OHIO MUNICIPAL CASH TRUST
(A PORTFOLIO OF FEDERATED MUNICIPAL TRUST)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
CASH II SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectuses of Ohio Municipal Cash Trust (the ``Fund'), a portfolio of
Federated Municipal Trust (the ``Trust') dated December 31, 1996. This
Statement is not a prospectus. You may request a copy of a prospectus
or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated December 31, 1996
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 314229659
Cusip 314229840
Cusip 314229857
1030105B (12/96)
INVESTMENT POLICIES 1
Acceptable Investments 1
Participation Interests 1
Municipal Leases 1
Ratings 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Credit Enhancement 2
OHIO INVESTMENT RISKS 2
INVESTMENT LIMITATIONS 3
Investing in Restricted Securities 3
FEDERATED MUNICIPAL TRUST MANAGEMENT 5
Share Ownership 9
Trustees Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 11
Investment Adviser 11
Advisory Fees 11
BROKERAGE TRANSACTIONS 11
OTHER SERVICES 11
Fund Administration 11
Custodian and Portfolio Accountant 12
Transfer Agent 12
Independent Public Accountants 12
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES 12
DETERMINING NET ASSET VALUE 12
REDEMPTION IN KIND 13
MASSACHUSETTS PARTNERSHIP LAW 13
THE FUND'S TAX STATUS 13
PERFORMANCE INFORMATION 13
Yield 14
Effective Yield 14
Tax-Equivalent Yield 14
Tax-Equivalency Table 15
Total Return 16
Performance Comparisons 16
Economic and Market Information 16
ABOUT FEDERATED INVESTORS 16
Mutual Fund Market 17
Institutional Clients 17
Trust Organizations 17
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 17
APPENDIX 18
INVESTMENT POLICIES
Unless indicated otherwise, the policies described below may be changed by
the Board of Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
When determining whether a security presents minimal credit risks, the
investment adviser will consider the creditworthiness of: the issuer of the
security; the issuer of any demand feature applicable to the security; or
any guarantor of either the security or any demand feature.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days). The municipal
securities subject to the participation interests are not limited to the
Fund's maximum maturity requirements so long as the participation interests
include the right to demand payment from the issuers of those interests. By
purchasing these participation interests, the Fund is buying a security
meeting the maturity and quality requirements of the Fund and also is
receiving the tax-free benefits of the underlying securities.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests that represent an undivided proportional interest in lease
payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. Furthermore, a lease may provide
that the participants cannot accelerate lease obligations upon default. The
participants would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute source of
payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors: whether the lease can be terminated
by the lessee; the potential recovery, if any, from a sale of the leased
property upon termination of the lease; the lessee's general credit
strength (e.g., its debt, administrative, economic and financial
characteristics and prospects); the likelihood that the lessee will
discontinue appropriating funding for the leased property because the
property is no longer deemed essential to its operations (e.g., the
potential for an `event of non-appropriation''); and any credit
enhancement or legal recourse provided upon an event of non-appropriation
or other termination of the lease.
RATINGS
The securities in which the Fund invests must be rated in one of the two
highest short-term rating categories by one or more nationally recognized
statistical rating organizations (`NRSROs'') or be of comparable quality
to securities having such ratings. An NRSRO's two highest rating categories
are determined without regard for sub-categories and gradations. For
example, securities rated SP-1+, SP-1, or SP-2 by Standard & Poor's Ratings
Group (`S&P''), MIG-1 or MIG-2 by Moody's Investors Service, Inc.
(`Moody's''), or F-1+, F-1, or F-2 by Fitch Investors Service, Inc.
(`Fitch'') are all considered rated in one of the two highest short-term
rating categories. The Fund will follow applicable regulations in
determining whether a security rated by more than one NRSRO can be treated
as being in one of the two highest short-term rating categories; currently,
such securities must be rated by two NRSROs in one of their two highest
rating categories. See `Regulatory Compliance.''
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund in a dollar amount sufficient to make payment for the securities to be
purchased are: segregated on the Fund`s records at the trade date; marked
to market daily; and maintained until the transaction is settled. The Fund
does not intend to engage in when-issued and delayed delivery transactions
to an extent that would cause the segregation of more than 20% of the total
value of its assets.
REPURCHASE AGREEMENTS
Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
securities to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price. To the extent that the seller does
not repurchase the securities from the Fund, the Fund could receive less
than the repurchase price on any sale of such securities. The Fund or its
custodian will take possession of the securities subject to repurchase
agreements, and these securities will be marked to market daily. In the
event that a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Fund and allow retention or disposition of such securities. 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 guidelines established by the
Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument in
return for a percentage of the instrument's market value in cash and agrees
that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but does not ensure this result. However,
liquid assets of the Fund, in a dollar amount sufficient to make payment
for the securities to be purchased, are: segregated on the Fund's records
at the trade date; marked to market daily; and maintained until the
transaction is settled.
CREDIT ENHANCEMENT
The Fund typically evaluates the credit quality and ratings of credit-
enhanced securities based upon the financial condition and ratings of the
party providing the credit enhancement (the `credit enhancer''), rather
than the issuer. However, credit-enhanced securities will not be treated as
having been issued by the credit enhancer for diversification purposes,
unless the Fund has invested more than 10% of its assets in securities
issued, guaranteed or otherwise credit enhanced by the credit enhancer, in
which case the securities will be treated as having been issued by both the
issuer and the credit enhancer.
The Fund may have more than 25% of its total assets invested in securities
credit enhanced by banks.
OHIO INVESTMENT RISKS
The Fund invests in obligations of Ohio (the "State") issuers which result
in the Fund's performance being subject to risks associated with the
overall conditions present within the State. The following information is a
brief summary of the prevailing economic conditions and general summary of
the State's financial condition. This information is based on official
statements relating to securities that are believed to be reliable but
should not be considered as a complete description of all relevant
information.
The Ohio economy is largely composed of manufacturing which is
concentrated in the automobile sector and other durable goods. The exposure
to these industries, particularly the auto sector, leaves the State
vulnerable to an economic slowdown associated with business cycles. The
State has diversified its economy somewhat over the past decade with
services and trade composing roughly 50% of the economy. Unemployment in
Ohio over the past two years has been below the national average, but
population growth, as in many great lakes states, has been stagnant.
The State fully depleted the budget stabilization fund that exceeded $300
million, to achieve balanced budgets as a result of the most recent
recession. The State acted promptly in addressing the fall in revenue with
an expansion of the sales tax and cuts in appropriations. As a result of
prudent financial management, the State restored the budget stabilization
fund in fiscal 1993. Strong performance in fiscal 1994, 1995 and 1996
resulted in reserve levels that are well above the levels of 1990. Ohio's
budget stabilization fund is now above $828 million.
The overall condition of the State is further demonstrated by its debt
ratings. Ohio, rated Aaa by Moody's Investors Service, Inc. in the 1970's,
was downgraded to Aa in 1979 . Moody's recently revised Ohio's rating
upward to Aa1 in September of 1996. Standard & Poor's Ratings Group first
rated the State in 1984 at AA; that rating was also upgraded to AA+ in
October of 1996.
The Fund's concentration in securities issued by the State and its
political subdivisions provides a greater level of risk than a fund whose
assets are diversified across numerous states and municipal issuers. The
ability of the State or its municipalities to meet their obligations will
depend on the availability of tax and other revenues; economic, political,
and demographic conditions within the State; and the underlying fiscal
condition of the State, its counties, and its municipalities.
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 are necessary for
clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous.The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, the Fund will restrict the purchase of portfolio
securities to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements, but only to the
extent necessary to assure completion of the reverse repurchase
agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
as necessary to secure permitted borrowings. In those cases, it may
pledge assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the
time of the pledge.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may acquire
publicly or nonpublicly issued Ohio municipal securities or temporary
investments or enter into repurchase agreements, in accordance with
its investment objective, policies, limitations, and its Declaration
of Trust.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts,
or commodity futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in securities of issuers
whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in 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 purchase securities if, as a result of such
purchase, 25% or more of the value of its total assets would be
invested in any one industry or in industrial development bonds or
other securities, the interest upon which is paid from revenues of
similar types of projects. However, the Fund may invest as temporary
investments more than 25% of the value of its assets in cash or cash
items, securities issued or guaranteed by the U.S. government, its
agencies, or instrumentalities, or instruments secured by these money
market instruments, such as repurchase agreements.
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of the value of its net assets
in illiquid securities including 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.
INVESTING IN OPTIONS
The Fund will not invest in puts, calls, straddles, spreads, or any
combination of them.
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 , as well as its ability to consider a security
as having received the requisite short-term ratings by NRSROs, 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.
FEDERATED MUNICIPAL TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Municipal Trust, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Glen R. Johnson*
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President and Trustee
Trustee, Federated Investors; President and/or Trustee of some of the
Funds; staff member, Federated Securities Corp.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
*This Trustee is deemed to be an ``interested person'' as defined in
the Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
As referred to in the list of Trustees and Officers, `Funds'' includes the
following investment companies: 111 Corcoran Funds; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc. ; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated
American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds;
Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income
Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Investment Portfolios;
Federated Investment Trust; Federated Master Trust; Federated Municipal
Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.;
Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
SHARE OWNERSHIP
Officers and Trustees as a group own less than 1% of the Fund`s outstanding
shares.
As of December 2, 1996, the following shareholders of record owned 5% or
more of the outstanding Institutional Shares of the Fund: Mahoning National
Bank, acting in various capacities for numerous accounts, owned
approximately 16,880, 682 shares (27.17%); Panabco owned approximately
21,329,524 shares (34.33%); Grand Old Co. owned approximately 3,582,768
shares (5.77%); Saxon & Co. owned approximately 13,897,000 shares (22.37%).
As of the same date the following shareholders of record owned 5% or more
of the outstanding Institutional Service Shares of the Fund: Key Trust Co.
owned approximately 5,425,000 shares (8.42%); Star Bank N.A. owned
approximately 3,300,000 shares (5.12%); Parcol & Co. owned approximately
29,678,128 shares (46.06%); and SNBSO & Co. owned approximately 9,227,717
shares (14.32%). As of the same date the following shareholders of record
owned 5% or more of the outstanding Cash II Shares of the Fund: First
National Bank of Ohio owned approximately 16,153,243 shares (7.49%); and
Gradison & Company, Inc. owned approximately 166,460,949 shares (77.16%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue $0 $0 for the Trust and
Chairman and Trustee 54 other investment companies in the
Fund Complex
Thomas G. Bigley++ $3,611 $86,331 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
John T. Conroy, Jr. $3,934 $115,760 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
William J. Copeland $3,934 $115,760 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Glen R. Johnson $0 $0 for the Trust and
President and Trustee 14 other investment companies in the
Fund Complex
James E. Dowd $3,934 $115,760 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Lawrence D. Ellis, M.D. $3,611
$104,898 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Edward L. Flaherty, Jr. $3,934
$115,760 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Peter E. Madden $3,611 $104,898 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Gregor F. Meyer $3,611 $104,898 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
John E. Murray, Jr., $3,611 $104,898 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Wesley W. Posvar $3,611 $104,898 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
Marjorie P. Smuts $3,611 $104,898 for the Trust and
Trustee 54 other investment companies in the
Fund Complex
*Information is furnished for the fiscal year ended October 31, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
16 portfolios.
+The information is provided for the last calendar year.
++ Mr. Bigley served on 39 investment companies in the Federated Funds
complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.
TRUSTEE LIABILITY
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISER
The Fund's investment adviser is Federated Management. It is a subsidiary
of Federated Investors. All the voting securities of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue, his wife
and his son, J. Christopher Donahue.
The adviser shall not be liable to the Trust, the Fund,or any shareholder
of the Fund for any losses that may be sustained in the purchase, holding,
or sale of any security or for anything done or omitted by it, except acts
or omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
ADVISORY FEES
For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectus. For the fiscal
years ended October 31, 1996, 1995, and 1994, the adviser earned
$1,183,374, $957,142 and $818,724, respectively, of which $570,677,
$95,512, and $392,961, respectively, were waived.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established by the
Trustees. The adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995,
and 1994, the Fund paid no brokerage commissions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994 to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services and Federated
Administrative Services, Inc. may hereinafter collectively be referred to
as the `Administrators.'' For the fiscal years ended October 31, 1996,
1995, and 1994, the Administrators earned $223,680, $181,139, and $209,077,
respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
PA, provides certain accounting and recordkeeping services with respect to
the Fund's portfolio investments. The fee paid for this service is based
upon the level of the Fund's average net assets for the period plus out-of-
pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based on the
size, type and number of accounts and transactions made by shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for the Fund are Arthur Andersen LLP,
Pittsburgh, PA.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
With respect to Cash II Shares, the Fund has adopted a Distribution Plan
pursuant to Rule 12b-1 which was promulgated by the Securities and Exchange
Commission pursuant to the Investment Company Act of 1940. Additionally,
the Fund has adopted a Shareholder Services Agreement with respect to Cash
II Shares, Institutional Shares and Institutional Service Shares.
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities may include, but are
not limited to: marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and
other personnel as necessary or beneficial to establish and maintain
shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses.
By adopting the Plan, the Trustees expect that the Fund will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objectives. By
identifying potential investors whose needs are served by the Fund `s
objectives, and properly servicing these accounts, the Fund may be able to
curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended October 31, 1996, payments in the amount of
$611,752 were made pursuant to the Plan for Cash II Shares, of which
$236,326 was waived. In addition, for the fiscal year ended October 31,
1996, the Fund paid shareholder service fees in the amount of $89,418,
$509,793 and $0, respectively for Institutional Service Shares, Cash II
Shares and Institutional Shares.
DETERMINING NET ASSET VALUE
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 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 net asset value 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 Securities and Exchange Commission under
the Investment Company Act of 1940. Under the Rule, the Trustees must
establish procedures reasonably designed to stabilize the net asset value
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 net asset
value 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 0.50% 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 net asset value.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000 or 1%
of the Fund's net asset value, whichever is less, for any one shareholder
within a 90-day period. Any redemption beyond this amount will also be in
cash unless the Trustees determine that further payments should be in kind.
In such cases, the Fund will pay all or a portion of the remainder of the
redemption in portfolio instruments valued in the same way as the Fund
determines net asset value. The portfolio instruments will be selected in a
manner that the Trustees deem fair and equitable. Redemption in kind is
not as liquid as a cash redemption. If redemption is made in kind,
shareholders who sell these securities could receive less than the
redemption value and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
its shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of its shareholders for acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument the Trust or its
Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust itself cannot
meet its obligations to indemnify shareholders and pay judgments against
them.
THE FUND'S TAX STATUS
To qualify for the special tax treatment afforded to regulated investment
companies, the Fund must, among other requirements: derive at least 90%
of its gross income from dividends, interest, and gains from the sale of
securities; derive less than 30% of its gross income from the sale of
securities held less than three months; invest in securities within certain
statutory limits; and distribute to its shareholders at least 90% of its
net income earned during the year.
PERFORMANCE INFORMATION
Performance depends upon such variables as: portfolio quality; average
portfolio maturity; type of instruments in which the portfolio is invested;
changes in interest rates; changes in expenses; and the relative amount of
cash flow. To the extent that financial institutions and broker/dealers
charge fees in connection with services provided in conjunction with an
investment in shares of the Fund, the performance will be reduced for those
shareholders paying those fees.
YIELD
The yield is calculated based upon the seven days ending on the day of the
calculation, called the `base period.'' This yield is computed 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.
For the seven-day period ended October 31, 1996, the yield for
Institutional Shares, Institutional Service Shares and Cash II Shares were
3.36%, 3.16% and 2.86%, respectively.
EFFECTIVE YIELD
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.
For the seven-day period ended October 31, 1996, the effective yield for
Institutional Shares, Institutional Service Shares and Cash II Shares were
3.42%, 3.21% and 2.90%, respectively.
TAX-EQUIVALENT YIELD
The tax-equivalent yield of the Fund is calculated similarly to the yield
but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming 47.10% tax rate (the maximum
combined effective federal and state rate for individuals) and assuming
that the income is 100% tax exempt.
For the seven-day period ended October 31, 1996, the tax-equivalent yield
for Institutional Shares, Institutional Service Shares and Cash II Shares
were 6.35%, 5.97% and 5.41%, respectively.
TAX-EQUIVALENCY TABLE
A tax-equivalency table may be used in advertising and sales literature.
The interest earned by the municipal securities in the Fund's portfolio
generally remains free from federal regular income tax,* and is often free
from state and local taxes as well. As the table below indicates, a `tax-
free''investment can be an attractive choice for investors, particularly
in times of narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF OHIO
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET:
19.457% 33.201% 37.900% 43.500% 47.100%
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.86% 2.25% 2.42% 2.65% 2.84%
2.00% 2.48% 2.99% 3.22% 3.54% 3.78%
2.50% 3.10% 3.74% 4.03% 4.42% 4.73%
3.00% 3.72% 4.49% 4.83% 5.31% 5.67%
3.50% 4.35% 5.24% 5.64% 6.19% 6.62%
4.00% 4.97% 5.99% 6.44% 7.08% 7.56%
4.50% 5.59% 6.74% 7.25% 7.96% 8.51%
5.00% 6.21% 7.49% 8.05% 8.85% 9.45%
5.50% 6.83% 8.23% 8.86% 9.73% 10.40%
6.00% 7.45% 8.98% 9.66% 10.62% 11.34%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional
state and local taxes paid on comparable taxable investments were not
used to increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local taxes.
TOTAL RETURN
Average annual total return 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 net asset value 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, adjusted over the
period by any additional shares, assuming the monthly reinvestment of all
dividends and distributions.
For the one-year and five-year periods ended October 31, 1996, and for the
period from April 22, 1991 (date of initial public investment) through
October 31, 1996, the average annual total returns for Cash II Shares were
2.96%, 2.66% and 2.82%, respectively, and average annual total returns for
Institutional Service Shares (formerly called Institutional Shares) were
3.27%, 2.96%, and 3.12%, respectively. Institutional Shares did not exist
prior to February 29, 1996.
Cumulative total return reflects the total performance over a specific
period of time. For the period from March 5, 1996 (date of initial public
investment) through October 31, 1996, the cumulative total return for
Institutional Shares was 2.22%. This total return is representative of only
eight months of activity since the date of initial public investment.
PERFORMANCE COMPARISONS
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
OLIPPER 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.
oIBC/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.
oMONEY, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day effective
yield.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund`s returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by the Fund portfolio mangers and their views and
analysis on how such developments could affect the Funds. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including growth of the
industry, from sources such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the money market sector, Federated Investors 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, 1995, Federated Investors managed
more than $40.2 billion in assets across approximately 47 money market
funds, including 17 government, 10 prime and 20 municipal with assets
approximating $20.9 billion, $11.5 billion and $7.8 billion, respectively.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees
the management of Federated Investors' international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. 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 Division.
*Source: Investment Company Institute
APPENDIX
STANDARD & POOR'S RATINGS GROUP
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A Standard & Poor's Ratings Group (S&P) note rating reflects the liquidity
concerns and market access risks unique to notes.
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus sign (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
S&P assigns dual ratings to all long-term debt issues that have as part of
their provisions a variable rate demand feature. The first rating (long-
term rating) addresses the likelihood of repayment of principal and
interest when due, and the second rating (short-term rating) describes the
demand characteristics. Several examples are AAA/A-l+, AA/A-I+, A/A-1. (The
definitions for the long-term and the short-term ratings are provided
below.)
COMMERCIAL PAPER (CP) RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
LONG-TERM DEBT RATINGS
AAA Debt rated `AAA'' has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rate `AA'' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated `A'' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
MOODYS INVESTORS SERVICE, INC.,
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's Investor Service, Inc. (Moody's) short-term ratings are designated
Moody's Investment Grade (MIG or VMIG) (see below). The purpose of the MIG
or VMIG ratings is to provide investors with a simple system by which the
relative investment qualities of short-term obligations may be evaluated.
MIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Short-term ratings on issues with demand features are differentiated by the
use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on
external liquidity. In this case, two ratings are usually assigned, (for
example, AAA/VMIG-1); the first representing an evaluation of the degree of
risk associated with scheduled principal and interest payments, and the
second representing an evaluation of the degree of risk associated with the
demand feature. The VMIG rating can be assigned a 1 or 2 designation using
the same definitions described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1 Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established
industries, high rates of return on funds employed, conservative
capitalization structure with moderate reliance on debt and ample
asset protection, broad margins in earning coverage of fixed financial
charges and high internal cash generation, well-established access to
a range of financial markets and assured sources of alternate
liquidity.
P-2 Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above, but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
LONG-TERM DEBT RATINGS
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as `gilt edged.'' Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in AAA
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in AAA securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
NR Indicates that both the bonds and the obligor or credit enhancer are
not currently rated by S&P or Moody's with respect to short-term
indebtedness. However, management considers them to be of comparable
quality to securities rated A-1 or P-1.
NR(1)
The underlying issuer/obligor/guarantor has other outstanding debt
rated `AAA'' by S&P or ``AAA'' by Moody's.
NR(2)
The underlying issuer/obligor/guarantor has other outstanding debt
rated `AA'' by S&P or ``AA'' by Moody's.
NR(3)
The underlying issuer/obligor/guarantor has other outstanding debt
rated `A'' by S&P or Moody's.
FITCH INVESTORS SERVICES, INC.
SHORT-TERM DEBT RATING DEFINITIONS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment, only slightly less in degree than issues
rated F-1+.
F-2 Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
