PROSPECTUS
Federated Short-Term U.S. Government Trust
A money market mutual fund seeking high current income consistent with stability
of principal and liquidity by investing only in a portfolio of short-term U.S.
government securities maturing in 13 months or less.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and any representation to the contrary is a criminal offense.
FEBRUARY 28, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities
in Which the Fund Invests? 4
What are the Specific Risks of Investing in the Fund? 5
What do Shares Cost? 5
How is the Fund Sold? 5
How to Purchase Shares 5
How to Redeem Shares 6
Account and Share Information 8
Who Manages the Fund? 9
Financial Information 10
Report of Independent Public Accountants 20
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is high current income consistent with stability
of principal and liquidity. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of U.S. Treasury and government agency
securities maturing in 13 months or less. These investments include repurchase
agreements collateralized fully by U.S. Treasury and government agency
securities. The average maturity of the Fund's portfolio will be 90 days or
less.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Although the Fund seeks to
maintain a stable net asset value, it is possible to lose money investing in the
Fund. The Shares offered by this prospectus are not deposits or obligations of
any bank, are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.
RISK/RETURN BAR CHART AND TABLE
[Graphic]
The bar chart shows the variability of the Fund's actual total returns on a
yearly basis.
The Fund does not impose a sales charge (load). Hence, the total returns
displayed above are based upon the net asset value.
7-Day Net Yield as of 12/31/98 was 4.63%.
Within the period shown in the Chart, the Fund's highest quarterly return was
2.34% (quarter ended June 30, 1989). Its lowest quarterly return was 0.72%
(quarter ended June 30, 1993).
CALENDAR PERIOD FUND
1 Year 5.16%
5 Year 5.04%
10 Year 5.49%
Investors may call the Fund to acquire the current 7-Day Net Yield by calling
1-800-341-7400.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
rewards.
What are the Fund's Fees and Expenses?
FEDERATED SHORT-TERM U.S. GOVERNMENT TRUST
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER
FEES
<S> <C>
Fees Paid Directly From Your
Investment
Maximum Sales Charge (Load) Imposed on Purchases (as
a
percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage
of
original
purchase
price or redemption proceeds, as applicable) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends
(and other
Distributions)
(as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed,
if
applicable) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES (Before Waivers) 1 Expenses That are Deducted
From Fund Assets (as percentage of average net assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee None
Shareholder Services Fee 3 0.25%
Other Expenses 0.14%
Total Annual Fund Operating Expenses 0.79%
1 Although not contractually obligated to do so, the adviser and shareholder
services provider waived certain amounts. These are described below along with
the net expenses the Fund actually paid for the fiscal year ended December 31,
1998.
Waiver of Fund Expenses 0.33%
Total Actual Annual Fund Operating Expenses (after waivers) 0.46%
2 The adviser voluntarily waived a portion of the management fee. The adviser
can terminate this voluntary waiver at any time. The management fee paid by the
Fund (after the voluntary waiver) was 0.27% for the year ended December 31,
1998.
3 The shareholder services fee has been voluntarily reduced. This voluntary
reduction can be terminated at any time. The shareholder services fee paid by
the Fund (after the voluntary reduction) was 0.05% for the year ended December
31, 1998.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Shares for the time
periods indicated and then redeem all of your Shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's Shares operating expenses are BEFORE WAIVERS as shown in the
table and remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year $ 81
3 Years $252
5 Years $439
10 Years $978
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of U.S. Treasury and government agency
securities maturing in 13 months or less. These investments include repurchase
agreements collateralized fully by U.S. Treasury and government agency
securities. The average maturity of the Fund's portfolio will be 90 days or
less.
The Adviser targets an average portfolio maturity range by assessing likely
movements in interest rates based upon general economic and market conditions.
The Adviser generally shortens the portfolio's average maturity when it expects
interest rates to rise and extends the maturity when it expects interest rates
to fall. The Adviser selects securities used to lengthen or shorten the
portfolio's average maturity by comparing the returns currently offered by
different investments to their historical and expected returns.
What are the Principal Securities in Which the Fund Invests?
U.S. Treasury and government agency securities pay interest, dividends or
distributions at a specified rate. The rate may be fixed or adjusted
periodically. The issuer must also repay the principal amount of the
security, normally within a specified time. The Fund invests primarily in
the following types of U.S. government securities:
TREASURY SECURITIES are direct obligations of the federal government of the
United States.
AGENCY SECURITIES are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a "GSE"). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
REPURCHASE AGREEMENTS are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return for the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
What are the Specific Risks of Investing in the Fund?
Although there are many factors which may effect an investment in the Fund, the
principal risks of investing in a U.S. government money market fund are
described below.
MARKET RISK
Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.
Interest rate changes have a greater effect on the price of fixed income
securities with longer maturities. Money market funds try to minimize this risk
by purchasing short-term securities.
What do Shares Cost?
You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is
open. When the Fund receives your transaction request in proper form, it is
processed at the next calculated net asset value (NAV).
The Fund does not charge a front-end sales charge. NAV is determined at 12:00
noon and 3:00 p.m. (Eastern time) and as of the end of regular trading (normally
4:00 p.m. Eastern time) each day the NYSE is open.
The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.
An account may be opened with a smaller amount as long as the $25,000 minimum is
reached within 90 days. An institutional investor's minimum is calculated by
combining all accounts it maintains with the Fund. Accounts established through
investment professionals may be subject to a smaller minimum investment amount.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
How is the Fund Sold?
The Fund's Distributor markets the Shares described in this prospectus to
institutional investors such as banks, fiduciaries, custodians of public funds,
and similiar institutional investors such as corporations, unions, hospitals,
insurance companies, and municipalities, or to individuals directly or through
investment professionals.
The Distributor and its affiliates may pay out of their assets amounts
(including items of material value) to investment professionals for
marketing and servicing Shares. The Distributor is a subsidiary of
Federated Investors, Inc. (Federated).
How to Purchase Shares
You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before 3:00 p.m.
(Eastern time.) You will receive that day's dividend if the investment
professional forwards the order to the Fund and the Fund receives payment by
3:00 p.m. (Eastern time.) You will become the owner of Shares and receive
dividends when the Fund receives your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares after the Fund receives your wire or your
check. If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees the Fund or its transfer agent incurs.
An institution may establish an account and place an order by calling the Fund
and will become a shareholder after the Fund receives the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds). Orders by mail are considered received when payment
by check is converted into federal funds (normally the business day after the
check is received) and Shares begin earning dividends the next day.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem Shares
You should redeem Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption request to your investment professional by the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). Investment
professionals are responsible for promptly submitting redemption requests and
providing proper written redemption instructions as outlined below.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem Shares by calling the Fund once you have completed the
appropriate authorization form for telephone transactions.
If you call before 3:00 p.m. (Eastern time) your redemption will be wired to you
the same day. You will not receive that day's dividend.
If you call after 3:00 p.m. (Eastern time) your redemption will be wired to you
the following business day. You will receive that day's dividend.
BY MAIL
You may redeem Shares by mailing a written request to the Fund.
Your redemption request will be processed on the day the Fund receives your
written request in proper form. Dividends are paid up to and including the day
that a redemption request is processed.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed; and
* signatures of all Shareholders exactly as registered.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last thirty days; or
* a redemption is payable to someone other than the shareholder(s) of
record.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union, or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues share certificates. If you are redeeming Shares
represented by certificates previously issued by the Fund, you must return the
certificates with your written redemption request. For your protection, send
your certificates by registered or certified mail, but do not endorse them.
Account and Share Information
ACCOUNT ACTIVITY
You will receive periodic statements reporting all account activity, including
dividends and capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares any dividends daily and pays them monthly to shareholders. If
you purchase shares by wire, you begin earning dividends on the day your wire is
received. If you purchase shares by check, you begin earning dividends on the
business day after the Fund receives your check. In either case, you earn
dividends through the day your redemption request is received.
The Fund does not expect to realize any capital gains or losses. If capital
gains or losses were to occur, they could result in an increase or decrease in
dividends. The Fund pays any capital gains at least annually. Your dividends and
capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a dividend or capital gain
distribution, you will pay the full price for the Shares and then receive a
portion of the price back in the form of a taxable distribution, whether or not
you reinvest the distribution in Shares. Therefore, you should consider the tax
implications of purchasing Shares shortly before the Fund declares a dividend or
capital gain. Contact your investment professional or the Fund for information
concerning when dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, non- retirement
accounts may be closed if redemptions cause the account balance to fall below
the minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.
Fund distributions are expected to be primarily dividends. Redemptions are
taxable sales. Please consult your tax adviser regarding your federal, state,
and local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Research. The Adviser manages the Fund's assets,
including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-
3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999. The Year 2000 problem may cause systems to process information incorrectly
and could disrupt businesses that rely on computers, like the Fund.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase.
The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years, or since inception, if the life of
the Fund is shorter. Some of the information is presented on a per share basis.
Total returns represent the rate an investor would have earned (or lost) on an
investment in the Fund, assuming reinvestment of any dividends and capital
gains.
This information has been audited by Arthur Andersen LLP, whose report, along
with the Fund's audited financial statements, is included in this Prospectus.
Financial Highlights
(For a share outstanding throughout each period)
Reference is made to the Report of Independent Public Accountants on page 20.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.05 0.05 0.05 0.06 0.04
LESS DISTRIBUTIONS:
Distributions from net investment income (0.05) (0.05) (0.05) (0.06) (0.04)
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN 1 5.16% 5.24% 5.10% 5.72% 3.99%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.46% 0.46% 0.46% 0.46% 0.45%
Net investment income 5.04% 5.10% 4.99% 5.57% 3.89%
Expense waiver 2 0.33% 0.33% 0.33% 0.32% 0.11%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $350,019 $489,292 $609,589 $773,851 $977,106
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM OBLIGATIONS-55.1%
$ 2,500,000 Federal Farm Credit Bank Note, 5.500%, 4/1/1999 $ 2,499,155
29,000,000 1 Federal Home Loan Bank System Floating Rate Notes, 4.800% -
5.133%, 1/5/1999 - 3/1/1999 28,992,113
8,200,000 Federal Home Loan Bank System Notes, 5.080% - 5.705%,
3/26/1999 - 11/9/1999 8,198,236
28,878,000 2 Federal Home Loan Mortgage Corp. Discount Notes, 4.890% -
5.090%, 1/29/1999 - 3/15/1999 28,671,388
15,000,000 1 Federal Home Loan Mortgage Corp. Floating Rate Notes, 5.182%
- 5.361%, 1/19/1999 - 2/17/1999 14,993,950
6,500,000 Federal Home Loan Mortgage Corp. Notes, 5.544% - 5.605%,
3/12/1999 - 8/13/1999 6,498,376
69,700,000 2 Federal National Mortgage Association Discount Notes, 4.400%
- 5.160%,
1/15/1999 - 7/30/1999 68,647,970
17,000,000 1 Federal National Mortgage Association Floating Rate Notes,
5.021% - 5.334%, 1/5/1999 - 2/28/1999 16,996,770
10,500,000 Federal National Mortgage Association Notes, 4.780% -
5.650%,
2/19/1999 - 11/30/1999 10,496,133
5,000,000 1 Student Loan Marketing Association Floating Rate Notes,
5.090% - 5.388%, 1/5/1999 4,997,860
2,000,000 Student Loan Marketing Association Notes, 5.580%, 3/11/1999 1,999,919
TOTAL SHORT-TERM OBLIGATIONS 192,991,870
REPURCHASE AGREEMENTS-45.6% 3
10,000,000 ABN AMRO Chicago Corp., 5.100%, dated 12/31/1998, due
1/4/1999 10,000,000
10,000,000 Bankers Trust Corp., 5.100%, dated 12/31/1998, due 1/4/1999 10,000,000
8,700,000 Deutsche Bank Government Securities, Inc., 4.875%, dated
12/31/1998, due 1/4/1999 8,700,000
9,000,000 4 Goldman Sachs Group, LP, 5.190%, dated 10/8/1998, due
1/6/1999 9,000,000
11,000,000 4 J.P. Morgan & Co., Inc., 5.150%, dated 10/15/1998, due
1/13/1999 11,000,000
5,000,000 4 J.P. Morgan & Co., Inc., 5.150%, dated 11/2/1998, due
1/6/1999 5,000,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
REPURCHASE AGREEMENTS-continued 3
$ 16,000,000 4 Morgan Stanley Group, Inc., 4.860%, dated 10/15/1998, due
1/14/1999 $ 16,000,000
15,000,000 Nationsbanc Montgomery Securities, Inc., 5.100%, dated
12/31/1998, due 1/4/1999 15,000,000
75,000,000 PaineWebber Group, Inc., 5.100%, dated 12/31/1998, due
1/4/1999 75,000,000
TOTAL REPURCHASE AGREEMENTS 159,700,000
TOTAL INVESTMENTS (AT AMORTIZED COST) 5 $ 352,691,870
</TABLE>
1 Current rate and next reset date shown.
2 Each issue shows the rate of discount at the time of purchase.
3 The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investments in the repurchase agreements are through participation in joint
accounts with other Federated funds.
4 Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase agreement
within seven days.
5 Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($350,018,926) at December 31, 1998.
The following acronym is used throughout this portfolio:
LP -Limited Partnership
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in repurchase agreements $ 159,700,000
Investments in securities 192,991,870
Total investments in securities, at amortized cost and value $ 352,691,870
Cash 86,750
Income receivable 1,293,202
Receivable for shares sold 73,280
Total assets 354,145,102
LIABILITIES:
Payable for investments purchased 2,998,530
Payable for shares redeemed 129,665
Income distribution payable 935,837
Accrued expenses 62,144
Total liabilities 4,126,176
Net Assets for 350,018,926 shares outstanding $ 350,018,926
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
$350,018,926 / 350,018,926 shares outstanding $1.00
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 20,682,938
EXPENSES:
Investment advisory fee $ 1,502,252
Administrative personnel and services fee 283,175
Custodian fees 19,800
Transfer and dividend disbursing agent fees and expenses 67,846
Directors'/Trustees' fees 13,597
Auditing fees 13,192
Legal fees 10,176
Portfolio accounting fees 69,746
Shareholder services fee 938,907
Share registration costs 22,448
Printing and postage 8,707
Insurance premiums 5,479
Miscellaneous 8,704
Total expenses 2,964,029
WAIVERS-
Waiver of investment advisory fee $ (468,786)
Waiver of shareholder services fee (751,126)
Total waivers (1,219,912)
Net expenses 1,744,117
Net investment income $ 18,938,821
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 18,938,821 $ 26,938,415
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (18,938,821) (26,938,415)
SHARE TRANSACTIONS:
Proceeds from sale of shares 1,340,144,670 1,781,376,018
Net asset value of shares issued to shareholders in payment
of distributions declared 5,415,142 7,242,227
Cost of shares redeemed (1,484,833,055) (1,908,915,031)
Change in net assets resulting from share transactions (139,273,243) (120,296,786)
Change in net assets (139,273,243) (120,296,786)
NET ASSETS:
Beginning of period 489,292,169 609,588,955
End of period $ 350,018,926 $ 489,292,169
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
December 31, 1998
ORGANIZATION
Federated Short-Term U.S. Government Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The investment objective of the Fund is high
current income consistent with stability of principal and liquidity.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
The Fund uses the amortized cost method to value its portfolio securities in
accordance with Rule 2a-7 under the Act.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when- issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
December 31, 1998, capital paid-in aggregated $350,018,926. Transactions in
shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1998 1997
<S> <C> <C>
Shares sold 1,340,144,670 1,781,376,018
Shares issued to shareholders in payment of distributions
declared 5,415,142 7,242,227
Shares redeemed (1,484,833,055) (1,908,915,031)
Net change resulting from share transactions (139,273,243) (120,296,786)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Research, the Fund's investment adviser (the "Adviser"), receives for
its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. 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 Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors, Inc. for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its
subsidiary, FSSC, serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
Report of Independent Public Accountants
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FEDERATED SHORT-TERM U.S. GOVERNMENT TRUST:
We have audited the accompanying statement of assets and liabilities of
Federated Short-Term U.S. Government Trust (a Massachusetts business trust),
including the schedule of portfolio of investments, as of December 31, 1998, and
the related statement of operations for the year then ended, the statement of
changes in net assets, and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund'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 our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian and brokers. As to
confirmation replies not received, we carried out other alternative auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Short-Term U.S. Government Trust as of December 31, 1998, the results
of its operations for the year then ended, the changes in its net assets, and
its financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 22, 1999
[Graphic]
PROSPECTUS
Federated Short-Term U.S. Government Trust
February 28, 1999
A Statement of Additional Information (SAI) dated February 28, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's semi-annual report to shareholders
as they become available. To obtain the SAI, semi-annual report and other
information without charge, call your investment professional or the Fund at
1-800-341-7400.
You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.
[Graphic]
Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-5035
Cusip 313905101
8020102A (2/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated Short-Term U.S. Government Trust
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Short-Term U.S. Government
Trust dated February 28, 1999.
Obtain the prospectus without charge by calling 1-800-341-7400.
FEBRUARY 28, 1999
[Graphic]
Federated Short-Term U.S. Government Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
8020102B (2/99)
Federated is a registered mark of Federated Investors, Inc.
1999 (C)Federated Investors, Inc.
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
How is the Fund Sold? 4
Subaccounting Services 4
Redemption in Kind 4
Massachusetts Partnership Law 4
Account and Share Information 5
Tax Information 5
Who Manages and Provides Services to the Fund? 5
How Does the Fund Measure Performance? 8
Who is Federated Investors, Inc.? 9
Addresses 11
How is the Fund Organized?
The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on
February 2, 1987. The Fund's investment adviser is Federated Research
(Adviser).
Securities in Which the Fund Invests
In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risk.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a "GSE"). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities. Agency securities are
generally regarded as having low credit risk, but not as low as Treasury
securities.
The Fund treats mortgage-backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does not
reduce the market and prepayment risks of these mortgage backed securities.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates, maturities
and other terms. Mortgages may have fixed or adjustable interest rates.
Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage-backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage-backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments on to the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and pre-payments from the underlying mortgages.
As a result, the holders assume all the prepayment risks of the underlying
mortgages.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity,
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the market and credit risks of a zero coupon security.
There are many forms of zero coupon securities. Some are issued at a discount
and are referred to as zero coupon or capital appreciation bonds. Others are
created from interest bearing bonds by separating the right to receive the
bond's coupon payments from the right to receive the bond's principal due at
maturity, a process known as coupon stripping. Treasury STRIPs are the most
common forms of stripped zero coupon securities. In addition, some securities
give the issuer the option to deliver additional securities in place of cash
interest payments, thereby increasing the amount payable at maturity. These are
referred to as pay-in-kind, or PIK, securities.
SPECIAL TRANSACTIONS
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risk. In addition, reverse repurchase agreements create leverage risk
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create market
risks for the Fund. Delayed delivery transactions also involve credit risks in
the event of a counterparty default.
SECURITIES LENDING
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the
market value of the loaned securities increases. Also, the borrower must pay the
Fund the equivalent of any dividends or interest received on the loaned
securities.
The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.
Loans are subject to termination at the option of the Fund or the borrower. The
Fund will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund may pay
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.
Securities lending activities are subject to market risks and credit risks.
ASSET COVERAGE
In order to secure its obligations in connection with when-issued and
delayed-delivery transactions, the Fund will "cover" such transactions, as
required under applicable interpretations of the Securities and Exchange
Commission (SEC), either by owning the underlying securities; entering into an
offsetting transaction; or segregating, earmarking, or depositing into an escrow
account readily marketable securities in an amount at all times equal to or
exceeding the Fund's commitment with respect to these instruments or contracts.
As a result, use of these instruments will impede the Fund's ability to freely
trade the assets being used to cover them, which could result in harm to the
Fund.
INVESTMENT RISKS
There are many factors which may effect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
INVESTMENT RISKS
CREDIT RISK
* Credit risk is the possibility that an issuer will default (fails to repay
interest and principal when due). If an issuer defaults, the Fund may lose
money. Money market funds try to minimize this risk by purchasing higher quality
securities.
* Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to lose
the benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
MARKET RISK
* Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.
* Interest rate changes have a greater effect on the price of fixed income
securities with longer maturities. Money market funds try to minimize this risk
by purchasing short-term securities.
LEVERAGE RISK
* Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.
PREPAYMENT RISKS
* Generally, homeowners have the options to prepay their mortgages at any time
without penalty. Homeowners frequently refinance high interest rate mortgages
when mortgage rates fall. This results in the prepayment of mortgage backed
securities with higher interest rates. Conversely, prepayments due to
refinancings decrease when mortgage rates increase. This extends the life of
mortgage-backed securities with lower interest rates. As a result, increases in
prepayments of high interest rate mortgage backed securities, or decreases in
prepayments of lower interest rate mortgage-backed securities, may reduce their
yield and price. This relationship between interest rates and mortgage
prepayments makes the price of mortgage-backed securities more volatile than
most other types of fixed-income securities with comparable credit risks.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on margin
but may obtain such short-term credits as may be necessary for clearance of
purchase and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities. The Fund will not borrow money except
as a temporary measure for extraordinary or emergency purposes and then only in
amounts not in excess of 5% of the value of its total assets or in an amount up
to one-third of the value of its total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling portfolio
instruments. Any such borrowings would not be collateralized.
PLEDGING ASSETS
The Fund will not pledge securities except that it may enter into reverse
repurchase agreements permitted by its investment objective and policies.
LENDING CASH OR SECURITIES
The Fund will not lend any assets, except portfolio securities up to one-third
of the value of its total assets. This shall not prevent the Fund from
purchasing or holding U.S. government securities, including repurchase
agreements, permitted by its investment objective and policies.
ACQUIRING SECURITIES
The Fund will not acquire the voting securities of any issuer, except as a part
of a merger, consolidation, reorganization, or acquisition of assets.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE "VOTE OF A
MAJORITY OF ITS OUTSTANDING VOTING SECURITIES" AS DEFINED BY THE INVESTMENT
COMPANY ACT. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD
WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL
CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with its investment objective, policies, and
limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in any one
industry. However, the Fund may invest 25% or more of the value of its total
assets in cash, cash items, or securities issued or guaranteed by the government
of the United States, or its agencies, or instrumentalities and repurchase
agreements collateralized by such U.S. government securities. The U.S.
government is not considered to be an industry.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the government of the United
States, or its agencies, or instrumentalities and repurchase agreements
collateralized by such U.S. government securities) if as a result more than 5%
of the value of its total assets would be invested in the securities of that
issuer, or if it would own more than 10% of the outstanding voting securities of
that issuer.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
illiquid securities including certain restricted securities not determined to be
liquid under criteria established by the Trustees and repurchase agreements
providing for settlement in more than seven days after notice.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies, except as
part of a merger, consolidation, or other acquisition.
INVESTING FOR CONTROL
The Fund will not invest in securities of a company for the purpose of
exercising control or management.
For purposes of the above limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." 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 limitation.
The Fund 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
during the coming fiscal year.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in the
prospectus and this Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940. In particular, the Fund will comply
with the various requirements of Rule 2a-7, which regulates money market mutual
funds. The Fund will determine the effective maturity of its investments
according to Rule 2a-7. The Fund may change these operational policies to
reflect changes in the laws and regulations without the approval of its
shareholders.
DETERMINING MARKET VALUE OF SECURITIES
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
Accordingly, neither the amount of daily income nor the net asset value (NAV) is
affected by any unrealized appreciation or depreciation of the portfolio. In
periods of declining interest rates, the indicated daily yield on shares of the
Fund computed by dividing the annualized daily income on the Fund's portfolio by
the NAV computed as above may tend to be higher than a similar computation made
by using a method of valuation based upon market prices and estimates. In
periods of rising interest rates, the opposite may be true.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the SEC under the Investment Company Act of 1940. Under the Rule,
the Trustees must establish procedures reasonably designed to stabilize the NAV
per share, as computed for purposes of distribution and redemption, at $1.00 per
share, taking into account current market conditions and the Fund's investment
objective. The procedures include monitoring the relationship between the
amortized cost value per share and the NAV per share based upon available
indications of market value. The Trustees will decide what, if any, steps should
be taken if there is a difference of more than 0.5 of 1% between the two values.
The Trustees will take any steps they consider appropriate (such as redemption
in kind or shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the two
methods of determining NAV.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution- related
or shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Fund. To protect its
shareholders, the Fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Fund.
In the unlikely event a shareholder is held personally liable for the Fund's
obligations, the Fund is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Fund will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Fund. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Fund itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share Information
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of the Fund have
equal voting rights.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Fund's outstanding shares.
As of February 8, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Shares: ISTCO, Union Planters
Bank, Belleville, IL owned approximately 31,541,689 (8.64%), UNATCO, First
Midwest Trust Co., Joliet, IL owned approximately 27,542,110 shares (7.55%),
ONEDUN, First American Bank owned approximately 26,941,224 shares (7.38%) and
Friedmar & Co., Mechanics Bank, Richmond, CA, owned approximately 24,712,363
shares (6.77%).
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birthdate, present position(s) held with the Fund,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Fund for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Federated Fund Complex
includes 56 funds whose investment adviser is affiliated with the Fund's
Adviser.
As of February 8, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Shares.
An asterisk (*) denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940. The following symbol (#) denotes
a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.
<TABLE>
<CAPTION>
NAME Total
BIRTHDATE Aggregate Compensation
ADDRESS Principal Occupations Compensation From Fund and
POSITION WITH FUND for Past 5 Years From Fund Fund Complex
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer and Director or Trustee of the $0 $0 for the Fund and
Birthdate: July 28, 1924 Federated Fund Complex; Chairman and Director, Federated 54 other investment
Federated Investors Tower Investors, Inc.; Chairman and Trustee, Federated Advisers, companies in the
1001 Liberty Avenue Federated Management, and Federated Research; Chairman and Fund Complex
Pittsburgh, PA Director, Federated Research Corp., and Federated Global
CHAIRMAN AND TRUSTEE Research Corp.; Chairman, Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of the Federated Fund Complex; Director, $1,301.63 $113,860.22 for the
Birthdate: February 3, 1934 Member of Executive Committee, Children's Hospital of Fund and 54 other
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst & Young LLP; investment companies
Pittsburgh, PA Director, Committee, University of Pittsburgh. in the Fund Complex
TRUSTEE
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund Complex; $1,432.03 $125,264.48 for the
Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Vice Fund and 54 other
Wood/IPC Commercial Dept. President, John R. Wood and Associates, Inc., Realtors; investment companies
John R. Wood Associates,
Inc. Realtors Partner or Trustee in private real estate ventures in in the Fund Complex
3255 Tamiami Trial North
Naples, FL Southwest Florida; formerly: President, Naples Property
TRUSTEE Management, Inc. and Northgate Village
Development Corporation.
WILLIAM J. COPELAND Director or Trustee of the Federated Fund Complex; Director $1,432.03 $125,264.48 for the
Birthdate: July 4, 1918 and Member of the Executive Committee, Michael Baker, Inc.; Fund and 54 other
One PNC Plaza-23rd Floor formerly: Vice Chairman and Director, PNC Bank, N.A., and investment companies
Pittsburgh, PA PNC Bank Corp.; Director, Ryan Homes, Inc. in the Fund Complex
TRUSTEE Previous Positions: Director, United Refinery; Director,
Forbes Fund; Chairman, Pittsburgh Foundation; Chairman,
Pittsburgh Civic Light Opera.
<CAPTION>
NAME Total
BIRTHDATE Aggregate Compensation
ADDRESS Principal Occupations Compensation From Fund and
POSITION WITH FUND for Past 5 Years From Fund Fund Complex
<S> <C> <C> <C>
JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund Complex; Attorney- $1,432.03 $125,264.48 for the
Birthdate: May 18, 1922 at-law; Director, The Emerging Germany Fund, Inc. Fund and 54 other
571 Hayward Mill Road Previous Positions: President, Boston Stock Exchange, Inc.; investment companies
Concord, MA Regional Administrator, United States Securities and in the Fund Complex
TRUSTEE Exchange Commission.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund Complex; Professor $1,301.63 $113,860.22 for the
Birthdate: October 11, 1932 of Medicine, University of Pittsburgh; Medical Director, Fund and 54 other
3471 Fifth Avenue University of Pittsburgh Medical Center-Downtown; investment companies
Suite 1111 Hematologist, Oncologist, and Internist, University of in the Fund Complex
Pittsburgh, PA Pittsburgh Medical Center; Member, National Board of
TRUSTEE Trustees, Leukemia Society of America.
EDWARD L. FLAHERTY, JR., ESQ. Director or Trustee of the Federated Fund Complex; Attorney $1,432.03 $125,264.48 for the
Birthdate: June 18, 1924 of Counsel, Miller, Ament, Henny & Kochuba; Director Fund and 54 other
Miller, Ament, Henny & Kochub Emeritus, Eat'N Park Restaurants, Inc.; formerly: Counsel, investment companies
205 Ross Street Horizon Financial, F.A., Western Region; Partner, Meyer and in the Fund Complex
Pittsburgh, PA Flaherty.
TRUSTEE
PETER E. MADDEN Director or Trustee of the Federated Fund Complex; formerly: $1,301.63 $113,860.22 for the
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; Fund and 54 other
One Royal Palm Way President, State Street Bank and Trust Company and State investment companies
100 Royal Palm Way Street Corporation. In the Fund Complex
Palm Beach, FL Previous Positions: Director, VISA USA and VISA
TRUSTEE International; Chairman and Director, Massachusetts Bankers
Association; Director, Depository Trust Corporation.
JOHN E. MURRAY, JR., J.D., S. Director or Trustee of the Federated Fund Complex; $1,301.63 $113,860.22 for the
Birthdate: December 20, 1932 President, Law Professor, Duquesne University; Consulting Fund and 54 other
President, Duquesne Universit Partner, Mollica & Murray. Investment companies
Pittsburgh, PA Previous Positions: Dean and Professor of Law, University of in the Fund Complex
TRUSTEE Pittsburgh School of Law; Dean and Professor of Law,
Villanova University School of Law.
WESLEY W. POSVAR Director or Trustee of the Federated Fund Complex; $1,301.63 $113,860.22 for the
Birthdate: September 14, 1925 President, World Society of Ekistics (metropolitan Fund and 54 other
1202 Cathedral of Learning planning), Athens; Professor, International Politics; investment companies
University of Pittsburgh Management Consultant; Trustee, Carnegie Endowment for in the Fund Complex
Pittsburgh, PA International Peace, RAND Corporation, Online Computer
TRUSTEE 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; Trustee, Czech Management Center,
Prague.
Previous Positions: Professor, United States Military
Academy; Professor, United States Air Force Academy.
MARJORIE P. SMUTS Director or Trustee of the Federated Fund Complex; Public $1,301.63 $113,860.22 for the
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. Fund and 54 other
4905 Bayard Street Previous Positions: National Spokesperson, Aluminum Company investment companies
Pittsburgh, PA of America; business owner. in the Fund Complex
TRUSTEE
GLEN R. JOHNSON* Trustee, Federated Investors, Inc.; staff member, Federated $0 $0 for the Fund and
Birthdate: May 2, 1929 Securities Corp. 8 other investment
Federated Investors Tower companies in the
1001 Liberty Avenue Fund Complex
Pittsburgh, PA
PRESIDENT AND TRUSTEE
J. CHRISTOPHER DONAHUE+ President or Executive Vice President of the Federated Fund $0 $0 for the Fund and
Birthdate: April 11, 1949 Complex; Director or Trustee of some of the Funds in the 16 other investment
Federated Investors Tower Federated Fund Complex; President and Director, Federated companies in the
1001 Liberty Avenue Investors, Inc.; President and Trustee, Federated Advisers, Fund Complex
Pittsburgh, PA Federated Management, and Federated Research; President and
EXECUTIVE VICE PRESIDENT Director, Federated Research Corp. and Federated Global
Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Shareholder Services Company; Director, Federated
Services Company.
<CAPTION>
NAME Total
BIRTHDATE Aggregate Compensation
ADDRESS Principal Occupations Compensation From Fund and
POSITION WITH FUND for Past 5 Years From Fund Fund Complex
<S> <C> <C> <C>
EDWARD C. GONZALES Trustee or Director of some of the Funds in the Federated $0 $0 for the Fund and
Birthdate: October 22, 1930 Fund Complex; President, Executive Vice President and 1 other investment
Federated Investors Tower Treasurer of some of the Funds in the Federated Fund Complex; company in the
1001 Liberty Avenue Vice Chairman, Federated Investors, Inc.; Vice President, Fund Complex
Pittsburgh, PA Federated Advisers, Federated Management, Federated
EXECUTIVE VICE PRESIDENT 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.
JOHN W. MCGONIGLE Executive Vice President and Secretary of the Federated Fund $0 $0 for the Fund and
Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, 54 other investment
Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, companies in the
1001 Liberty Avenue Federated Management, and Federated Research; Director, Fund Complex
Pittsburgh, PA Federated Research Corp. and Federated Global Research
EXECUTIVE VICE PRESIDENT Corp.; Director, Federated Services Company; Director,
AND SECRETARY Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; Vice President- $0 $0 for the Fund and
Birthdate: June 17, 1954 Funds Financial Services Division, Federated Investors, 54 other investment
Federated Investors Tower Inc.; Formerly: various management positions within Funds companies in the
1001 Liberty Avenue Financial Services Division of Federated Investors, Inc. Fund Complex
Pittsburgh, PA
TREASURER
RICHARD B. FISHER President or Vice President of some of the Funds in the $0 $0 for the Fund and
Birthdate: May 17, 1923 Federated Fund Complex; Director or Trustee of some of the 6 other investment
Federated Investors Tower Funds in the Federated Fund Complex; Executive Vice companies in the
1001 Liberty Avenue President, Federated Investors, Inc.; Chairman and Director, Fund Complex
Pittsburgh, PA Federated Securities Corp.
VICE PRESIDENT
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and various other $0 $0 for the Fund and
Birthdate: March 3, 1949 Funds in the Federated Fund Complex; Executive Vice 41 other investment
Federated Investors Tower President, Federated Investment Counseling, Federated Global companies in the
1001 Liberty Avenue Research Corp., Federated Advisers, Federated Management, Fund Complex
Pittsburgh, PA Federated Research, and Passport Research, Ltd.; Registered
CHIEF INVESTMENT OFFICER Representative, Federated Securities Corp.; Portfolio
Manager, Federated Administrative Services; Vice President,
Federated Investors, Inc.; Formerly: Executive Vice
President and Senior Vice President, Federated Investment
Counseling Institutional Portfolio Management Services
Division; Senior Vice President, Federated Research Corp.,
Federated Advisers, Federated Management, Federated
Research, and Passport Research, Ltd.
SUSAN R. HILL Susan R. Hill is the Vice President of the Fund. Ms. Hill $0 $0 for the Fund and
Birthdate: June 20, 1963 joined Federated in 1990 and has been a Portfolio Manager 9 other investment
Federated Investors Tower since 1993 and a Vice President of the Fund's Adviser since companies in the
1001 Liberty Avenue 1997. Ms. Hill was a Portfolio Manager and an Assistant Vice Fund Complex
Pittsburgh, PA President of the Adviser from 1994 until 1997. Ms. Hill is a
VICE PRESIDENT Chartered Financial Analyst and received an M.S. in
Industrial Administration from Carnegie Mellon University.
</TABLE>
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust.
* Information is furnished for the fiscal year ended December 31, 1998.
# The aggregate compensation is provided for the Trust which is comprised
of one portfolio.
++ The information is provided for the last calendar year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Fund or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Fund.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
RESEARCH SERVICES
Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio. Federated Services Company may voluntarily waive a
portion of its fee and may reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets, plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by
shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, Boston, MA is the independent public accountant for the
Fund.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 1998 1997 1996
<S> <C> <C> <C>
Advisory Fee Earned $1,502,252 $2,113,857 $2,431,793
Advisory Fee Reduction $468,786 $666,937 $775,483
Administrative Fee $283,175 $398,950 $459,537
Shareholder Services Fee $187,781 - -
</TABLE>
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the SEC's standard method for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.
Unless otherwise stated, any quoted Share performance reflects the effect of
non-recurring charges, such as maximum sales charges, which, if excluded, would
increase the total return and yield. The performance of Shares depends upon such
variables as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences in the
Fund's or any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns given for the one-year, five-year and ten-year periods ended
December 31, 1998.
Yield and Effective Yield given for the seven-day period ended December 31,
1998.
<TABLE>
<CAPTION>
7-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Total Return 5.16 5.04 5.49
Yield 4.63
Effective Yield 4.74
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.
YIELD
The yield of Shares is based upon the seven days ending on the day of the
calculation, called the "base period." This yield is calculated by: determining
the net change in the value of a hypothetical account with a balance of one
Share at the beginning of the base period, with the net change excluding capital
changes but including the value of any additional Shares purchased with
dividends earned from the original one Share and all dividends declared on the
original and any purchased Shares; dividing the net change in the account's
value by the value of the account at the beginning of the base period to
determine the base-period return; and multiplying the base-period return by
365/7. The effective yield is calculated by compounding the unannualized
base-period return by: adding 1 to the base-period return, raising the sum to
the 365/7th power; and subtracting 1 from the result.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs, and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging, and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Funds; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC.
Lipper Analytical Services, Inc., ranks funds in various fund categories based
on total return, which assumes the reinvestment of all income dividends and
capital gains distributions, if any.
IBC/DONOGHUE'S MONEY FUND REPORT
IBC/Donoghue's Money Fund Report publishes annualized yields of money market
funds weekly. Donoghue's Money Market Insight publication reports monthly and
12-month-to-date investment results for the same money funds.
MONEY
Money, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day effective yield.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index, and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset-backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated manages 9
mortgage-backed, 5 government/agency, and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion, and $41.6 billion,
respectively. Federated trades approximately $425 million in U.S. government and
mortgage-backed securities daily and places approximately $25 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $43.2 billion in government funds within
these maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime, and 23 municipal with assets
approximating $41.6 billion, $22.8 billion, and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield-
J. Thomas Madden; U.S. fixed income-William D. Dawson, III; and global
equities and fixed income-Henry A. Frantzen. The Chief Investment Officers
are Executive Vice Presidents of the Federated advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide-we have over 2,200 broker/dealer and bank broker/dealer relationships
across the country-supported by more wholesalers than any other mutual fund
distributor. Federated's service to financial professionals and institutions has
earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement. The
marketing effort to these firms is headed by James F. Getz, President,
Broker/Dealer Sales Division, Federated Securities Corp.
Addresses
FEDERATED SHORT-TERM U.S. GOVERNMENT TRUST
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 Research
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
225 Franklin Street
Boston, MA 02110-2812
