
TRUST'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998, WHICH CAN
BE OBTAINED FREE OF CHARGE.
PORTFOLIO OF INVESTMENTS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. SHORT-INTERMEDIATE TERM OBLIGATIONS--98.0%
U.S. TREASURY NOTES--98.0%
$ 18,000,000 6.250%, 3/31/1999 $ 18,141,840
35,000,000 6.375%, 4/30/1999 35,337,050
25,000,000 6.250%, 5/31/1999 25,213,250
20,050,000 6.750%, 5/31/1999 20,339,722
20,000,000 6.875%, 7/31/1999 20,355,200
15,000,000 6.000%, 8/15/1999 15,093,750
45,000,000 5.875%, 8/31/1999 45,216,450
60,000,000 5.750%, 9/30/1999 60,189,000
15,025,000 7.125%, 9/30/1999 15,379,440
56,500,000 5.625%, 10/31/1999 56,547,460
26,000,000 7.500%, 10/31/1999 26,785,460
90,000,000 5.875%, 11/15/1999 90,453,600
15,000,000 7.750%, 11/30/1999 15,540,150
68,000,000 5.625%, 12/31/1999 68,092,480
50,000,000 6.000%, 8/15/2000 50,503,500
55,000,000 5.750%, 11/15/2000 55,259,600
TOTAL INVESTMENTS (IDENTIFIED COST $615,664,440)(A) $ 618,447,952
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $615,679,010.
The net unrealized appreciation of investments on a federal tax basis amounts to
$2,768,942 which is comprised of $2,859,730 appreciation and $90,788
depreciation at February 28, 1998.
Note: The categories of investments are shown as a percentage of net assets
($631,179,815) at February 28, 1998.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEBRUARY 28, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $ 618,447,952
$615,664,440 and tax cost $615,679,010)
Income receivable 10,520,691
Receivable for shares sold 4,684,307
Total assets 633,652,950
LIABILITIES:
Payable for shares redeemed 578,808
Income distribution payable 1,159,004
Payable to Bank 651,018
Accrued expenses 84,305
Total liabilities 2,473,135
NET ASSETS for 60,658,508 shares outstanding $ 631,179,815
NET ASSETS CONSIST OF:
Paid in capital $ 645,077,377
Net unrealized appreciation of investments 2,783,512
Accumulated net realized loss on investments (16,681,074)
Total net assets $ 631,179,815
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$597,548,752 / 57,426,443 shares outstanding $10.41
INSTITUTIONAL SERVICE SHARES:
$33,631,063 / 3,232,065 shares outstanding $10.41
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
YEAR ENDED FEBRUARY 28, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 40,497,681
EXPENSES:
Investment advisory fee $ 2,742,606
Administrative personnel and services fee 517,508
Custodian fees 32,941
Transfer and dividend disbursing agent fees and 224,519
expenses
Directors'/Trustees' fees 11,971
Auditing fees 17,800
Legal fees 4,767
Portfolio accounting fees 126,161
Distribution services fee--Institutional Service 74,536
Shares
Shareholder services fee--Institutional Shares 1,639,592
Shareholder services fee--Institutional Service 74,536
Shares
Share registration costs 42,800
Printing and postage 37,293
Insurance premiums 6,551
Taxes 73
Miscellaneous 14,176
Total expenses 5,567,830
Waivers and reimbursements--
Waiver of investment advisory fee $ (46,875)
Waiver of distribution services fee--Institutional (71,555)
Service Shares
Waiver of shareholder services fee--Institutional (1,639,592)
Shares
Waiver of shareholder services fee--Institutional (2,981)
Service Shares
Total waivers (1,761,003)
Net expenses 3,806,827
Net investment income 36,690,854
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 2,018,431
Net change in unrealized appreciation (depreciation) 3,542,439
of investments
Net realized and unrealized gain on investments 5,560,870
Change in net assets resulting from operations $ 42,251,724
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
<S> <C> <C>
1998 1997
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 36,690,854 $ 38,315,986
Net realized gain (loss) on investments ($2,033,001 and 2,018,431 2,407,185
$2,407,185 net gain, respectively, as computed for federal tax
purposes)
Net change in unrealized appreciation (depreciation) 3,542,439 (6,065,113)
Change in net assets resulting from operations 42,251,724 34,658,058
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (35,155,560) (36,995,327)
Institutional Service Shares (1,535,294) (1,320,659)
Change in net assets resulting from distributions to (36,690,854) (38,315,986)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 302,726,969 322,523,461
Net asset value of shares issued to shareholders in payment of 18,874,038 17,987,684
distributions declared
Cost of shares redeemed (426,661,455) (330,297,708)
Change in net assets resulting from share transactions (105,060,448) 10,213,437
Change in net assets (99,499,578) 6,555,509
NET ASSETS:
Beginning of period 730,679,393 724,123,884
End of period $ 631,179,815 $ 730,679,393
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEBRUARY 28, 1998
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 Trust offers
two classes of shares: Institutional Shares and Institutional Service
Shares. The investment objective of the Trust is to provide current income.
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 furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or less
at the time of purchase may be valued at amortized cost, which approximates fair
market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to the expiration of a portion of the
capital loss carryforward. The following reclassifications have been made to the
financial statements.
INCREASE (DECREASE)
ACCUMULATED NET
PAID IN CAPITAL REALIZED LOSS
(63,167,180) 63,167,180
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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 28, 1998, the Trust, for federal tax purposes, had a capital loss
carryforward of $16,666,504, 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 in 2003.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may engage in when-issued or delayed delivery transactions. The Trust
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1998 1997
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 27,005,133 $ 279,621,175 29,434,341 $303,822,056
Shares issued to shareholders 1,693,644 17,556,139 1,630,031 16,817,409
in payment of distributions declared
Shares redeemed (39,219,746) (406,462,678) (30,345,659) (313,337,852)
Net change resulting from
Institutional Share transactions (10,520,969) ($109,285,364) 718,713 $ 7,301,613
<CAPTION>
YEAR ENDED FEBRUARY 28,
1997 1998
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 2,230,331 $ 23,105,794 1,810,402 $ 18,701,405
Shares issued to shareholders in payment of
distributions declared 127,126 1,317,899 113,428 1,170,275
Shares redeemed (1,951,903) (20,198,777) (1,644,276) (16,959,856)
Net change resulting from Institutional
Service Share transactions 405,554 $4,224,916 279,554 $ 2,911,824
Net change resulting from
share transactions (10,115,415) ($105,060,448) 998,267 $ 10,213,437
At February 28, 1998,capital paid-in aggregated $645,077,377.
</TABLE>
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.
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
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive any portion of its fee. FSC can modify or terminate this
voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Trust will pay FSS up to 0.25% of average daily 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 28, 1998, FSS fully waived its shareholder services fee.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary, Federated
Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing
agent for the Trust. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
Federated Services Company 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.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 1998, were as follows:
PURCHASES $795,561,171
SALES $898,733,891
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 28, 1998, 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 the financial highlights (see pages 2 and 9
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 28, 1998, by correspondence with the custodian and brokers or other
appropriate auditing procedures where replies from brokers were not received. 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 28, 1998, 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 15, 1998
NOTES
NOTES
[Graphic]
Federated Investors
Federated U.S. Government Securities Fund:
1-3 Years
Institutional Service Shares
PROSPECTUS
APRIL 30, 1998
An Open-End, Diversified Management Investment Company
FEDERATED U.S. GOVERNMENT SECURITIES FUND:
1-3 YEARS
INSTITUTIONAL SERVICE SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 31428M209
8032806A-SS (4/98)
[Graphic]
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, 1998. 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 1-800-341-7400.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated April 30, 1998
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Cusip 31428M100
Cusip 31428M209
8032806B(4/98)
[Graphic]
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE TRUST 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 1
Investing in Securities of Other Investment Companies 1
Portfolio Turnover 1
Investment Limitations 1
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS MANAGEMENT 2
Trust Ownership 6
Trustee Compensation 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
Adviser to the Trust 7
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
OTHER SERVICES 8
Trust Administration 8
Custodian and Portfolio Accountant 8
Transfer Agent 8
Independent Auditors 8
PURCHASING SHARES 9
Distribution Plan (Institutional Service Shares Only) and Shareholder
Services 9
Conversion to Federal Funds 9
DETERMINING NET ASSET VALUE 9
Determining Market Value of Securities 9
REDEEMING SHARES 10
Redemption in Kind 10
MASSACHUSETTS PARTNERSHIP LAW 10
TAX STATUS 10
The Trust's Tax Status 10
Shareholders' Tax Status 11
TOTAL RETURN 11
YIELD 11
PERFORMANCE COMPARISONS 11
Duration 12
ABOUT FEDERATED INVESTORS 12
Mutual Fund Market 13
Institutional Clients 13
Bank Marketing 13
Broker/Dealers and Bank Broker/Dealer Subsidiaries 13
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 in U.S. government securities with remaining maturities of
three and one-half (31U2) 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Trust may invest in the securities of affiliated money market funds as an
efficient means of managing the Trust's uninvested cash.
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 28,
1998, and February 28, 1997, the portfolio turnover rates were 118% and 145%,
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 Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Member of Executive Committee, Children's Hospital of Pittsburgh;
formerly, Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.;
Director, Member of Executive Committee, University of Pittsburgh; Director or
Trustee of the Funds.
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; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Formerly, Partner, Andersen Worldwide SC; Director or Trustee of the Funds.
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.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
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, 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.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; 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; 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; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public Relations/Marketing/Conference Planning; 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, Secretary, and Treasurer
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; Treasurer of some 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.
* 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; 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 Core
Trust; 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 Investment Portfolios; Federated
Investment Trust; 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: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds;
Fixed Income Securities, 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 Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
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; WesMark Funds; WCT Funds; and World Investment Series,
Inc.
TRUST OWNERSHIP
Officers and Trustees own less than 1% of the Trust's outstanding shares.
As of April 8, 1998, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Trust: The Northern Trust Company as
Trustee for the Libbey Owens Ford Savings Trust, Chicago, Illinois, owned
approximately 8,834,593 shares (15.65%); Charles Schwab and Company, Inc., San
Francisco, California acting in various capacities for numerous accounts owned
approximately 4,796,703 shares (8.50%); Sheldon & Company, Cleveland, Ohio,
owned approximately 4,059,571 shares (7.19%).
As of April 8, 1998, 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 417,219 shares (13.18%); Forethought
National Trustbank, Batesville, Indiana, owned approximately 185,010 shares
(5.84%); Industricorp and Co. Inc., Minneapolis, Minnesota owned approximately
205,150 shares (6.48%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
<S> <C> <C>
John F. Donahue $0 $0 for the Trust and
Chairman and Trustee 56 other investment companies
in the Fund Complex
Thomas G. Bigley $1,547.87 $111,222 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
John T. Conroy, Jr. $1,702.90 $122,362 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
Nicholas P. Constantakis++ $377.18 $0 for the Trust and
Trustee 34 other investment companies
in the Fund Complex
William J. Copeland $1,702.90 $122,362 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
James E. Dowd $1,702.90 $122,362 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
Lawrence D. Ellis, M.D. $1,547.87 $111,222 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
Edward L. Flaherty, Jr. $1,702.90 $122,362 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
Peter E. Madden $1,547.87 $111,222 for Trust and
Trustee 56 other investment companies
in the Fund Complex
John E. Murray, Jr. $1,547.87 $111,222 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
Wesley W. Posvar $1,547.87 $111,222 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
Marjorie P. Smuts $1,547.87 $111,222 for the Trust and
Trustee 56 other investment companies
in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended February 28, 1998.
# The aggregate compensation is provided for the Trust which is comprised of
one portfolio.
+ The information is provided for the last calendar year.
++ Mr. Constantakis became a member of the Board of Trustees on February 23,
1998.
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. For the fiscal years ended February
28, 1998, February 28, 1997, and February 29, 1996, the Trust's adviser earned
$2,742,606, $2,917,433, and $2,902,888, respectively, which were reduced by
$46,875, $160,105, and $96,365, respectively, because
of undertakings to limit the Trust's expenses.
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 28, 1998, and
February 28, 1997, and February 29, 1996, 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
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
prospectuses. From March 1, 1994, to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Trust's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company, and Federated Administrative Services may
hereinafter collectively be referred to as the "Administrators." For the fiscal
years ended February 28, 1998, February 28, 1997, and February 29, 1996, the
Administrators earned $517,508, $551,185, and $549,195, respectively.
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 prospectuses 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 Institutional 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 ended February 28, 1998, payments in the amount of $66,385
were made pursuant to the Distribution Plan (Institutional Service Shares only),
of which $63,730, was waived. In addition, for the fiscal year ended February
28, 1998, payments in the amount of $1,639,592 and $74,536 for the Institutional
Shares and Institutional Service Shares, respectively, were made pursuant to the
Shareholder Services Agreement of which $1,639,592 and $2,981, 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. Federated Shareholder Services
Company 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.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Trust's portfolio securities are determined as follows:
* 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
* 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:
* yield;
* quality;
* coupon rate;
* maturity;
* type of issue;
* trading characteristics; and
* 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 Federated Shareholder Services Company
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.
Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Trust's portfolio. To the extent available,
such securities will be readily marketable.
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 on behalf of the Trust.
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 from its assets.
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:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* invest in securities within certain statutory limits; and
* 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, five-year, and ten-year periods ended February 28, 1998, were 6.41%,
4.92%, and 6.45%, respectively. The Trust's average annual total return for
Institutional Service Shares for the period from May 30, 1992 (start of
performance of Institutional Service Shares), through February 28, 1998, and for
the year ended February 28, 1998, were 4.66% and 6.15%, respectively.
YIELD
The Trust's yield for the thirty-day period ended February 28, 1998, was 4.88%
and 4.63% 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:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested; * changes in
interest rates and market value of portfolio securities; * changes in the
Trust's expenses or either class of Share's expenses;
and
* 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:
* 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.
* 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.
* 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.
* 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.
* 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.
* 2-YEAR TREASURY NOTE--Source: Wall Street Journal, Bloomberg Financial
Markets, and Telerate.
* 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. 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. These traders handle trillions of dollars
in annual trading volume.
In the government sector, as of December 31, 1997, Federated Investors manages 9
mortgage-backed, 6 government/ agency and 18 government money market mutual
funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion,
respectively. Federated trades approximately $400 million in U.S. government and
mortgage-backed securities daily and places approximately $23 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $36 billion in government funds within these
maturity ranges.
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 and global portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 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 approximately 900 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.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillon, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide -- we have over 2,200 broker/ dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President Federated Securities Corp.
* Source: Investment Company Institute
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
Annual Report for Fiscal Year Ended February 28, 1998
MANAGEMENT DISCUSSION AND ANALYSIS
Federated U.S. Government Securities Fund: 1-3 Years represents a fully
invested participation in those obligations of the U.S. Treasury and certain
government agencies which have a maximum maturity of 3 1/2 years and an
average maturity of 11/2 to 2 years. During the fund's fiscal year ended
February 1998, the fund was primarily invested in U.S. Treasury securities.
Standard & Poor's has maintained the fund's "AAAf" credit rating.*
During the fund's annual reporting period, fixed income performance reflected
above trend economic growth combined with subdued inflation. After remaining on
hold for over a year and citing persisting strength in demand as increasing the
risk of inflationary imbalances, the Federal Reserve Board increased the federal
funds target rate from 5.25% to 5.50% near the end of March 1997. This was the
first tightening of monetary policy in over two years. The 2-year Treasury note
yield increased from 6.09% at the end of February 1997 to 6.54% near the end of
April as the short to intermediate portion of the yield curve transitioned from
pricing in a status quo to a more restrictive Fed monetary policy.
U.S. Treasury yields steadily declined during the remainder of the fund's
reporting period, more than offsetting the preceding interest rate rise.
Consumer prices increased at only a 1.4% annual rate through February 1998, and
the federal funds rate remained on hold as the Asian financial crisis eliminated
the possibility of a tightening of Fed monetary policy. The 2-year Treasury note
yield declined to 5.54% at the end of February 1998. The fund's average
maturity/duration has been managed within its neutral range, and ended the
reporting period at 1.7/1.7 years. Due to the counteracting forces of the
underlying strength in the U.S. economy and the potential deflationary impact of
the Asian crisis, Fed monetary policy should remain unchanged in the near term.
The fund's net total return for Institutional Shares and Institutional Service
Shares for the year ended February 28, 1998, was 6.41%** and 6.15%,**
respectively, compared to 6.00% for the Merrill Lynch 1-Year Treasury Index+ and
6.95% for the Merrill Lynch 2-Year Treasury Index.+
* "AAAf" rated fund portfolio holdings and counterparties provide extremely
strong protection against losses from credit defaults.
** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
+ These indices are unmanaged.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
(Institutional Service Shares)
GROWTH OF $25,000 INVESTED IN FEDERATED U.S. GOVERNMENT SECURITIES FUND:
1-3 YEARS
(INSTITUTIONAL SERVICE SHARES)
The graph below illustrates the hypothetical investment of $25,000* in the
Federated U.S. Government Securities Fund: 1-3 Years (Institutional Service
Shares) (the "Fund") from May 30, 1992 (start of performance) to February 28,
1998, compared to the Merrill Lynch U.S. Treasury Short-Term Index (1-2.99
years) (MLUSTSTI),+ and the Lipper Short U.S. Government Funds Average
(LSUSGFA).++
[Graphic] (see Appendix)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE, SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated April
30, 1998, and, together with financial statements contained therein, constitutes
the Fund's annual report.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The MLUSTSTI and the LSUSGFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
+ The MLUSTSTI is not adjusted to reflect sales charges, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. The index is unmanaged.
++ The LSUSGFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the respective category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees that the
Securities and Exchange Commission requires to be reflected in a fund's
performance.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
(Institutional Shares)
GROWTH OF $25,000 INVESTED IN FEDERATED U.S. GOVERNMENT SECURITIES FUND:
1-3 YEARS
(INSTITUTIONAL SHARES)
The graph below illustrates the hypothetical investment of $25,000* in the
Federated U.S. Government Securities Fund: 1-3 Years (Institutional Shares)
(the "Fund") from February 28, 1988 to February 28, 1998, compared to the
Merrill Lynch U.S. Treasury Short-Term Index (1-2.99 years) (MLUSTSTI),+ and
the Lipper Short U.S. Government Funds Average (LSUSGFA).++
[Graphic] (see Appendix)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE, SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated April
30, 1998, and, together with financial statements contained therein, constitutes
the Fund's annual report.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The MLUSTSTI and the LSUSGFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
+ The MLUSTSTI is not adjusted to reflect sales charges, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance. The index is unmanaged.
++ The LSUSGFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the respective category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees that the
Securities and Exchange Commission requires to be reflected in a fund's
performance.
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428M209
Cusip 31428M100
8032806ARS (4/98)
[Graphic]
APPENDIX
A-1. The graphic presentation here displayed consists of a line graph titled
"Growth of $25,000 Invested in Federated U.S. Government Securities Fund: 1-3
Years (Institutional Service Shares)". The corresponding components of the line
graph are listed underneath. The Federated U.S. Government Securities Fund: 1-3
Years (Institutional Service Shares) (the "Fund") is represented by a solid
line. The Merrill Lynch U.S. Treasury Short-Term Index (the "MLUSTSTI") is
represented by a dotted line. The Lipper Short U.S. Government Funds Average
(the "LSUSGFA") is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical $25,000
investment in the Fund, the MLUSTSTI and the LSUSGFA . The "x" axis reflects
computation periods from the start of performance (May 30, 1992) to February 28,
1998. The "y" axis reflects the cost of the investment, ranging from $25,000 to
$35,000. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the MLUSTSTI and the LSUSGFA. The ending
values are $32,915, $34,689 and $33,261, respectively.
A-2. The graphic presentation here displayed consists of a line graph titled
"Growth of $25,000 Invested in Federated U.S. Government Securities Fund: 1-3
Years (Institutional Shares)". The corresponding components of the line graph
are listed underneath. The Federated U.S. Government Securities Fund: 1-3 Years
(Institutional Shares) (the "Fund") is represented by a solid line. The Merrill
Lynch U.S. Treasury Short-Term Index (the "MLUSTSTI") is represented by a dotted
line. The Lipper Short U.S. Government Funds Average (the "LSUSGFA") is
represented by a broken line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $25,000 investment in the Fund,
the MLUSTSTI and the LSUSGFA . The "x" axis reflects computation periods from
February 28, 1988 to February 28, 1998. The "y" axis reflects the cost of the
investment, ranging from $25,000 to $50,000. The right margin reflects the
ending value of the hypothetical investment in the Fund as compared to the
MLUSTSTI and the LSUSGFA. The ending values are $46,706, $49,852 and $46,977,
respectively.
